The once lukewarm futures brokerage license has become more alluring recently as talk heats up about financial derivative trading having huge market potential in China.

 

"The turnover of the derivatives market in China is likely to reach US$80 trillion within five years of its launch," said Zhang Guangping, deputy director of business innovation and supervisory cooperation department of China Banking Regulatory Commission (CBRC), at a recent conference.

 

The introduction of financial derivatives is seen by many as one of the keys to stimulate the struggling domestic futures industry.

 

The government's approval earlier this year to set up a new exchange in Shanghai to trade financial derivative products, market watchers say, indicates that the day of derivatives products trading is inching closer and closer.

 

Industry players widely believe futures brokerages will automatically be granted the license to trade financial derivatives, although there is no official line on the issue yet.

 

"The perception that existing futures brokerages will be naturally allowed to trade financial derivatives products is adding lure to the value of the futures brokerage license," said Chen Hui, general manager at Guangzhou-based Joint Futures Co Ltd.

 

"The price of the (futures brokerage) license, which has become insignificant in the last few years, is likely to rebound as more and more foreign futures players eye the derivatives market," Chen said.

 

Some licenses, according to Chen, were even priced less than 200,000 yuan (US$25,000) a few years ago.

 

But the license of some first-tier futures companies is now priced at more than 10 million yuan (US$1.25 million), according to estimates by industry players.

 

In financial derivatives trading turf, futures firms have some advantages, such as better risk management expertise over securities houses, the manager said.

 

"But it is hard to say whether securities firms will be granted the same treatment or not," he said.

 

What's more, analysts say the difficulty in getting a securities brokerage license and the uncertainty over whether securities firms will, as expected, be allowed to trade financial derivatives, is driving many overseas futures brokerage firms to search for their Chinese futures brokerage partners.

 

The current overwhelming sentiment among the domestic securities firms, which witnessed industry-wide losses last year and is under restructuring and consolidation, is against the entry of foreign players, according to a researcher with China International Futures Co Ltd, the country's largest futures house.

 

But the difficulty in getting a securities license is deterring many away, who instead turn to the futures brokerage license, which is "relatively cheap," said the researcher, who requested anonymity.

 

In a bid to open up the futures market, China published new rules last August that allow Hong Kong or Macao-registered foreign futures brokers to form ventures with Chinese counterparts.

 

(China Daily February 28, 2006)