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FANG Xinghai, Vice Chairman of CSRC delivers a speech at the Sixth Members Assembly of SHFE

 

Distinguished Mr. Zheng Yang, friends from the futures community, and ladies and gentlemen:

Good morning!

It’s a great pleasure to attend the sixth Members Assembly of SHFE. This Members Assembly, a big event in the futures industry, is of significance in improving the governance of SHFE and promoting the sound development of the futures market. First of all, I would like to extend, on behalf of CSRC, my warm congratulations on the holding of this Assembly and my sincere gratitude to futures market professionals as well as those who, over time, have been interested in and given support for the development of China’s futures and derivatives markets. Also, I would like to take this opportunity to share my views with you.

I. With huge development achievements, the futures market offers encouraging prospects for further development

One of the strategies adopted by the CPC Central Committee and the State Council is to ensure the stable development of the futures market. After over two decades of concerted efforts across the market and the industry, the futures market, on the whole, maintains a good development momentum and shows an increasingly strong capability to serve the real economy.

1. Product innovation has been steadily boosted and a system of futures products covering the key industries of the national economy has initially taken shape. In 2017, new innovation breakthroughs were been made in the futures market. Specifically speaking, soybean meal options, white sugar options and cotton yarn futures were listed successfully, steady progress was made in preparing for the launch of the crude oil futures and the trading of stock index futures was substantially restored. Currently, there are 55 listed futures and options products in China, including 47 commodity futures, 5 financial futures, 1 financial option, and 2 commodity options, which basically cover the key sectors of the national economy. Along with the development of the futures market, China’s commodity pricing system has been further optimized, offering more risk management choices for relevant industries of the national economy.

2. The futures market has witnessed stable growth in size and progressive increase in international influence. During the first 8 months of this year, China’s futures market recorded a trading volume of 2.096 billion contracts and a turnover of RMB 123.33 trillion. These figures include 937 million contracts and RMB 59.53 trillion for Shanghai commodity futures market, representing 44.70% and 48.27%, respectively, of thenationwide market. According to the U.S. Futures Industry Association (FIA), China’s commodity futures market, by trading volume, has been ranked among the top ones in the world for 8 consecutive years. The rankings of Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange, by trading volume, have risen to No. 6, No.8 and No.11, respectively, in the world. More importantly, open interest in commodity futures has been steadily growing over the past few years.

3. With the performance of its function, the futures market has seen continual progress in public recognition. In terms of price discovery, the prices of copper, steel rebar, iron ore and PTA and other futures have become benchmarks for domestic and overseas trade and more and more industrial enterprises plan their production and operation activities by referencing futures prices. A number of commodity futures prices have been adopted by the Ministry of Commerce, the Ministry of Finance and other relevant ministries and commissions as important references for making of decisions on national macro-economic control. In addition, the commodity futures price index has been very close in movement to China’s PPI over the years, in other words, the commodity futures price index can provide a very good forecast for the movements of PPI, which is greatly useful to the macro-economic decision making of China. Our recent research also reveals that when there is a scissor difference between PPI and CPI, economic development usually goes well, bringing in better benefits in all areas. Our commodity futures price index can offers a very good forecast for China’s economic trends as it does for PPI movements. Therefore, the futures market plays an increasingly important role in preventing risks, providing pricing information for enterprises and informing national macro-economic decision making.

In terms of risk management, a growing number of enterprises, especially in the agriculture sector, are using the futures market to manage price volatility risks. As modern agriculture technologies and IT technologies continue to advance, risks in the production of agricultural products will become smaller, but market and price risks to which agricultural products are exposed may continue to increase partly due to globalization and other reasons. Given that the function of the futures market is to manage price risk in the market, it will play a more important role in the future development of the agriculture industry. This view has been strongly supported by the top officials of the Ministry of Agriculture. Thus, the important role of the futures market in the development of the agriculture industry should be fully understood so as to allow the market to further contribute to the agricultural supply-side structural reform.

