Chinese regulators mull a revival in trading of stock index futures

PUBLISHED : Wednesday, 03 August, 2016, 6:57pm
UPDATED : Wednesday, 03 August, 2016, 10:57pm

To revive the lacklustre A-share market, mainland Chinese authorities are looking at relaxing rules imposed on the stock index futures market, which was almost suspended from trading after regulators cracked down on non-hedging accounts after a stock rout hit the mainland market last summer.

Trading on China’s once hot stock futures market has withered since late August 2015 when the regulator introduced measures to “curb excessive speculation in stock index futures trading”.

The move was made to minimise the impact on the A-share market after the market rout sliced 40 per cent off the benchmark index in just a few weeks from its seven-year high in mid June. At the time, regulators blamed speculators who they said were shorting the stock indices on the futures market, exacerbating the market slump.

Now that investor sentiment has stabilised but market turnover has failed to gain momentum, the regulators are considering moves to revive the market by encouraging more players to come back.

A source close to the China Financial Futures Exchange (CFFEX), overlooking the index futures market, said the regulator was considering introducing rules that allow more positions to be opened under non-hedging accounts, as well as lowering margin requirements and transaction fees for futures trading.

The proposals have been submitted to the China Securities Regulatory Commission (CSRC) for review, and the extent of the relaxation will be known when a final decision is made within a month or two, the source said.

The best thing for us is that we may finally get our hedging tools back
Xin Yu, Ze Quan Investment

Bloomberg reported that the proposals under consideration included allowing non-hedging accounts to open 100 new positions a day on a single contract. They also propose lowering the 40 per cent margin requirement for non-hedging trades to 30 per cent, and the 20 per cent requirement for hedging accounts to 10 per cent, as well as reducing fees for closing positions that were opened on the same day, while the minimum price movement for certain contracts may widen from the current 0.2 per cent of contract value.

In early September, the CFFEX defined opening more than 10 positions on a single contract under a non-hedging account as “abnormal trading”. The standard for “abnormal” had been set at 600 before the stock rout. Fees for settling positions that were opened on the same day were raised to 0.23 per cent from 0.0115 per cent.

Xin Yu, Beijing-based chairman of hedge fund company Ze Quan Investment, said the new rules, if approved, would have a “neutral impact” on the A-share market.

“Although it may attract fresh liquidity into the stock market, the index futures market gives investors tools to both long and short the market. The best thing for us is that we may finally get our hedging tools back – although 100 positions in a contract a day is still too small to hedge some large-size products,” he said.

Hedging accounts are designated to investors who use futures to offset risks from their holdings in the stock market, which are exempt from the earlier limits on opening more than 10 contracts in a day. But retail investors and most private hedge fund firms do not qualify to apply for the hedging accounts.