Shanghai's reborn market must learn from past mistakes if it is to succeed
Sound corporate governance must accompany improved risk management practices among traders if Shanghai's revived oil futures market is to succeed, according to a risk management expert.
Desmond Li, president of United States-based Thomas Ho Company, said the quality of corporate governance would be a fundamental factor behind the development of the new Shanghai Futures Exchange, which is set to begin trading next month.
Beijing shut down trading of crude and refined oil futures in Beijing and Shanghai in 1995, after rampant speculation and fraud sparked chaos and massive losses.
'There needs to be checks and balances between the different departments to make sure that no one person has all the power and makes all the decisions,' said Mr Li, whose company services traders with risk management and quantitative finance solutions.
'The chief executive, chief financial officer and chief risk officer must answer independently to the board, especially in China where many chief executives have absolute control.'
The collapse of United States energy giant Enron was an example of how companies could be brought to their knees by dodgy derivatives transactions not easily uncovered by outsiders due to creative accounting, he said.