Distinguished guests, ladies and gentlemen:

Good afternoon!

As one of the co-organizers of this forum, on behalf of China Financial Futures Exchange (CFFEX), I would like to express our warm welcome and sincere appreciation to all leaders and friends who pay attention to and support the development of the financial derivatives market.

In April of this year, General Secretary XI Jinping noted at the 40th collective study session of the CPC Politburo that financial security is a major component of the national security and an important basis for the steady and healthy development of the economy. Maintaining financial security is a strategic and fundamental task vital to China’s overall economic and social development. General Secretary XI Jinping’s recent remarks are an important part of the “new normal” theory and are consistent with those on supply-side structural reforms. These remarks provide top-level arrangements contributing to the fulfillment of the objectives of reducing overcapacity, destocking, deleveraging, lowering cost and shoring up weak growth areas. These arrangements not only meet challenges and prevent risks, but also indicate a clear direction for the steady development of the financial risk management market. In this context, this sub-forum co-hosted by China Foreign Exchange Trade System (CFETS) and CFFEX is of great significance as it will explore how to steadily develop the financial derivatives market and further enhance prevention of risks.

With the continuous progress in the market-based reform of China’s interest rate over recent years, both exchange-traded and OTC interest rate derivatives markets have grown rapidly and played an increasingly important role in the financial markets. Under the CSRC’s leadership and with the strong support of the PBOC, the Ministry of Finance, the CBRC and the CIRC, the CFFEX has successfully listed 5-year and 10-year T-bond futures. Since the listing of T-bond futures, the T-bond futures market has witnessed ongoing rapid development and maintained sound operation, as reflected in the following aspects: firstly, trading volume and open interest have steadily increased. From the beginning of 2017 to May 23, the daily average trading volume of T-bond futures stood at 70,300 contracts, with a daily average open interest of 86,400 contracts; secondly, the futures and spot markets are closely interconnected.

Since the listing of T-bond futures, the correlation factor between the prices of 5-year and 10-year dominant contracts and the spot prices of the underlying T-bonds has exceeded 98%, indicating a high consistency in the movements of the futures and spot prices; thirdly, most of market participants are institutional investors. Currently, the daily average open interest of institutional investors makes up 79.33% of the total open interest in the market; and fourthly, the delivery process is stable and smooth. Currently, a total of 21 5-year and 10-year T-bond futures contracts have been delivered, representing an average delivery rate of about 3%. Delivery participants become more diverse, the delivery process is stable and smooth and the risk prevention system is functioning well.

Since the listing of T-bond futures, the quality and efficiency of the market’s operation have experienced ongoing improvement and the T-bond futures have played a positive role in maintaining the stability of the market. Firstly, T-bond futures provide the market with an instrument for avoiding interest rate risks and increase the flexibility and resilience of the bond market. With the steady development of China’s T-bond market, the interest rate risk management function of T-bond futures has become increasingly prominent. In the primary market, T-bond futures help members of underwriting groups to lock up bond underwriting risks to facilitate the offering of T-bonds; in the secondary market, institutional investors use T-bond futures to hedge against spot market volatility risks. During the recent wild swings of the bond market, when it was difficult to sell bonds, especially credit bonds, the T-bond futures market, as an important risk outlet, diverted a lot of sell-off pressures in the spot market, increased the flexibility and resilience of the bond market and prevented regional risks from translating into systemic risks, thus playing a positive in stabilizing the market.

Secondly, the price discovery function of T-bond futures rapidly reflects market changes and provides regulators with real-time market movement signals. Accurate judgment of risks is the prerequisite to ensure financial security. Working in coordination with yield-based quotations adopted in the bond market, the price-based quotations adopted for T-bond futures provide transparent, continuous and straightforward prices so as to better communicate signals of changes in the movements of the T-bond market and of its strength to regulators and the general public. On December 15 of last year, T-bond futures sent the earliest signal of bond market risks, providing government authorities with the most direct and swift channel to obtain first-hand information about the bond market and serving as an important reference for regulators in making informed decisions and taking rapid responses.

Thirdly, T-bond futures increase the liquidity of the spot market and further improve the T-bond yield curve that reflects market supply and demand. After the listing of T-bond futures, demands for futures and spot hedging and arbitrage and physical delivery has led to positive changes in the liquidity of the secondary T-bond market. Within one month after the listing of 10-year T-bond futures, the daily average spot trading volume of 10-year T-bonds rose to RMB 8.1 billion, up 113% over the month immediately before the listing. The increased liquidity of the T-bond spot market has consolidated the basis for the preparation of the T-bond yield curve and helps to further improve the T-bond yield curve that reflects market supply and demand.

Currently, we are still faced with complex domestic and international financial situations where domestic and foreign markets are interconnected to a greater extent and China’s financial market is likely to be impacted by the spillover effect of the US Federal Reserve’s interest rate hikes. In addition, China’s domestic policies to prevent risks and reduce asset bubbles will also create ongoing pressures on the interest rate and exchange rate markets. In this context, volatilities in the interest rate and exchange rate market are likely to increase, resulting in the stronger risk management demands of market participants.

To meet the diverse risk management demands of market entities, increase the stability of the financial markets and maintain the security of the financial markets, it is recommended to advance the development of the financial derivatives market in a way which can basically achieves the diversification of products, interconnectedness of products and markets, and sharing of benefits among investors: firstly, it is recommended to diversify the composition of futures investors by encouraging commercial banks, insurance companies, QFIIs, RQFIIs and foreign institutions to participate in trading of T-bond futures. Currently, most participants in the T-bond futures market are securities companies, fund management companies and other trading institutions, which hold less than 8% of the total outstanding T-bonds across the market. As a result, there is no sufficiently representative price in the T-bond futures market. It is imperative to introduce important spot market bond holders into the T-bond futures market to diversify the investor base, increase the width and depth of the market, enhance market pricing efficiency and accuracy, and form price signals that accurately reflect market-wide information. Secondly, it is recommended to expand the T-bond futures product range. In international markets, the most representative 2-year, 5-year and 10-year T-bond futures products are highly active and can meet risk management needs for bonds with various maturities. While the risk management function of China’s 5-year and 10-year T-bond futures is increasingly evident, there is still a lack of short and medium-term T-bond futures products. Thus, it is suggested to expedite the launch of 2-year T-bond futures to enhance the capabilities of the financial system to manage interest rate risks. Thirdly, it is recommended to speed up the development of the RMB currency futures and options market. Relevant authorities should deepen cooperation to propel the R&D and the listing of exchange rate derivatives of China’s major trading partners and the RMB / Belt and Road country currency options. Fourthly, it is recommended to enhance the coordinated development of exchange-traded and OTC derivatives markets to better serve the real economy. As they have different strengths, promoting the coordinated development of exchange-traded and OTC derivatives markets will help to further meet the risk management needs of industrial companies and institutional investors and better serve the real economy.

Lastly, I would like to thank all leaders and guests for attending this forum and wish this derivatives forum a full success!

Thank you!