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This paper studies the rise and fall of the first financial futures market in China. We comparethe characteristics in the Chinese Government bond futures market with those in the UST-bond futures market. They differ in market design and structure, market governance,margin requirements, position limits, delivery process, and the way in which the settlementprice is calculated. Furthermore, with a unique dataset, we show that prior to maturities ofgovernment bond futures, traders began to accumulate significant amounts of long positionsfor several selected contracts without the intention to offset, forcing short position holders toeither purchase deliverable bonds or offset futures at highly inflated prices, causing highermarket volatility and price disequilibrium in both spot and futures markets. Arbitrageopportunity arises and the market eventually collapses. The lessons learned from thesuspension of the Chinese Government bond futures market offer an invaluable learningexperience.
This paper studies the rise and fall of the first financial futures market in China. We compare the characteristics in the Chinese Government bond futures market with those in the UST-bond futures market. They differ in market design and structure, market governance, margin requirements, position limits, delivery process, and the way in which the settlementprice is calculated. further, with a unique dataset, we show that prior to maturities ofgovernment bond futures, traders began to accumulate significant amounts of long positions for several selected contracts without the intention to offset , forcing short position holders toeither purchase deliverable bonds or offset futures at highly inflated prices, causing higher market volatility and price disequilibrium in both spot and futures markets. Arbitrageopportunity arises and the market eventually collapses. The lessons learned from thesuspension of the Chinese Government bond futures market offer an invaluable learningexperience.