The China Securities Regulatory Commission has published draft rules that would allow Qualified Foreign Institutional Investors to trade the China Financial Futures Exchange’s CSI 300 Index Futures, though it has not set a date yet.
Several restrictions will apply. The CSRC said: “Given the small size of China’s index futures market and local investors’ lack of experience... we [have] imposed some limits on the types of transaction and trading behaviour for foreign investors who want to take part in the business.”
QFIIs will only be allowed to trade CSI 300 Futures for hedging purposes. Positions will be capped at the size and duration of long equity holdings.
Investors will be permitted to choose no more than three domestic futures companies to open accounts with, and one bank to make trading deposits with.
One futures commission merchant executive in Hong Kong said that, despite the restrictions, QFIIs would be keen to begin trading CSI 300 Futures. “QFIIs are permitted to trade in the securities markets, but without the regulatory permission firms have been unable hedge their positions within China,” the executive said.
The regulator is anxious for the ratio of open interest to volume in CSI 300 Futures to rise. At the end of January just 34,000 contracts were outstanding, though 4.34m – 128 times that number – had been traded during the month. This very low ratio suggests that most trading is short term speculative interest, rather than hedging.
The CSRC has been so worried about a speculative mania that in June the exchange told brokers to limit the amount of trading their clients could do each day. The policy appears to have worked – monthly trading has come down to around 4m contracts, from a peak of about 7m in July and August.
Volume could rise again when up to 103 QFIIs are admitted. Each has a quota of allowed exposure to China’s equity market, ranging from $50m to $800m. The total exposure by QFIIs in China is about $20bn.
Each futures contract is worth Rmb300 times the index, which is about Rmb950,000 ($145,000). If 10% of the foreign equity exposure gets hedged, open interest could rise by about 14,000 contracts, an increase of 40%.
The CSRC invited market comment on its proposal until February 12, and said it would issue final rules later.