"UBS and several other (overseas) firms are in talks with the regulator to allow select foreign institutions to participate in trading of index futures," Nicole Yuen, a managing director at UBS, said yesterday.

"Although the final decision is up to the stock watchdog, we hope we can get a license as letting foreign institutions enter the market at an initial stage will benefit its long-term development."

Chinese authorities are finalizing preparatory work for pilot equity-index futures, a raft of products set to track a gauge that covers the top 300 Chinese mainland-listed firms. The stock regulator has pledged to push them forward within the year.

Market watchers believe the introduction of such derivatives could provide institutions with a much-needed tool to hedge risks, but may also spur speculation and widen volatility.

Yuen has been sitting on a 25-member listing committee at the China Securities Regulatory Commission since December 2003, and was the first overseas banker to be named to the stock-sale vetting body.

Yuen joined UBS in 1994, and has established good rapport with Chinese regulators as she led various Hong Kong share offerings from the mainland.

She is also head of China Equities at UBS, which has been given a quota of US$800 million by mainland regulators to invest in yuan-backed securities under the Qualified Foreign Institutional Investor scheme.

"The market condition is ripe for launching stock-index futures, and investors needn't worry too much," said Yuen. "Allowing foreign players to participate will bolster trading and help tap overseas expertise for the market."

To curb potential risks incurred by introducing overseas investors, Yuen indicated regulators could set up a quota system similar to that under the qualified foreign institutional investor program.

Foreign investors should also be limited to using the index futures to hedge risks, she said. An official at the China Securities Regulatory Commission declined to comment yesterday.

"Regulators are definitely cautious on deregulating the market to foreign investors," said Yuen. "I believe only quality overseas institutions should be allowed in the market in the early stages."

Yuen said she is confident about the long-term outlook of mainland stock markets, although 2007 could be more volatile after a staggering surge last year.

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