The strong performance of the H-share index this year should ensure a fair amount of interest in the new futures based on the index which start trading today, market participants say. But more importantly, perhaps, there will be several new warrants based on the futures to help create demand for the new contract. Warrants are a popular trading tool among Hong Kong retail investors, given that they offer similar exposure but are cheaper than the underlying products. 'We think it will become a very liquid future within a very short period of time and that it will attract very good interest from issuers of products,' said Matthew Long, the head of equity derivatives sales at Macquarie Equities (Asia). He said one of the reasons for this was the strong demand for products with exposure to China, as shown by increasing turnover in the 32 H-share index constituents, and in the abundant demand for China-related initial public offerings. The new futures product also comes at a time when there are increasing calls from investors to have H shares included in the Hang Seng Index to make it more representative of the market. As a result, the H-share index future 'has a real potential to become a new benchmark', said David Friedland, the managing director of Interactive Brokers. In an effort to boost investor participation, Hong Kong Exchanges and Clearing, which is introducing the new futures contract, is offering a $50 supermarket gift coupon to buyers and sellers of the first 800 H-share index futures contracts. According to dealers, some investors have been buying H shares in the run-up to the launch in the belief that the futures will open at a premium to the underlying index and thus prompt share prices to climb. The H-share index, or the Hang Seng China Enterprises Index as it is officially named, closed at a six-year high last Wednesday, having rallied 104 per cent this year. When used as a hedging tool, futures products will add liquidity to the market, while at the same time reducing volatility. However, they can also be used to take a bet on whether the market will rise or fall within a specific time-frame. The launch will also make it easier for securities houses to issue warrants, as the hedging of their exposure becomes less cumbersome. Without a futures contract, issuers would have to buy every single stock in the index every time they were to sell a call warrant and since stringent requirements prevented short-selling of some H shares, it had so far not been possible to issue put warrants, said Cheril Lee of SG Securities. Macquarie Securities has already launched a put warrant, which will start trading on Wednesday, plus two new call warrants, which will be available for trading today, according to Mr Long. Ms Lee said SG, which has four call warrants on the H-share index in the market, would be also ready to issue a put warrant based on the index futures today 'as long as the future has reasonable volume'. Credit Suisse First Boston, which has two outstanding call warrants is also 'very interested' in issuing put warrants and will probably do so 'in the near future', according to the vice-president of the equities division Danny Lin. To be sure, while its Hang Seng Index futures are highly successful, the trading history of HKEx's China-related products suggests some caution may be warranted with regard to the new contract. A red-chip future based on the Hang Seng China-Affiliated Index, launched in 1997, never really took off and was withdrawn in July 2001. In May 2001, the HKEx launched a futures product on the MSCI China Free Index, which includes H shares, red chips and China-listed B shares, but this too has attracted thin interest with a total trading volume of only 20 contracts in the past three months. Strong Demand Underlying index: Hang Seng China Enterprises Index: Contract multiplier: $50 (at an index level of 4000, the contract is valued at $200,000) Contract months at launch: December 2003, January, March and June 2004 Number of constituents in H-share index: 32 Marketing initiatives for H-share futures: Buyers and sellers of the first 800 contracts receive a $50 supermarket coupon No SFC levy for trading H-share futures until June Futures Exchange participants will receive $2.50 for each contract traded through their client accounts until March.