Relaxation on index futures ruled out by exchange

CFFEX denies reports that restrictions imposed during last summer’s stock market crash are to be lifted

PUBLISHED : Friday, 05 August, 2016, 6:03pm
UPDATED : Friday, 05 August, 2016, 10:19pm

China’s futures exchange has denied reports it is planning to relax the restrictions introduced on stock-index contracts following last summer’s market crash.

Except for trading on the China Financial Futures Exchange (CFFEX) for hedging purposes, investors are still only allowed to open a maximum 10 positions on a single contract, compared with the previous 600. Anything above that is considered abnormal trading.

The restriction was introduced to cap short-selling that the China Securities Regulatory Commission (CSRC) blamed for a boom-to-bust cycle starting in June last year, which eventually wiped $5 trillion worth off the value of shares two months later.

Index futures are futures contracts on a stock or financial index. They are a major tool used in “algo,” a popular quantitative investment strategy.

Beijing launched index futures at the CFFEX in 2010, creating a hedging tool and arbitrage system for institutional investors.

During the strong A-share rally between October 2014 and June 2015, the Shanghai-based financial futures exchange was Asia’s largest bourse for index futures in terms of turnover.

It is now among the last four regional index futures exchanges owing to sluggish trading.

Media reports have suggested the bourse is considering allowing non-hedging accounts to open 100 new positions a day on a single contract. Bloomberg said it was also considering lower margin requirements and smaller fees on same-day transactions.

But a statement from the bourse on its website, reported by Reuters, said: “We have not released any information recently” regarding loosening restrictions.

Speculation had heightened in recent months the regulator would relax the curbs now that the market was showing signs of stabilising.

The curbs will be lifted sooner or later because quantitative investment would benefit the long-term development of the market. It’s just a matter of time
He Yan, a hedge fund manager with Shanghai Shiva Investment

A fully-opened index futures market would allow a clutch of computer-based strategies, or quantitative investment, to be employed by institutions such as brokerages, mutual funds and hedge funds to chase profits from trading shares.

“The curbs will be lifted sooner or later because quantitative investment would benefit the long-term development of the market,” said He Yan, a hedge fund manager with Shanghai Shiva Investment. “Regulators are fully aware of that, and it’s just a matter of time.”

Quantitative investment, an arbitrage trading based on pre-programmed mathematical calculations, has gained popularity on the mainland market since in early 2010s.

The CSRC had been supportive of such computerised investment strategies as they can technically inject ample liquidity and curb irrational speculation in a fluctuating market.

In recent months China’s retail market has reacted violently at times, sometimes due to little more than rumours, as investors sought to make short-term gains or curb their losses.

Dozens of billions of yuan were estimated to be managed by investment professionals using such “quant” trading tactics in 2013, before chaotic trading caused by a computer glitch at Everbright Securities drove the key indicator up nearly 6 per cent in just a few minutes.

The CSRC launched a probe into the trading systems at financial institutions after that trading mishap, to ward off further risk.

But it didn’t stop some mainland institutions from strengthening their teams to delve into quant trading.

Analysts say that too many mainland retail investors still put their faith in the wizardry of star fund managers, while ignoring market fundamentals.

Feng Zhangpeng, a senior manager with Everbright Securities’ asset management division, said that good investment strategies generally prove to be more reliable than fund managers’ skills.

Many still remain suspicious of China’s mutual fund sector, however, given its relative lack of maturity and inexperience by the traders managing its the trillion yuan (HK$9.3 trillion) of assets under management.

Analysts say the latest denial of any planned moves to relax market restrictions sends a strong message that it is likely to be some time before the mainland equity trading bourses are considered to be running on a par with international norms.

“The regulators believe it’s not the right time to press the button for major policy changes as they are worried about another roller-coaster ride,” said Bob Zhou, chief executive of Yinshu Capital, a Shanghai-based asset management firm.

“Tightened regulation will continue to dominate the A-share market through to the end of this year.”

Beijing launched index futures at the CFFEX in 2010, creating a hedging tool and arbitrage system for institutional investors.

During the strong A-share rally between October 2014 and June 2015, the Shanghai-based financial futures exchange was Asia’s largest bourse for index futures in terms of turnover.

It is now among the last four regional index futures exchanges owing to sluggish trading.

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