China's Oil Futures: Frazzle or Dazzle for Foreign Traders?

China's Oil Futures: Frazzle or Dazzle for Foreign Traders?
Shanghai Crude aims to rival the world's two crude benchmarks.


BEIJING, March 22 (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 affliates 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.

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.


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