Beijing has set a limit on how much mutual funds can invest in the country's first equity-based derivative, to be launched in mid-April, in a move to prevent what regulators fear could be rampant trading in the stock index futures product. According to a draft rule by the China Securities Regulatory Commission, stock-focused and stock- related funds are allowed to have long holdings in the new derivative of no more than 10 per cent of their net asset value. The value of their short positions cannot exceed 20 per cent of their stock holdings. Bond funds and currency funds are barred from buying the yet-to-be-named derivative, a stock index futures contract based on the China Securities Index 300. 'Mutual funds are supposed to play the index futures in light of the principle of risk control,' the rule said. 'Hedging is the only purpose for the funds when they trade the index futures.' In January, the State Council announced that the long-delayed index futures would be launched on the Shanghai-based China Financial Futures Exchange. CSRC chairman Shang Fulin said earlier this month that the first equity-based derivative would debut in mid-April. The regulator, spooked by a scandal 15 years ago, is still wary of runaway investment on the financial futures exchange when trading kicks off next month, analysts said. The so-called '327 incident' in 1995, a scandal that involved trading of bond futures on the Shanghai Stock Exchange, forced the regulator to halt trading of the product. On February 23, 1995, Shanghai Wanguo Securities hugely exceeded a ceiling on its futures position to drag down prices of a bond futures contract - whose code was 327 - triggering massive selling. The government was eventually forced to spend more than one billion yuan to pay off Wanguo's losses. The CSRC has set a high threshold for retail investors who plan to trade the derivative. Individuals are not allowed to open accounts at the futures exchange unless they make a minimum deposit of 500,000 yuan. The regulator also set the margin requirement - the initial minimum amount of cash an investor must deposit before making a transaction - at 12 per cent, higher than the 10 per cent the market required. The futures exchange also requires investors to take a training course in financial derivatives and pass a written test when they apply to open accounts. 'For risk concerns, the regulator has every reason to play down a potential buying frenzy in the derivative,' said Yang Zongyao, an analyst with China Jianyin Investment Securities. 'The investment cap is quite reasonable.' If the financial futures market spins out of control, the ripple effects would spread to the stock exchanges in Shanghai and Shenzhen, which could prove disastrous to China's capital market, analysts said. The Shanghai Composite Index has lost 8.7 per cent so far this year following an 80 per cent gain in 2009.