HKEX Report丨An Overview of Global Commodity Derivatives Market

北大汇丰金融研究院 2022-04-25

Editor's Note

In the past decade, the economic growth of Mainland China, its increased commodities trades with the world, and the rise of Mainland commodity exchanges have driven fundamental change in the landscape of the global commodity derivatives market. Despite this growth, foreign participation in the Mainland commodity derivatives market is highly restricted. This development and liberalisation of Mainland commodity derivatives trading promises that the landscape of the global commodity derivatives market will continue to evolve.

Author: Chief China Economist's Office, Hong Kong Exchanges and Clearing Limited

REPORT SUMMARY

Commodities are physical assets that are tradable andsupplied without substantial differentiation by the general public. Majorcategories are precious metals, base metals (or non-precious metals),agriculture and energy products. Commodity trading refers to the trading ofcommodities in the physical (spot) market as well as the trading of commodityderivatives, which include the standardised products of futures and options onexchange markets and unstandardised products like swaps in the over-the-countermarket.

A growing trend is observed over the past decade inthe trading of on-exchange commodity derivatives, along with the growing marketshare of Asian exchanges. This can be attributed to: (1) the global economicgrowth which has increased the demand for hedging for commodity trades; (2) theincreased use of commodity derivatives in portfolio investment for hedgingagainst risks of investment in financial products like equities and bonds orfor pure investment purposes; and (3) the rise of the Mainland economy whichfurther boosted global trading in commodities and related hedging demand and ofthe Mainland commodity exchanges which have an increased significance in theworld.

More than half of the derivatives exchanges in theworld offer commodity derivatives in their product suites, the majority ofwhich are futures. While the developed markets in the US and Europe may havetaken the lead in terms of number of commodity products offered, the Mainland commodityderivatives exchanges have assumed a leading role in terms of trading volume.At least one of the three Mainland exchanges were among the top three in termsof trading volume in 2019 for three of the four commodity categories ― preciousmetals, non-precious metals and agriculture. They fell behind only for energyproducts, these products however constituted the majority of global commodityderivatives trading volume (mainly from crude oil futures). Moreover, foreignparticipation in the Mainland commodity derivatives market is highly restricted― only a few designated products have been opened to foreign participants. Inother words, the high trading volume on the Mainland exchanges are basicallycontributed by domestic participants only. Commodity contracts on the Mainlandexchanges are typically of a smaller contract size and are traded in relativelyhigh turnover ratios than their counterparts in the western developed markets.

With the further development and opening-up of theMainland exchanges, the global landscape of commodity derivatives market willcontinue to evolve.

FULL REPORT

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