CFFEX launches stock index futures

As of April 16 2010, Shanghai-based China Financial Futures Exchange (CFFEX) launched the first stock index futures in China. As a result, eligible Chinese investors are now available to practice the stock index futures business.

The Regulation on the Administration of Futures trading was rectified by the State Council of the PRC on March 16 2007. It regulated content, from commodity futures to financial futures, according to which legal obstacles on the stock index futures were removed. On September 8 2007, with the approval and authorisation of China Securities Regulatory Commission (CSRC), CFFEX was founded jointly by Shanghai Futures Exchange, Zhengzhou Commodity Exchange, Dalian Commodity Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange.

In the past three years, CFFEX has been working on product design, rulemaking and all kinds of technical preparation, as well as potential investor education. A series of regulations and rules had been promulgated by CSRC and CFFEX, including The Trial Measures of Financial Futures Clearing Business, The Trial Measures for the Provision of Intermediary Introduction Business to Futures Companies by Securities Companies, The Trial Measures for the Administration of Risk Control Indicators of Futures Companies, Futures Exchange Management Measures, Futures Company Management Regulations and the Trading Rules of CFFEX.

The reform triggered by the Regulation on the Administration of Futures trading in 2007 was once suspended due to the high risks of financial futures. As the stock index futures business has been officially launched and traded since April 16 2010, the lack of hedging tools by which Chinese investors will be able to decrease their losses in a falling market was made up.

Pursuant to the trading rules and implementation details promulgated by CFFEX, the trading target of the CSI 300 index futures contract (CSI 300) is the CSI 300 index. This consists of 300 A-share stocks listed on the Shanghai or Shenzhen stock exchanges. Further details about CSI 300 include:

1) Eligible investors: along with The Trial Implementation for Appropriateness System of Stock Index Futures Investors promulgated by CSRC with effect from on February 8, the CFFEX issued The Circular on issuing the Implementing Measures for Appropriateness System of Stock Index Futures Investors (Trial Implementation) (Circular 15). Pursuant to Circular 15, as a threshold for opening an account, eligible investors must satisfy the following conditions: a) available funds should be not less than Rmb500,000 (US$73,210) for opening an account; b) have basic knowledge of stock index futures and have passed the relevant test; c) have more than 20 times index futures transaction records within at least 10 days, or more than 10 times of commodity futures transaction records within the past three years.

2) The contract size: the contract size specifies the amount of the asset. Pursuant to the trading rules of CFFEX, effective from February 20 2010 (trading rules), the contract multiplier of CSI 300 is 300. That is to say, the contract size of CSI 300 is 300 times bigger than the CSI 300 stock index.

3) Delivery months: a future contract is numbered by its delivery month. The delivery month of CSI 300 is the contract month, the next month, and the next two quarter months (quarter month means March, June, September or December).

4) Daily price movement limits: daily price movement limits is regulated by CFFEX. Once the price moves beyond the limits, trading will be suspended on the day. Trading rules regulate the increased/ decreased limitation of CSI 300, which is +10% or –10% of settlement price of the previous trading day.

5) Trading margin: trading rules set the minimum trading margin, which is no less than 12% of the contract's value. This is with exception to The circular of the CSI 300 public offering, published by CFFEX on March 26 2010, under which trading margins of stock index contracts in May and June 2010 were reset to 15%, while those in September and December 2010 were reset to 18%.

With official promulgation and performance of the CSI 300 index futures, more issues and even disputes may be discovered. These include margin requirements, daily settlement procedure, delivery procedure, bid-offer spread, introducing broke business (IB) and the role and duty of the exchange clearing. Needless to say, the regulations on resolving the issues should be placed on the agenda of lawmakers.