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The long road to index futures trading

By Wang Lan (China Daily)
Updated: 2007-07-04 08:55

The long-awaited debut of CSI300 index futures, the mainland's first financial futures product, is testing the patience of many market participants, particularly institutional stock investors who would welcome an effective hedging tool to help minimize looming risks in an increasingly uncertain market environment.

But Shanghai-based China Financial Futures Exchange insiders said the exchange and the government regulatory agencies insist on getting everything right before the launch.

As a result, much time and effort is being spent on the regulations that cover trading practices, participants' rights and obligations, risk management and clearing facilities. Finding a shortage of experienced financial futures traders, many prospective participants are conducting training courses for selected staff members.

The preparation process is further complicated by the diversity of the participants, whose specific interests must be equally protected.

"The birth of stock index futures represents the transition of China's financial market, from the previously divided operations and supervisions in separated markets to an integrated financial system with coordinated efforts from all markets," said Yu Yiran, an analyst with China International Futures (Shanghai) Co Ltd.

In the past years, a number of key rules and regulations have been introduced to pave the way for the launch of the index futures market. The Regulation on Futures Trading, which came into effect in April, has effectively laid down the ground rules for all participants.

China Financial Futures Exchange (CFFEX) last week said China Securities Regulatory Commission (CSRC) has approved the trading rules and contract specifications for CSI300 futures. The approved rules cover trading practices, clearing procedures, members' rights and obligations, risk control, information management, hedging operations and investigation and penalties for irregular trading.

The approval of the trading rules and contract specifications is widely seen as having cleared one of the final hurdles in the long preparation process.

The assessment of members' qualifications is expected to be the next focus for CFFEX in the coming months. The exchange has said the approval of the trading rules and the contract specifications was a major boost to the preparation work, although the specific trading date for the index futures is yet to be fixed.

But industry experts pointed out that other supplementary rules and regulations will have to be added to form a complete legal system for the proposed market.

Before that happens, it's difficult for the prospective market participants, including broking firms, fund management companies, institutional investors and clearing banks, to make any real progress in their preparation work.

"We just can't speed things up within our organization before all the relevant rules are put in place," said Yu.

TCSRC on June 22 said it began the process of vetting futures brokerage companies that have applied for approval to conduct clearing business.

The securities watchdog also started the qualification assessment of securities companies for IB, or introducing broker, business. IB enables an approved stock brokerage companies to earn commissions by introducing clients to futures trading through futures brokerages.

The futures market is also facing a shortage of industry professionals. This year, the total number of those who have cleared the futures employee qualification examination rose 26 percent from last year to 36,165, according to statistics from China Futures Association.

Related readings:  Regulator approves index futures trading rules  CSRC warms up for launch of index futures  No timetable set for stock index futures launching Special Coverage: Markets Watch

T he frequency of such examinations has been increased to three times a year. Before last year, it was held once or twice a year.

Many futures employees in China, despite having gained expertise in the commodity futures markets, have very limited knowledge of the financial futures market.

Educating investors is also a key factor in preparing for index futures. In 2006 alone, China Futures Association hosted 37 seminars on financial futures for individual investors.

In the past two years, the association has organized 20 lectures aimed at institutional investors. Alongside hundreds of lectures by the association and futures companies, investor education has also been conducted in other forms.

The simulated trading of CSI300 futures, started in October, is widely considered invaluable in providing a lifelike market experience to participants.