China's oil futures: frazzle or dazzle
for foreign traders?
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[March 22, 2018]
By Josephine Mason and Meng Meng
BEIJING (Reuters) - China's crude oil
futures, to be launched on Monday, will be a major step in Beijing's
years-long push to win greater sway over oil pricing, but for western
traders it will likely bring frustration as well as opportunity.
Shanghai Crude aims to rival the world's two crude benchmarks, luring
overseas traders with the promise of a deep pool of liquidity and the
chance for arbitrage between Asian, U.S. and European markets.
However, the contract will also come with quirks that traders used to
London's Brent or U.S. West Texas Intermediate (WTI) may find less
appealing, including shorter business hours, unique Chinese trading
habits and extended holiday breaks.
Yuan-denominated trading and a blend of new rules and regulatory burdens
will also likely hamper initial take-up on the Shanghai International
Energy Exchange (INE), executives at a dozen banks and brokers and
experts involved in the launch told Reuters.
"The rules around trading methodology will be unfamiliar for western
houses," said John Browning, chief operating officer of Hong Kong-based
futures broker Bands Financial Ltd, which is an approved overseas
intermediary for the INE.
"They'll have to get to grips with a different set of trading
parameters, including initial margin calculation, rolling between
months, order cancellations ratios, etc. It's all very different."
So far, China has opened more than 6,000 trading accounts, including the
country's oil majors and about 150 brokerages. Ten foreign
intermediaries have registered, including J.P.Morgan, Bands Financial,
Straits Financial Services and other Hong Kong based affiliates of
domestic brokerages.
Last-minute changes are still being made to entice overseas users. On
Tuesday, the government said it would waive income taxes for foreign
investors for the first three years.
CHINESE CHARACTERISTICS
Specific issues for traders include Shanghai's shorter trading hours,
split into three slots, with the afternoon session ending at 3:00 p.m.
local time (0700 GMT), just before London ramps up.
Although the exchange will have an overnight trading session to match
late European and early U.S. trading, it will close for more than six
hours before trade resumes in Beijing.
This could mean the contract risks having to play catch-up each morning
to the moods and swings of Europe and America, rather than setting its
own price, several senior futures traders said.
Chinese trading habits may also be a shock to foreign users, they said.
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Pumpjacks are seen at an oil field in Huaian, Jiangsu province,
China November 11, 2017. REUTERS/Stringer
Chinese commodity futures investors do not typically trade steadily
over the months, but instead pick specific months in which they
deal, due to a different cost structure. That could complicate
efforts to trade spreads between Brent, WTI and Shanghai.
These and other factors mean the contract may have a "hard time"
building correlations with Brent and WTI that would make arbitrage
possible, said Albert Helmig, chief executive of financial
consultancy Grey House and a former vice chairman of NYMEX.
"It's a China market, with Chinese characteristics," said Helmig.
FUTURE PLANS
Still, China offers the potential for a deep, liquid market, buoyed
by an explosion of interest from mom-and-pop investors that has
supported its vast commodities derivative markets from apples to
iron ore in Shanghai, Zhengzhou and Dalian.
In 2017, the total traded value of ShFE's steel derivatives
contracts was $4.4 trillion from domestic investors. This compares
with global turnover of more than $10 trillion in international oil
futures, the world's biggest commodity market.
Previous attempts at an Asia benchmark have foundered. Contracts set
up by the Dubai Mercantile Exchange a decade ago have not matched
Brent or WTI, traded on the Intercontinental Exchange <ICE.N> and
the New York Mercantile Exchange (NYMEX) owned by CME Group <CME.O>.
China hopes it can do better: with state-controlled oil majors like
PetroChina <601857.SS> and Sinopec <600028.SS> expected to provide
liquidity, analysts said the contract has a chance of succeeding
even if it faces short-term caution.
"Launching a new exchange is enormously complex, so if the initial
uptake for the contract isn't that strong, it isn't necessarily a
bad thing," said Bands' Browning.
(Reporting by Josephine Mason, Meng Meng and Tom Daly in BEIJING and
Henning Gloystein in SINGAPORE; editing by Richard Pullin)
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