4. Futures institutions have steadily developed their innovative business lines and improved their comprehensive strength. As of the end of 2016, futures firms in China reached RMB 543.941 billion in asset, RMB 68.771 billion in net capital and RMB 6.567 billion in net profit. In addition to their traditional brokerage business line, the innovative business lines of futures firms such as asset management and risk management have developed steadily.

5. The framework of laws and regulations governing the futures market has become increasingly robust. After continuous practice and improvement efforts, China has established a regulatory system specific to China and aligned with international practice. In this system, the Regulations on the Administration of Futures Trading stands at the core and the regulations and normative documents of CSRC takes a dominant position, supported by the Articles of Association of the Futures Association of China and the Articles of Association and trading rules of futures exchanges. We have revised several provisions of the Regulations on the Administration of Futures Trading in order to legally continue the efforts to streamline administration, delegate powers and improve regulation and to further stimulate the development of the futures market. It should be noted that the formulation of the Futures Law, long expected by everybody here and the futures community as a whole, has been accelerated.

6. A risk prevention and resolution mechanism has been largely established for the futures market which has enabled the market to successfully withstand sharp fluctuations in commodity and financial markets in recent years. In particular, there has been no material risk event arising in the futures industry against fluctuations in stock index futures and commodity prices since 2015. This has further demonstrated the effectiveness of the futures industry’s risk management system. I believe that, in the management of risks arising in the operation of the futures industry, our system is mature and has been proved in the market to be effective.

II. Concerted efforts and due fulfillment of responsibilities are required to promote the steady and sound development of the futures industry

Currently, China’s economy maintains steady development and is in a critical period for deepening reform and opening-up efforts in all respects. At the same time, the relative position of China’s economy in the international arena has been on the rise. All futures market participants have to, from a national strategic perspective, keep in mind the mission to provide services for the real economy, pursue market-oriented, law-governed and internationalized development, and work together to develop China’s futures market into a regulated, open and internationally competitive market which is commensurate with the level of China’s economic and financial development and meets the risk management needs of the real economy. Specifically speaking, focus should be consistently put on the following priorities:

First of all, futures exchange should bear in mind their missions, duly perform their responsibilities, and fully play their pivotal role as an exchange so as to increase the breadth and depth of their capabilities in serving the real economy: 1. Futures exchange should, based on market demand, continue to develop futures products that meet the needs of the real economy and are ready for the market so that a wider range of commodity and stock options can be made available. The crude oil futures should be launched in due time pursuant to the requirements of high standards and stability; 2. Futures exchanges should refine their existing products. The existing contracts should be optimized in aspects, ranging from contract clauses, detailed rules and brand registration to warehouse distribution, in order to improve the efficiency of market operation and bring the function of the futures market into full play. Particularly, they should gradually improve delivery management and continually optimize the distribution of delivery warehouses; 3. Futures exchange should expand the pilot program of “insurance + futures” and effectively provide services for “agriculture, farmers and rural areas”, especially for the modern agriculture; 4. Futures exchange should explore new ways to combine futures trading with spot trading, expand the scope of floor trading, and offer physical, warrant and OTC derivatives services related to floor trading; 5. Futures exchange should increase their market development efforts and actively guide industrial enterprises to extensively use futures products. Moreover, they should strengthen research on the basic theories of futures markets and guidance of public sentiments; and 6. Futures exchange should pay more attention to the development of futures market infrastructures. The development of technology, information and other market infrastructures should be enhanced to provide strong support for the development of the futures market. Located in Shanghai, SHFE should play an important role in the implementation of the national strategy to develop Shanghai as an international financial center. Therefore, SHFE should actively provide services for the economic and social development of Shanghai. At the same time, we also expect greater support from the Shanghai Municipal Government to SHFE. Futures exchanges should actively seek advice from their members on various services so as to give full play to their wisdom and take in more suggestions from them.

