UBS Planning China Stock Futures as Hedge Demand Soars

UBS AG plans to start trading Chinese stock-index futures after turnover more than tripled in the past two years amid growing investor demand for ways to hedge against equity losses.

The Swiss bank will probably offer contracts on the CSI 300 Index by next year after acquiring a Chinese commodities-futures brokerage this month, said Yang Xia, the head of China equities at UBS. Trading of the securities climbed more than 250 percent over the last two years as the CSI 300 slumped, data compiled by Bloomberg show. The index has fallen 7.6 percent this year, extending its losses since the end of 2009 to 40 percent, and closed at a 14-month low yesterday.

“It is a promising business,” Yang said in an interview at the bank’s office in Shanghai. “That’s why we bought the futures broker.”

The use of financial derivatives in China is expanding as policy makers allow more investment from foreign money managers, loosen restrictions on hedge funds and seek a bigger role for the yuan in global capital markets. Regulators restarted bond futures in September after an 18-year ban and have begun mock trading of options on some of the nation’s biggest stocks.

The equity-index futures -- agreements to buy or sell the CSI 300 at a preset price and date -- allow speculators to wager on rising and falling markets while also giving stock investors a tool to hedge their holdings. The notional value of the nation’s financial futures contracts is 140.7 trillion yuan ($23 trillion), representing 53 percent of total contracts, according to the China Futures Association.

Market Speculation

UBS is expanding beyond its cash equities business into derivatives and services tailored to more sophisticated investors as China allows hedge funds to operate more freely and increases quotas for foreign institutional investors, according to Yang.

Selling CSI 300 index futures while buying shares of smaller companies has been a popular trading strategy, according to Hao Hong, the chief China strategist at Bocom International Holdings Co. The ChiNext index of small-cap shares rallied 83 percent last year, as the CSI 300 dropped 7.65 percent.

China restricts overseas investors to foreign-currency denominated B shares, while only institutions approved under the qualified foreign institutional investors, or QFII, program can invest in yuan-denominated A shares. Trading volumes on the Shanghai Stock Exchange are little changed from three years ago, according to data compiled by Bloomberg. The Shanghai Composite Index rose 0.4 percent at the close today, paring this week’s loss to 2.7 percent.

Oil Futures

UBS is also looking for opportunities tied to the Shanghai Free-Trade Zone, Yang said. The zone, which opens up financial services, shipping and gaming industries to foreign investment, is a testing ground for free-market policies that the government has said may be implemented more broadly in the world’s second-largest economy. The ruling Communist Party may unveil reform plans at the annual meeting of the National People’s Congress that begins March 5.

While financial futures were the focus of UBS’s acquisition of Shanghai Pumin Futures Brokerage Co., the bank plans to maintain the commodities business. It may move those operations to the free-trade zone amid government plans to introduce crude-oil futures, Yang said. The contracts may start trading as early as next month, the Shanghai Daily reported in December.

UBS is also looking to do more business with China’s biggest insurers and pension-fund managers as the government relaxes limits on investment in foreign equities for companies operating inside the zone, Yang said.

Yang, who is also a managing director at UBS, previously worked at rival Credit Suisse Group AG and has Master’s degrees from New York University and Carnegie Mellon University.

“This is where we keep highlighting that one-stop shop solution,” he said. “We want to engage these guys in China so they know us and our global capabilities.”

— With assistance by Allen Wan, and Gregory Turk

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