China Further Rolls Back Curbs on Trading Stock Index Futures

* China’s financial futures exchange announced Sunday that it would lower margin requirements and commission charges for stock-index futures, and raise the daily trading limit

* Futures contracts with a stock index as the underlying asset are a key tool for investors to hedge against, or speculate on, broad price movements in the market, however they have faced restrictions since the 2015 market crash

(Beijing) — China has further relaxed the tough limits on one of the few tools stock investors have to hedge their bets, in response to domestic and foreign investors’ demands for better risk management.

China’s financial futures exchange announced Sunday that it would lower margin requirements and commission charges for stock-index futures, and raise the daily trading limit. The easing measures took effect Monday.

The changes, which aim to lower investors’ trading costs and improve market liquidity, marked China’s latest effort to further free up its financial sector by loosening regulation.

Futures contracts with a stock index as the underlying asset are a key tool for investors to hedge against, or speculate on, broad price movements in the market, as indexes cover a host of different stocks.

During the 2015 market crash, however, Chinese regulators blamed domestic and foreign short-sellers using this tool for worsening the market decline, and imposed a series of curbs on it, after which trading volume of stock-index futures plunged.

Amid a stable market in 2017, watchdogs started loosening the restrictions, but investors complained the easing has been insufficient to allow them to make full use of the tool.

On Monday, the China Financial Futures Exchange cut the margin requirement for trading CSI 300 index and SSE 50 index futures from 15% to 10% of the contract value, and that for trading CSI 500 index futures from 30% to 15%, according to its Sunday statement (link in Chinese).

The CSI 300 index tracks the 300 largest and most liquid A-share stocks in China, while the CSI 500 index consists of the largest remaining 500 stocks after excluding both the CSI 300 index components and the largest 300 stocks. The SSE 50 index consists of the 50 largest and most liquid A-share stocks listed in Shanghai.

In addition, the Shanghai-based derivatives exchange has reduced the commission charges for the sale of futures contracts purchased on the same day to 0.046% of the transaction value from the previous 0.069%.

Also, the exchange has set a new cap on an investor’s daily open positions at 50 lots per futures contract. The previous cap was 20 lots per futures product, which consists of four contracts. That means the current cap for a futures product is 200 lots, 10 times the previous limit. The cap doesn’t apply to hedging transactions, which have been under tight scrutiny.

The easing measures come one day after a top securities regulator told investors to “prepare for a revival of normal trading in stock-index futures.” They also come despite the continued bear market for mainland stocks, as the inclusion of Chinese stocks in MSCI and FTSE Russell indexes requires China to further free up its derivatives market.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)

This story has been corrected to reflect the comparison of the current and the previous daily trading caps.