Secondly, futures institutions should act with diligence and care, conduct their operations in accordance with the law, and continuously improve the level of their competitiveness and market services. Futures institutions are a bridge between exchanges and investors. On one hand, futures institutions provide risk management services to the public through their brokerage, asset management, and risk management business lines, etc. The operation of futures institutions directly affects the capacity of the futures market to serve the real economy. Futures institutions should focus on the target to serve the real economy, expand their financing channels, enhance their capital strength, strive to increase the level of their competitiveness and services, and mainly guide industrial clients to employ futures and options to manage market risks. Furthermore, futures institutions should steadily engage in innovative business activities such as pricing service, cooperative hedging, OTC options; guide and help upstream and downstream enterprises along the industry chain to leverage futures market prices to rationally allocate resources and consolidate industries; and offer differentiated and personalized risk avoidance services for industrial enterprises, particularly medium, small, and micro-sized enterprises. During their business activities, futures institutions should comply with rules and regulations, strictly apply investor suitability rules, and prevent frauds, irresponsible acts and misconduct. On the other hand, as members of member-based futures exchanges, futures institutions should fully exercise their rights granted by the exchanges and actively participate in the making of major decisions, such as the formulation of the articles of association and rules, business innovation, preparation of financial budget and final account of the exchanges. They should also offer advice and suggestions for the better development of the exchanges and promote the internal governance and regulated operation of the exchanges. Recently, several risk events have occurred in some futures institutions. Here, I would like to stress that futures institutions should pay high attention to reinforce their internal control to guard against risks in corporate governance.

Thirdly, the internationalization of the futures market should be accelerated. By its nature, a futures market is a global market. We should seize the historic opportunity, brought by the further development of economic globalization and China’s industrial structural transformation and upgrading, to escalate the opening up of the futures market to the outside world and improve the global competitiveness and influence of China’s futures market. Futures exchange should provide services for the implementation of the “Belt and Road” initiative and launch specific products to gradually introduce foreign investors to the commodity futures market in China. We can start from highly internationalized products, such as crude oil, iron ore, natural rubber, to gradually introduce “Belt and Road” initiative-related foreign investors to the domestic commodity futures market, and steadily extend the participation of foreign investors to other products. To cater to international demand for relevant futures products, futures exchanges are encouraged to set up overseas delivery warehouses and representative offices. We should, in conjunction with relevant authorities, continue to promote the improvement of tax policies and make bonded delivery of futures a normal practice. Besides, we should strengthen practical cooperation with other countries and regions, maintain closer relationships with overseas regulators and industry associations, learn from and draw upon mature experiences of international counterparts in product innovation and other areas and their best practices in market supervision, and strive to build a more healthy, orderly and open futures market. CSRC not only encourages futures exchanges to participate in international competition and exchange, but also encourages futures firms to participate in international market and communication with their international counterparts so as to learn more from mature international experiences for achievement for better performance.

Last but not least, the entire industry should place risk prevention and control at a more important position, firmly prevent systemic financial risk pursuant to the requirements of the National Conference on Financial Work, carry out supervision in a comprehensive and strict manner in accordance with the law, and maintain the smooth operation of the market. We should also increase regulatory enforcement efforts, protect the lawful rights and interests of investors, and adopt a zero tolerance approach to various violations. Futures exchange should serve as the frontline market supervisor, further strengthen their front-line supervision responsibilities, focus on preemptive measures, make timely assessment of market risks, and prepare responsive risk control plans, in order to effectively combat violations. In addition, we should promote the cross-market sharing of regulatory information and further enhance regulatory cooperation.

Dear friends, with the National Day and Mid-Autumn Festival approaching and the remarkable 19th National Congress of the Communist Party of China around the corner, I would like to, at this moment, wish you a happy holiday. Let us present outstanding performance to welcome the holding of the 19th National Congress of CPC. Finally, I wish the Members Assembly a complete success!

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