The Mutual Offset System - Riding On The Growth Of China

Since China began to open up and reform its economy in 1978, its GDP growth has averaged about 10% yearly. China’s rapid economic growth has also led many of its home-grown companies to seek public listings outside of China, and particularly in Hong Kong, given the latter’s unique advantage of having Mainland China as its hinterland and its extensive global network in which to tap international investors.

Like many other sectors, one of the ways for investors to participate in the growth of China is through an index. The FTSE China H50 tracks the performance of 50 of China’s largest and most liquid stocks listed in Hong Kong. The index is widely followed by international investors and serves as a barometer for Chinese equity markets. For futures market participants, CME has a listed E-mini contract on the FTSE China H50, which is well-correlated with other similar indices on Hong Kong-listed Chinese companies.

Round-the-Clock

In November last year, CME and Singapore Exchange (SGX) announced the expansion of the product scope of their unique Mutual Offset System (MOS), offering global investors a combined deep liquidity pool and round-the-clock access to trade and clear on the leading derivatives marketplaces in Asia and the United States.

As part of this expansion, CME and SGX added this E-mini FTSE China H50 index futures as well as the E-mini FTSE Emerging Index futures contracts to the MOS, offering traders a range of benefits from increased flexibility and liquidity to reduced costs when offsetting positions across international markets.

We selected these new products to enable traders to take advantage of the benefits MOS offers while accessing futures linked to the largest and most liquid Chinese stocks listed on the Stock Exchange of Hong Kong, as well as large and medium-sized companies in emerging markets. 

The Mutual Offset System

MOS is an innovative program between CME and SGX. It enables traders to open a futures position on one exchange and liquidate it on the other exchange, creating a unified 24-hour marketplace across the exchanges. The system has been in operation since 1984 and was the first of its kind. More than 63.2 million contracts of the Nikkei 225 futures have been traded through MOS since this was first added to the system in 2010. In addition to the yen- and dollar-denominated Nikkei 225 futures, it now offers the E-mini FTSE China H50 and the E-mini FTSE Emerging Index futures. 

The good news for traders is that MOS is extremely simple to use. To complete an inter-exchange transfer, all investors need to do is designate the trade as a MOS trade before it is executed. They then choose whether CME or SGX will carry the position. Transaction fees for MOS trades are only charged by the executing exchange, while positions are transferred at their original trade price.  

The MOS enables traders to open a futures position on one exchange and liquidate it on the other. For example, if a trader took a long position on a contract on SGX, and then entered into a short position with the same expiration date on CME, the impact would be the same as if they had liquidated the contract on SGX, namely that it would close the long position. MOS also allows for efficient performance bond requirements for offsetting positions in different products through the availability of spread margin offsets at the respective clearinghouses. The flexibility of the MOS arrangement helps customers to achieve greater capital efficiency while managing the positions between the two exchanges depending on their strategies.  

An Efficient Risk Management Platform

MOS remains one of the most successful programs between exchanges the derivatives industry has ever seen, as proven by the amount of Nikkei 225 futures transactions that are affected through the program, where the volumes continue to grow. As economic realities connect markets across the globe, trading arrangements like MOS could provide additional access and flexibility to market participants. The 37-year program between CME and SGX has further expanded its coverage and scope and now provides the framework for traders across the globe to gain exposure to China and emerging markets. 

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