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China Plans to Relax Curbs on Stock-Index Futures

By Liu Caiping and Dong Tongjian

(Beijing) — China plans this week to relax restrictions on transaction sizes and the costs of trading stock-index futures, following the inconclusive outcome of an investigation into their role in a 2015 stock market crash.

The China Financial Futures Exchange (CFFEX) will reduce margin deposits and trading commissions, and allow larger trading volumes of stock-index futures before the weeklong Chinese New Year holiday, sources familiar with the matter told Caixin.

The decision follows the conclusion of an investigation by regulatory authorities into the possible role played by futures derivatives in exacerbating a stock market crash in the summer of 2015 when more than 40% was wiped off the value of the stock market.

The introduction of stock-index futures by the China Securities Regulatory Commission (CSRC) in 2010 was met with alarm by regulators who thought short-selling would intensify selloffs.

In August and September 2015, the CFFEX introduced new rules requiring all investors trading stock-index futures — whether they were doing so to hedge risk or not — to increase deposits with brokers from 10% to 40% of the contract value. Also, commission charges for daily purchases and sales were raised from 0.015% of transaction values to 0.23%.

More importantly, the exchange said, all investors who opened a position of more than 10 lots on any stock-index futures contracts within one day would be considered to be engaging in “abnormal” trading activities and face punishment, a move that triggered a dramatic drop in the number of transactions of stock-index futures by about 90% the day the regulation came into effect.

The transaction volume of stock-index futures linked to CSI 300 in June 2016 dropped to 0.5% of that in the same period in 2015, according to statistics released by CFFEX. The trading volume of futures linked to SSE 50 and CSI 500 indexes also fell by about 99.3% and 97.4% respectively compared with a year earlier.

While trading of stock-index futures was targeted, authorities failed to find evidence to support the theory that such derivatives worsened the stock market crash. Instead, some traders suggested that curbs on short-selling created more pressure on the market at a time when stock prices were abnormally volatile, mainly because investors needed futures as a tool to hedge against risk.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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