Stock index futures trading may be opened to qualified investors

PUBLISHED : Wednesday, 21 July, 2010, 12:00am
UPDATED : Wednesday, 21 July, 2010, 12:00am

Authorities are considering selection of several foreign institutions to put up to 10 per cent of their investment quotas into the newly created stock index futures.

The move could provide a stabilising force to the fledging derivative market and regulators have drawn up a draft rule governing such investments.

Guidelines for participation of qualified foreign institutional investors (QFIIs) in the equity-based derivative could be outlined soon to solicit public opinion, according to an official with the China Securities Regulatory Commission. Under such a rule, QFIIs could invest as much as US$1.77 billion into the mainland's stock index futures that were first offered on the China Financial Futures Exchange on April 16. The official said no time frame had been set for the move.

'It is an apparent move to better develop the index futures market, which is still dominated by retail investors while domestic institutions are showing lukewarm response to it,' said Haitong Futures analyst Shu Chao. 'Some retail investors are still seeing the derivative as an investment rather than a hedging tool.'

Beijing launched the index futures after a nearly three-year delay. Initially, regulators were concerned that runaway investment in the futures market could undermine the volatile spot market.

To reduce such risk, the regulator allowed only investors who made a minimum deposit of 500,000 yuan (HK$572,600) to open accounts at the CFFE. Applicants also were required to take a written test on their knowledge of the index futures.

The margin requirement - the initial minimum amount of cash an investor must deposit before making a transaction - was set at 12 per cent, two percentage points higher than the market had expected. Brokerages and mutual funds were also allowed to trade index futures.

Liu Xinhua, a vice-chairman with the CSRC, said in May that the regulator would make a ruling about QFIIs' trading of index futures.

At the end of 2002, China allowed selected foreign institutions to invest in A shares, hoping the overseas funds would set a healthy tone for the volatile market.

In 2008, the State Administration of Foreign Exchange tripled the total foreign-exchange quota from US$10 billion to US$30 billion.

To date, 89 foreign institutions have received US$17.72 billion worth of quotas to invest. the China Securities Journal reported.

Beijing tried to launch the index futures in 2007. It was reported then that the QFIIs would be allowed to invest 10 per cent of their quotas into the market.

Seeking stability

Foreign investment is seen as a potential market stabiliser

The amount of investment quotas which can be placed in the stock index futures is expected to be: 10%