Hong Kong Exchanges and Clearing Limited (HKEX) has signed an agreement with MSCI to offer futures contracts on the MSCI China A Index, giving global investors a tool to hedge their investments in Asia’s largest equity market. The index futures, which does not have a launch date, is part of the exchange operator’s three-year plan to transform itself into a global financial market place, by offering a greater variety of products, including exchange-traded funds (ETFs), futures and options, as well as commodity and currency contracts . The new plan, which would end the monopoly by Singapore Exchange on offshore derivatives based on the A-share market, comes as the Chinese market has started experiencing some volatility. The Shanghai Composite Index tumbled 4.4 per cent on Friday, the most since October, after some leading mainland brokerages suggested investors should sell some stocks with the biggest gains this year. Before the plunge, the Shanghai benchmark index had risen 25 per cent while Shenzhen was up 34 per cent in the first two months of trading. What moved the stock market? ]]> “The volatile A share market shows it is important to have a hedging tool for international investors who trade A shares in Shanghai and Shenzhen via the northbound stock connects,” Charles Li Xiaojia said on a conference call on Monday. “As MSCI this year will increase the weighting of A shares in its index from 5 per cent to 20 per cent, the international fund flow into the A shares via the stock connect will increase substantially by US$70 billion to US$80 billion. This increases the need for the hedging tool.” The MSCI China A Index comprises 421 large and mid-cap Chinese stocks denominated in yuan, traded on the Shanghai and Shenzhen exchanges. Li said that the proposed HKEX product can compete with similar products offered by rival exchanges. Singapore Exchange, for instance, has the FTSE China A50 futures contract, which makes up about 40 per cent of the total volume of derivatives traded last quarter, with a daily turnover of US$5 billion and US$12 billion in open interest, according to Bloomberg. “The futures products we are going to launch will be more precise and comprehensive to match the hedging needs of these long term investors trading through the stock connects,” Li said. Henry Chan, chief investment officer of BEA Union Investment Management, said the company could consider shifting to HKEX’s new contract for hedging. “As a firm, we have been using China A-share futures traded in markets outside Hong Kong to hedge our exposure. We will definitely look into any proposed futures instruments listed on the Hong Kong exchange,” Chan said. George Molina, head of emerging markets trading at Franklin Templeton, said the proposed launch of the futures contract is confirmation of exchange’s work with the end investor’s needs for a tool to manage risk in their portfolios. Hong Kong exchange thinks it has a shot as world’s fundraising hub, tapping China’s trillions in savings. Does it? China’s US$6.83 trillion stock market is mostly off limits to international investors, except for a small sliver for qualified foreign institutional investors (QFII) and two cross-border investment channels via Hong Kong called the Connect scheme. The Connect schemes, launched in 2014 with Shanghai and two years later with Shenzhen, attracted 4.67 trillion yuan (US$698.4 billion) of equity investments into China last year, a jump of 106 per cent compared with 2017, according to exchange data. “With the evolution and sophistication of China’s securities markets, we continue to see increasing participation of global investors who are demanding tools to enhance their risk management capabilities,” said Henry Fernandez, chairman and chief executive of MSCI Inc. In depth: China’s stock market needs to ditch its patchwork rules for a clean start at its watershed moment Li said the launch date is subject to regulatory approval and market conditions. While the product details have not yet finalised, he said the futures will be settled in cash and are likely to be traded in US dollars. “The HKEX has already submitted all papers to the Securities and Futures Commission for regulatory approval. It is up to the SFC to decide if it would work with mainland regulators on the matter,” Li said. An SFC spokesman said that the HKEX-MSCI agreement is a positive development for markets in Hong Kong and the mainland. “We have no comment on individual product proposals from HKEX which will require specific regulatory approvals. As regulator, we always maintain close dialogue with HKEX to discuss its product proposals,” the SFC spokesman said. He added that the SFC and mainland regulator China Securities Regulatory Commission already work together on supervision and enforcement of futures trading. Li said the HKEX will consider launching bond futures and fixed income futures for international investors to hedge their risks as they trade mainland bonds via the HKEX bond connect. Shares of the bourse operator, which are listed in Hong Kong, closed 2.1 per cent higher at HK$272.20, after plans for the MSCI A Share Index futures were announced.