Asia Is Becoming Even More Important to World Markets

At a Glance

  • Asia-Pacific accounted for the largest futures and options volume by region in 2019
  • Futures are becoming a popular investment vehicle for individual traders following education efforts in the region by exchanges

Asia is continuing to catch the attention of investors, with the region’s GDP expected to overtake GDP for the rest of the world combined in 2020, according to the World Economic Forum. As Asia becomes an increasingly popular investment destination, its derivatives markets are also growing in importance.

The region already plays a significant role in global derivatives trading. The total number of futures and options traded worldwide rose by 13.7% in 2019 to reach a record 34.47 billion contracts. Within this total, Asia-Pacific accounted for the largest volume by region at 14.49 billion contracts – accounting for 42% of global trading volumes, according to the Futures Industry Association (FIA).

Trading Volumes Increase in Asia

Given the region’s rapid development, trading volumes in Asia are on a strong upward trend. The number of futures and options traded on Asia-Pacific exchanges rose by 29.1% year-on-year in 2019, according to FIA figures. By contrast, trading activity in both North America and Europe declined, falling by 2.8% and 4.4% respectively.

In a recent survey by the International Swaps and Derivatives Association (ISDA), 74% of participants said they expected derivatives trading by Asian banks to increase over the next three to five years, while 35% expected an increase by U.S. and European banks in Asia.

The study found that the most important factors driving growth in derivatives trading in Asia-Pacific were the depth and breadth of market infrastructure, a sound legal and regulatory framework, access to customers and counterparties and netting certainty. Transparency in derivatives markets is also increasing as regulators in Asia work to meet G20 commitments on trade reporting and the central clearing of derivatives made following the Global Financial Crisis.

In the past, trading costs in Asia have been higher than other markets, which has affected returns. But in the more developed markets of Australia, Hong Kong and Japan, trading costs are now converging with the U.S., as Asian investors benefit from a ripple effect following the European Union’s introduction of the Markets in Financial Instruments Directive. Meanwhile, there are significant margin efficiencies available from using futures compared with ETFs, which can result in an overall lower cost to trade the product.

Changing Trading Patterns

A range of factors are expected to drive changes in trading patterns going forward. With a number of major events on the horizon, such as the terms on which the UK will trade with the European Union following the Brexit transition, as well as uncertainty over the direction of interest rates, market volatility could increase. That is likely to drive demand for futures.

At the same time, rapid economic growth in Asia will lead to an increased need for derivatives and structured products within the region. Growing retail participation, particularly among high net-worth individuals, is also anticipated going forward. Futures offer this group a cost-effective way to manage portfolio risk as they look for more capital efficient ways to trade.

In addition to managing risk, trading futures is becoming an increasingly popular investment vehicle for sophisticated, individual traders. Road shows and other education efforts by derivatives exchanges have increased both awareness and understanding of derivatives among retail investors in Asia, with this group typically having a strong appetite for risk.

The trading patterns of Asian retail investors are also evolving, with derivative products now being used for diversification due to the low correlation they have to traditional equity and fixed income securities.

Asian Hours Trading Around The Globe

Global exchanges offer depth and liquidity for Asian investors, but if they are to tap into growing demand from the region, they must recognize that investors want round-the-clock access and facilitate Asian trading hours.

Doing so is not only important to enable local investors to respond to events in their own markets, but it also provides opportunities for investors located elsewhere in the world to trade when their own markets are closed.

For example, after drones attacked Saudi Aramco oil processing facilities on a Saturday last September, Asian markets were the first to open following the event. Trading in WTI futures and options when Asian markets reopened the following Monday were 200% and 270% higher respectively than average daily volumes.

Investors’ ongoing need to be able to respond to events quickly in volatile markets is expected to continue to drive demand for derivatives trading in Asia due to the limited overlap the region’s trading hours have with other markets.

It is a big reason why the trend of more derivatives trading in Asia is likely to continue.

Managing Director, Head of Asia Pacific at CME Group

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