Look at financial derivatives realistically
When I started writing, I remembered the story of the CEO of a listed company telling me about their use of derivatives more than 10 years ago. He said that since the 1990s, they have used both domestic and foreign stocks/futures markets to develop enterprises through domestic and foreign stock market financing on the one hand, and use domestic and foreign derivatives transactions to protect enterprises on the other. Relying on the two markets, it has promoted the development and growth of enterprises, and today their enterprises have ranked at the forefront of the global industry rankings. After the international financial crisis in 2008, the boss came to me eagerly and said that because of problems with foreign financial derivatives, they were required to stop derivatives trading. He said that once it stops, he doesn't know how to manage the business. There was also a big business executive who told me the story of farmers selling soybeans in Heilongjiang. He said that in the past, "middlemen" bought farmers' soybeans, and the purchase price was not transparent, and the intermediate price was eaten by "middlemen", and farmers suffered a lot in the transaction. Later, when farmers used DCE’s futures prices to bargain with "intermediaries", the price difference disappeared, and farmers increased their profits and defended their interests. These two stories show that, whether it is an enterprise or an individual, whether it is industry or agriculture, derivatives are important tools for production, operation and management, and are the real needs of the real economy. Its development and growth are beneficial to the national economy and social life.
The derivatives market has a history of more than 100 years, starting with commodity futures and then financial futures. In the 1970s and 1980s, before the emergence of financial derivatives such as foreign exchange, interest rates, stock futures, and options, commodity futures were the main derivatives. Since commodity futures have the functions of price discovery and hedging, they have been used very well by entity companies, and they have also brought bulk commodity pricing influence to European and American countries that first established futures markets. For example, nowadays, the futures markets in the United States and the United Kingdom have become global commodity pricing centers. When China imports crude oil, soybeans, corn, copper and other commodities, the futures trading prices of the Chicago Mercantile Exchange and the London Metal Exchange are generally used as the pricing benchmarks for trade negotiations. Some large Chinese companies are also using these markets overseas to hedge and manage risks in international trade. More than 90% of China's non-ferrous metals industry has participated in the futures market. According to existing research, the business performance and profits of this industry have been growing steadily and continuously for more than 20 years. After China officially launched stock index futures in 2010, some securities companies used stock index futures to manage risks, maintained stable business operations, and provided market-oriented support for the stability of the capital market.
At present, China's derivatives market has formed a certain scale and has the basic ability to serve the real economy.
China's derivatives market is built and developed under the advocacy and support of the country. The Chinese derivatives market began with the establishment of the commodity futures market, with a short history of only 30 years. As a product of reform and opening up, the early 1990s was a pilot period, crossing the river by feeling the stones. After development problems, the state carried out rectification and regulation, but none of the sticks was "killed", leaving a few varieties to continue testing; after 2000, the state supported the steady development of the futures market, and supported research financial futures and options on the basis of promoting the development of commodity futures. After the 2008 international financial crisis, China did not hesitate to approve the listing and trading of financial derivatives such as stock index futures and treasury bond futures in the face of a lot of negative public opinions on financial derivatives. In 2015, China's stock market fluctuated abnormally. In the face of turbulent and verbal public opinion, the state did not stop the trading of stock index futures, but merely adopted restrictive measures.
Nowadays, China’s derivatives market has been boldly explored and innovated. The market has greatly improved in terms of volume and quality. There are both commodity futures and financial futures; there are both on-exchange options and over-the-counter options, and new products continue to be listed，openness continues to increase. As of the end of 2020, there are 90 on-exchange derivatives listed for trading, of which 6 are open to foreign investors, and the market function has been brought to a new level. The development and growth of China's financial derivatives market have greatly promoted the construction of China's flexible, resilient and influential capital market.
From the beginning of the pilot program to the present, the state has always attached great importance to the development of financial derivatives. However, it is undeniable that the interpretation of financial derivatives in both academic and public opinion circles is mostly negative, which has affected people's comprehensive and complete understanding of financial derivatives.
