Experts credit technology, cross-border ties for booming Asia derivatives markets

Trades are coming into and out of Asia with increasing frequency as China continues to open up

1 December 2020


Amid historic volume and volatility in March and April of 2020, Asia derivatives markets not only stood up to the challenge but continued to grow significantly as more business flowed out of and into mainland China. That was in large part thanks to regulatory reforms in the region as well as technological improvements in recent years, and the trend should continue to gather momentum into 2021, according to industry experts who discussed the topic during the FIA Asia conference on 1 December.

John Buckley, chief operating officer for Asia at Citadel Securities, noted that Citadel's equities volume in the region averaged about 3.3 billion shares a day in March compared with just 2 billion on the firm's day last year. Handling that volume amid disruptions to normal workflow created by the pandemic would simply not have been possible 10 years ago, he said. He credited "more electronic trading and electronic trading firms being part of the market ecosystem" and that "technology capabilities are critical to managing successful execution of client demand."

Offering the exchange perspective, Mezhgan Qabool, Head of Market Development APAC, Eurex, noted that cross-border market access was crucial in 2020 as global derivatives markets looked to manage risks and exposures around the clock. "Asia is the first time zone to react to market news and geopolitical events when the markets open," she said. , and as such Eurex products like its well-established KOSPI futures products in Korea remained popular with global investors in 2020. However, she also noted that the exchange has built on its Euro Stoxx equity index futures complex in Asia and added products including the Stoxx Europe 600 and German government bond contracts to ensure Asian investors also have an opportunity to trade around the clock in European markets, too.

"As we take Asia into Europe … we want to bring Europe into Asia in parallel," Qabool said.

Christopher Fix, Managing Director, Asia, CME Group, echoed the importance of two-way, cross-border access to facilitate a diverse, global investor base. He noted that about half of CME's volume in the region doesn't originate from Asia but comes from overseas. "They're trading from overnight in the U.S or they're trading from early in the morning in Europe. And this growth in the value of the Asian liquidity is something that's key to driving all of our business."

Natasha Xie, a partner at Shanghai-based law firm JunHe, said that access to mainland China is steadily becoming easier thanks to recent changes in local regulatory structures intended to bring in a broader diversity of market participants. "Unlike like a few years ago, right now it's much easier to start the process to get approved [as a Qualified Foreign Institutional Investor], and you may have very diversified strategies that can be implemented in China." She noted particular interest from proprietary trading firms looking to trade commodity futures, financial futures and options as QFII firms.

She admitted that "the most difficult question is about the timing" as Chinese authorities look to balance the liberalisation of the nation's financial system with the desire to protect market stability. However, Xie said that "regulators are getting more familiar with the market participants and responding better to their needs."

Sharon Shi, Managing Director, G.H. Financials Hong Kong, notes that "each time the door opens a little bit more" she sees greater interest from her firm's global client base. And as a result, their activities in the region have become more sophisticated as the growth and competition in Asian derivatives markets provides a broader menu of products.

"A few years ago, European clients would come to me saying, 'Hey, tell me a way to trade into China,' " she said. "Now it has become, 'Hey, tell me the best way to trade into China' as international investors can choose from a lot of alternatives."

For all the steady growth in products, however, the regulatory environment remains fragmented and can create challenges for firms looking for cross-border access, said Russell Beattie, Director, APAC Head of Futures & Options, OTC Clearing Services & FX Prime Brokerage, BofA Securities. He notes that his firm deals with nine different regulatory bodies in the Asia-Pacific region, which means "managing to the highest standard." In some ways that helps the market as a whole by creating a "rising tide of best practice" for markets, but it can also add complexity when certain regulators or market participants lag too far behind.

Looking ahead to areas of potential improvements in the region that could with this "rising tide" of best practices, John Buckley of Citadel specifically called out three areas: the availability of give-ups in certain jurisdiction, broader adoption of self-match prevention, and greater understanding of algorithmic trading. All collectively have the potential to increase liquidity and resilience even as they lower volatility and transaction costs in the region, he said.

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