Rules could be relaxed if QFII index futures trading is successful
June 01, 2011 | BY
Candice MakCSRC allows QFIIs to trade SIFs in China
On May 6, the China Securities Regulatory Commission (CSRC) released new regulations that allow qualified foreign institutional investors (QFIIs) to trade stock index futures (SIFs) in China.
Although the Guidelines for the Participation in Stock Index Futures Trading by Qualified Foreign Institutional Investors (合格境外机构投资者参与股指期货交易指引) allows QFIIs to trade SIFs, there are two key restrictions: 1) they may trade for hedging purposes only and cannot sell overseas derivatives products based on the SIFs and 2) they must comply with applicable daily trading limits.
Shanghai-based Boss & Young partner Hubert Tse, who advises several QFIIs, said trading on the Chinese A-share market had become more volatile since the SIFs launch in April 2010. “To limit the possible risk of increased A-share market volatility, the CSRC has proposed restricting the type and volume of SIFs that can be traded by QFIIs, and requires QFIIs, custodian banks and domestic futures companies to assume certain compliance and supervisory obligations,” he said.
The QFIIs index futures trade will be counted as part of their existing investment quotas.
Other key points of the new rules include that the buying/selling hedging quota must not exceed 10% of a QFII's investment quota as approved by the State Administration of Foreign Exchange (Safe) and that the total value of SIFs contracts held by a QFII must not exceed its total amount of investment within each trading day, as well as at the end of each trading day.
Tse expects current limitations to ease and the quota to expand later on. “I think it's understandable and reasonable for the regulators to need to monitor how and where this is all going before opening up further, since domestic investors had only been allowed to trade SIFs since April 2010.”
“SIFs trading has been working well the past year and the CSRC hopes for more institutions to join,” said Jonathan Sun, a Beijing-based partner at Zhongyin Law Firm.
QFIIs may work with up to three domestic futures companies for SIFs trading, but may place its security deposit with only one custodian bank. Both the futures companies and the custodian bank must supervise and audit the QFII's SIFs trading activities, and report to the CSRC if they uncover any irregularities or illegalities. The custodian bank must report the QFII's trading status to the CSRC each month, and it and the QFII must specify the method of settlement, rights and obligations in transactions and clearing.
If any violations occur, the CSRC will impose penalties on the QFII.
QFIIs that intend to trade SIFs must obtain approval from the China Financial Futures Exchange (CFFEx). They should submit their investment plans to the CSRC and Safe, and open up an account with CFFEx.
Then, the QFII should sign a tripartite indenture with its custodian bank and futures companies, and apply for a trading code from CFFEx and a hedging quota, which is only valid for six months after approval.
To apply for a buying or selling hedging quota, the QFII must provide a Proof of Funds and the status certificate of stock assets. CM
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