Financial derivatives trading can make the capital market more resilient and influential. The attractiveness of the capital market is based on the principle of "three publics" and strict supervision and law enforcement. On this basis, liquidity is an important indicator of whether the capital market is resilient and attractive. Liquidity means that investors have the freedom and right to buy and sell at any time under clear rules. Financial derivatives, due to their special product design and trading mechanism, have higher liquidity than basic asset commodities, stocks, and bonds. The proper coordination of financial derivatives transactions and securities market transactions can drive the improvement of the entire capital market's liquidity.
Financial derivatives transactions can turn the capital market into a capital market with risk management. The financial derivatives market has strengthened and improved the institutional foundation of the capital market in terms of price discovery and risk management. Its risk hedging function has the effect of alleviating liquidity crises and has become the most important capital market innovation in the financial market since the 1970s. It not only makes the capital market a truly risk-managed capital market, improves the scale and cohesion of the capital market, but also strengthens the global competitiveness of the capital market, promotes the cross-border flow of capital and the global allocation of resources, improves the growth of the real economy and ability to upgrade the industry.
Financial derivatives trading can become a booster for the deepening development of the capital market. The evolution of economic history tells us: Capital has undergone three rounds of progressive changes. The first time was the separation of labor from the owners of land and means of production in the agricultural society. At this time, although capital existed while its power was weak, no derivatives market was created. The second time was the emergence of joint-stock companies after the machine and electrification revolution. Capital ownership is separated from operation and management power, shareholders and managers take their respective responsibilities, a global manufacturing center and international trade of commodities have emerged, which has created a commodity derivatives market; the third time was the world's entry in the 1980s after the information society, the asset ownership attribute of capital is separated from the price ownership attribute of capital. With the support of information technology, financial derivatives that can be traded independently of the underlying assets have been produced. A group of financial engineers used innovation to separate the price attributes of financial basic assets from the ownership attributes of financial assets themselves. The price attributes of different financial assets have been integrated by financial engineers and information technology into easily identifiable, universal, and tradable price benchmarks, resulting in a financial derivatives market that only trades the price attributes of financial basic assets.
This kind of divestiture has caused the secrecy of financial derivatives, which is not easy to understand. The two types of separation experienced by capital in the past, such as the separation of land and means of production in agricultural society from capital and farm workers, and the separation of equity and capitalists in industrial society, are both visible and tangible forms, and they are both very specific. However, the price attribute of the asset is separated from the equity attribute of the asset and becomes the subject of the transaction independently, which is too abstract, invisible, intangible, and incomprehensible.
I summarize this concealment into three points, namely, the dependence of assets, the concealment of functions, and the structure of public opinion.
Dependency of assets-financial derivatives is traded in the price attribute of asset ownership rather than the asset itself. Although it can be stripped, the price attribute is always attached to the basic assets; whether it is a commodity or a financial derivative, it is a product designed on the basic assets of commodities, stocks, bonds, and exchange rates. "The skin does not save the hair and will be attached." This kind of dependency makes people more concerned about and more sensitive to basic assets, and they often turn a blind eye to attachments because of their virtual nature. However, this change makes the purpose of derivatives competition no longer manifested as a competition for maximizing profits of a specific company, but a more direct competition for the relative value of capital. Traders get rid of the fetters of the personality characteristics of capital, that is, the attributes of the company, and focus their attention on the common attribute of capital, that is, the relative price of capital. Due to the adoption of a high-leverage margin trading mechanism, a high-risk, high-return market has been formed. If the lack of necessary internal control and necessary external supervision, it is easy to stimulate traders' enthusiasm, form overheated transactions, excessive speculation, and amplify risks. Once there are problems in the basic asset market such as commodities, stocks, and bonds, the dependency of financial derivatives (the price attribute of basic assets) will inevitably be repeatedly illuminated under the spotlight of public opinion. Especially when prices in the spot market fluctuate violently and fall rapidly, the pain of loss is often to pull out the dependent derivatives market to criticize the "sling". We have seen this situation in the vortex of public opinion encountered in the United States in 1987, Japan in the 1990s, and China's stock index futures in 2015.
