Q&A with Zhengqiang Li, Chairman, Dalian Commodity Exchange (DCE)
When you spoke to Focus last time (October 2016) you outlined the drivers behind the strong growth in commodity derivatives volumes in 2015, and DCE’s strong performance in that market. What is the current status of the commodity derivatives market?
In recent years, DCE has successfully moved forward in its fundamental aim of serving the real economy. It has launched the first commodity option product; internationalised the iron ore futures market; expanded the ‘insurance + futures’ pilot programme; and completed other key tasks. It has achieved a strategic transformation from a single and closed commodity futures exchange to a diversified, open and comprehensive derivatives exchange, striving to build itself into a world-class derivatives exchange in an all-round way.
At present, there are 16 futures products on DCE covering six major sectors - grain, oils, animal products, forest products, plastics and chemicals, and energy and minerals as well as a soybean meal option - providing instruments of commodity price discovery and risk management for nearly 10,000 industry enterprises on relevant industrial chains. By the end of October this year, DCE had recorded trading volume of 803 million contracts, a turnover of RMB 42.4 trillion, and an average daily open interest of 5.79 million contracts, accounting for 33.25%, 25.96% and 41.18% of the totals in China’s market, respectively.
Over the past few years, the DCE futures market has played an increasingly important role in serving the real economy. The correlation between the futures and spot prices of products such as soybean meal, soybean oil, palm olein, iron ore, LLDPE, PP and eggs has been more than 0.9, reflecting the market supply and demand in a timely way. At present, DCE futures prices have been adopted as the domestic pricing benchmarks in 70% of soybean meal and palm oil spot trade volumes, and 40% of soybean oil spot trade volume; and the futures prices of iron ore, coking coal, and coke have also been used as an important basis for spot trade and index preparation. Insurance companies have developed agricultural product price insurance products based on DCE prices. More than 90% of large and medium-sized oils and oilseeds enterprises have deepened their participation in futures trading on DCE, including more than 85% of palm oil import enterprises, 1,100 chemical companies, and more than 700 enterprises in coal, coke and iron and steel industries, in a bid to facilitate their risk management. Industrial enterprises and specialised investment institutions have also recognised and taken an active part in futures instruments, laying a solid foundation for the stable and rapid development of the DCE futures market.
Since its establishment 25 years ago, DCE has developed into the world's largest futures market for agricultural products, plastics, coal, and iron ore, and is also an important futures trading centre in China. According to rankings for trading volumes of the world’s major derivatives exchanges published by FIA, DCE was in 10th place in 2017.
In your October 2016 interview, you mentioned three areas of focus for the future: the launch of agricultural options; the internationalisation of iron ore futures; and the development of the OTC market. Please could you give us an update on each of these areas?
On 31 March 2017, the soybean meal option, China’s first commodity option product, was successfully launched on DCE, ending the history of China's commodity derivatives market with only a single instrument of futures. Since the launch, the soybean meal option has been characterised by stable operations, moderate liquidity, and reasonable and effective pricing, with market functions gradually brought into play. By the end of October this year, the soybean meal option recorded a trading volume of 10.18 million contracts, a turnover of RMB 7.86 billion, and an average daily open interest of 222 thousand contracts.
On 4 May 2018, overseas traders were introduced into iron ore futures, marking the internationalisation of a mature product in China’s futures market for the first time, and officially opening the door of DCE to the outside world.
By the end of September 2018, a total of 86 overseas clients from seven countries and regions including Singapore, the United Kingdom, Japan, Australia, the United Arab Emirates, Hong Kong and Taiwan opened accounts, with 57 of them participating in trading.
In 2015 DCE launched an integrated service platform for the OTC market; introduced and continuously improved businesses such as warehouse receipts and warehouse receipt service providers; and explored the development of a multi-level derivatives market. At the same time, DCE independently researched, developed and released 36 commodity futures indices, initially forming an index system covering composite, constituent, participants and single commodities. With the launch of the soybean meal option, the internationalisation of iron ore futures and the construction of the OTC market, DCE has realised its strategic transformation, from a single and closed exchange to a diversified and open one. This has ushered in a new era of ‘diversified and open’ development, characterised by the combination of futures and options, the integration of floor trading and OTC markets, the connection of physicals and derivatives, and the linkage of the domestic and overseas markets.
Are there any other strategic projects underway at the exchange at the moment?
In recent years, DCE has worked on major innovations to develop a more diversified and open market. These innovations include launching new contracts for No. 2 soybean futures; the establishment of a hog futures programme, which has been approved by the China Securities Regulatory Commission (CSRC), and will provide a hedging tool for the hog industry with an output value of over RMB 1 trillion after launch; and the diversified research and development of a corn option, an iron ore option, and pepper futures, alongside further expansion and improvement of other instruments and products.
DCE has also continued to tap into international markets by setting up a Singapore representative office, exploring the feasibility of establishing a Hong Kong representative office, and applying for the Recognized Market Operator (RMO) in Singapore.
Going forward, DCE will carry on with the concept of ‘mutual development, sharing and win-win results'. We have achieved our strategic transformation of becoming a diversified and open exchange, but will continue to open the business up following a principle of 'consolidation, enrichment and improvement', further building the business into a world-class derivatives exchange. DCE will continue to optimise contract rules, operations and management mechanisms; enrich market services; improve the structure of market participants; maintain market stability; and consolidate achievements in diversity. Furthermore, DCE will work to further enhance its core competitiveness and international influence, and will work with market participants to make the derivatives markets in China, and indeed across the world, better support the real economy.
Why is membership of the WFE so important to DCE?
As an industry association for the operators of securities, futures and options exchanges worldwide, the WFE boasts an important position and great influence in the exchange industry. Since becoming a full member of the WFE in 2012, DCE has attached great importance to WFE membership, and vigorously participated in the WFE's general assemblies, annual meetings and other relevant activities.
At present, DCE is at a critical juncture in its strategic transformation to a diversified, open, and comprehensive world-class derivatives exchange. We hope to further strengthen communication with the WFE, and use this platform to learn from the advanced experience of the international derivatives markets, consolidate cooperation with domestic and overseas colleagues, promote the deep integration of the world’s derivatives sector, and achieve mutual benefits and win-win results between markets both at home and abroad.