Sunday, January 22, 2012

Mainland Has Potential for Significant Derivatives Market Says Hong Kong Securities Regulator

While the current focus of Mainland China’s financial sector is the stock and bond markets, noted a Securities and Futures Commission senior official, there is an even greater potential for derivative products. In recent remarks, SFC Executive Director Alexa Lam urged the creation of a cooperative venture by Shanghai and Hong Kong in the derivatives markets, especially in derivatives involving precious metals and base metals, where Europe is neither the most important producer nor one of the biggest users. Expressing optimism for the future development of the global derivatives markets, she urged full use of Shanghai's large customer base and Hong Kong’s international standards of technology and regulation as a key to good cooperation and development. The official noted that, as of June 2011, the global outstanding notional amount of derivatives was over 700 trillion U.S. dollars.

The Deputy Chief Executive also noted that derivatives are risk management tools. Derivatives allow financial institutions, entities, businesses, investors and consumers to conduct risk management Since risk is continuous, she reasoned, as long as companies continue to operate there will be risk management needs. This dynamic will fuel global demand for derivatives products. But she also cautioned that the financial crisis revealed the risk of derivatives, including leverage and price volatility. At the same time, regulatory reform is underway, including importantly central clearing and central settlement for standardized derivatives. Not only does the settlement system itself need to have a sound risk management system, she emphasized, regulators must be able to conduct strict supervision.

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