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Exchange News
Speech on the Forum on Interest Rate and Foreign Exchange Derivatives Markets by HU Zheng, Chairman of CFFEX


Distinguished leaders, 

Dear guests and friends, 

Good afternoon!

Welcome to the Sub-forum on Interest Rate and Foreign Exchange Derivatives Markets. On behalf of China Financial Futures Exchange (CFFEX), I would like to extend our cordial welcome and sincere gratitude to you, who have been supporting the development of financial derivatives in China. 

In recent years, as China’s global economic status continues to improve, the financial sector has also seen marked progress in opening-up to the global market. The RMB is now included as an international reserve currency; China’s capital account is gradually liberalizing; the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect have been launched consecutively, with the Shanghai-London Stock Connect to be rolled out soon. This April, President Xi Jinping delivered a key speech at Boao Forum for Asia, announcing several key measures including opening-up of the financial sector; Yi Gang, Governor of the People’s Bank of China (PBOC), unveiled the specific measures and the schedule for further financial liberalization including cancellation of limit on shareholding by foreign holders in bank and asset management company and further promotion of financial opening-up, which indicates a new phase of China’s financial market development. 

The situations in and beyond China are still complicated, and we see a more urgent need to prevent and mitigate systematic financial risks and ensures financial security as the domestic financial sector becomes increasingly open to the world. In this context, the forum shall discuss how financial derivatives can be better employed for risk control and how to achieve a development and opening-up that balances both derivatives market and spot market. The answers to these questions are significant to the country’s capability to prevent and mitigate financial risk and to promote quality growth of derivatives market. 

The report of the 19th National Congress of the CPC points out that China is going to further promote interest rate and exchange rate market liberalization. It is a basic requirement for the financial sector to serve the real economy, and also a necessary step towards further financial opening-up. In July 2013, the PBOC fully removed control on the loan interest rate of financial institutions, since then, reforms including building a market-oriented benchmark interest rate system, and liberalizing the interest rate derivatives market have continued to progress. Such reforms have stimulated growth in the interest rate derivatives market which is now playing an increasingly critical role in financial market. 

CFFEX, under the leadership of CSRC and strongly supported by the Ministry of Finance, the PBOC, CBRC and CIRC, has launched the 5-year and 10-year Treasury Bond Futures. The trading volume of these products has grown steadily; the average daily trading volume in Q1 2018 was 42.2 thousand contracts, and average daily open interest reached 80.3 thousand contracts. Treasury bond futures closely mirrored the trends in the spot market, in the past 5 years, the correlation coefficient between the 5-year/ 10-year Treasury Bond Futures dominant contract and the cash market has remained above 99%. Market operation has been sound and secure without material risk incidents; trading patterns reflect rationality with an annual trading volume to open interest ratio of 0.5; dominance of institutional players has become a key market feature, in Q1 2018 institutional players accounted for 77% of the open interest, the highest percentage among all Chinese futures products. 

The Treasury bond futures products, since inception, has developed into a basic financial tool with critical market influence. First, it helps promote the bond market price transparency and serves as a key tool for investors and regulators to grasp bonds market dynamics in a timely fashion. Unlike the yield-based quotes that prevails in Treasury bond spot market, the futures provides a price-based quotes, which is more open and transparent, easy to understand, and better reflects the Treasury bond market’s trends and dynamics. Second, the products increases the spot market liquidity and improves the Treasury bond yield curve to reflect the market demand and supply. After the launch of the futures products, the liquidity on the Treasury bond secondary market, driven by demand of hedging, arbitrage and delivery settlement, showed positive improvements. The improvement of spot market liquidity will strengthen the foundation for compilation of the yield curve, which then allows the yield curve to better reflect market supply and demand. Third, the futures products serve as a tool to avoid interest rate-related risk, and enhances the agility and resilience of bonds market. The products can not only help financial institutions to hedge interest rate exposure, but also provide risk management tools to bonds market makers. When there is obvious fluctuation in the spot market and when bonds, especially credit bonds, are difficult to sell, the futures products can serve as a key risk exit for the market, help mitigate the pressure to undersell, and enhance the market’s agility and resilience, thus playing a positive role in maintaining market stability. 

The world today is seeing another wave of changes in development and transformation. On one hand, the global financial setting remains complicated, domestic and overseas markets become increasingly inter-dependent, and the Fed’s interest rate hike may bring more uncertainties to China’s financial markets. On the other hand, China’s domestic risk prevention and de-leveraging policies will exert significant impact on interest rate and foreign exchange markets. Therefore, there may be more fluctuation in the two markets, and stronger need for market players to manage risks. 

In order to meet the risk control needs of overseas market players in the context of financial opening-up, and improve its capability to prevent and address systematic financial risks, CFFEX, by focusing on the three priorities—supporting real economy, preventing and controlling financial risk and furthering financial reform, sticks to a market-orientated, rule-based and international development path to actively attract overseas entities including commercial banks, insurance companies, QFII and RQFII players to participate in China’s market; it will continue to develop its product lines, push forward the launch of key products including the 2-year Treasury Bond Futures and develop forex futures, aiming to build CFFEX into a world class futures exchange with well-established product lines, comprehensive functions, appropriate transaction volumes and streamlined operation, to exhibit both Chinese characteristics and global competitiveness. 

Finally, please allow me to express my sincere gratitude to those who are committed to the development of China’s financial futures market for over a decade, and those who provide support to the business and growth of CFFEX. 

I wish the Forum a great success. Thank you.

Copyright ©2010 CFFEX

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