The concealment of functions-because derivatives are the price attributes after the separation of assets, many people enjoy their functions and profit without knowing it. For example, the farmers in Heilongjiang mentioned above did not participate in derivatives market transactions, but they were able to use futures prices for free to protect their income. At the same time, the liquidity formed by derivatives transactions allows hedgers to easily enter the market to complete risk management. But it is difficult for people to see that this is formed by derivatives trading and is welfare for the public to enjoy free of charge. Because it does not appear as something visible or tangible, just like people's free enjoyment of air in their lives without knowing it, it ignores the lubricating effect of the derivatives market on the economy. The view that bank credit and stock bonds are beneficial to the real economy is generally accepted. The indirect financing of bank credit, that is, the bank provides loans to producers, operators and individual consumers, and savers deposits to obtain interest income and other activities is very intuitive and specific. Direct financing in the securities market, that is, the issuance of stocks and bonds by financiers, and the funds raised by enterprises from the securities market are also very clear and visible. Investors buy and sell stocks/bonds in the stock market, and it is clear that they will win and lose money at a glance. The positive effects and performance of the above two financial models on the national economy are obvious and clear. The functions of financial derivatives, such as looking at flowers in the fog are unrealistic, unintuitive, hard to say, concealed, not easy to see clearly, and easy to misunderstand.
The structure of public opinion-the interest groups in the spot market such as commodities, stocks, bonds, etc. are dozens or even hundreds of times larger than the derivatives market. The structure of investors brings about structural problems of public opinion. For example, the number of accounts in the securities market is more than 100 million, while the number of accounts in the futures market is only more than 1 million. The former is more than 100 times that of the latter. The public has far more information on spot assets than financial derivatives, and the information is structurally asymmetry. Financial derivatives depend on spot assets, and their functions are hidden. Once there is a problem or crisis in the spot market, the huge spot market interest groups will generally look outward when looking for the cause of the problem. Commodity and financial derivatives markets are open and transparent, and price rises and falls are concrete and clear at a glance, and are easy to be targeted; once there is guidance from public opinion, it is very likely to form a trend of responding and attacking in groups. Although the regulators and organizers of this market know best and understand the meaning of financial derivatives, they are in the minority. Therefore, it should be seen that this is not the right or wrong of the product itself, but the large or small number of investment groups, and the structural issue of the influence of public opinion in the spot asset market and the derivatives market.
The above three characteristics of derivatives determine that when problems arise in the spot asset market, the derivatives market will inevitably be criticized and become a scapegoat.
Long-term scenery should be eye-catching. From the perspective of the history of financial development, after a new market is created, there is a process for society to accept it, and it takes time as a running tool.
It has been 700 years since bank credit was invented by the Medici family in Italy. The early Italian bankers were not seen by society. This can be seen from Shakespeare's "The Merchant of Venice" on the loan shark's "a pound of meat" description. Today, society fully accepts banks. The capital market has a history of more than 300 years. Market manipulation, insider trading and fraud have also pierced the backbone. Its positive role in society has gradually been recognized in the wasteful years. Today, society has accepted the capital market. Since the development of commodity futures for more than 100 years and the development of financial futures for more than 50 years, the derivatives market is known worldwide for its "zero-sum game." The function of risk management, but the breadth and depth of acceptance is far inferior to that of banks and capital markets. I think it will take time for the society to fully recognize the financial derivatives market. As long as we stretch the timeline a little longer, we can look at it calmly.
With the purpose of popularizing financial derivatives, Mr. Sha Shi compiled his long-term practical experience and thoughts in financial derivatives markets at home and abroad into a book, named "The Essence of Financial Derivatives" and published it, trying to tell people Know the meaning and function of financial derivatives, and promote the whole society to pay more attention to and understand the financial derivatives market. I agree with his efforts and the main points in the book. I hope that there will be more and more books and articles of this kind that present facts and reason. In my opinion, it is an indisputable fact that the financial derivatives market is conducive to the development of the national economy.
At the same time, I also remembered a sentence: "If you want to demonstrate that a certain thing is bad, there are a bunch of facts; if you want to demonstrate that a certain thing is good, there are also a bunch of facts." To demonstrate the right and wrong of financial derivatives, there are a lot of facts to say, but it depends on what angle it comes from. Those who have used this market believe that it has great value and positive effects, and critics may find it difficult to agree with the former for a period of time. Therefore, it is more necessary for the collision and exchange of various views. The above reading experience should be the preface.