Futures markets around the world are booming.¹ Nearly two billion contracts changed hands in 2003, up 26 percent from 2000. A shift to electronic trading, as well as intensified competition among exchanges (propelled, for example, by the entry of Eurex and Euronext into the US market, in 2004), lowered trading costs and thus spurred demand.

Leading the upsurge are China and India (exhibit), whose nascent capital markets crave the price transparency, risk-management opportunities, and low transaction costs that properly functioning futures markets deliver. Shortsighted regulatory policies remain common in these and other emerging markets, however. Excessively high capital requirements, as well as restrictions on foreign participation, capital movement, and the types of products traded, conspire to hamper development. Against this backdrop, China's recent moves to ease the rules that govern the trading of derivatives and other financial products are a welcome sign. The adoption of these more sophisticated products would quicken the evolution of China's capital markets and better arm companies to hedge against financial risk.