Photographer: Qilai Shen/Bloomberg

China Said to Relax Index Futures Curbs as Market Steadies

  • Margin requirements, transaction fees to be reduced next week
  • Position cap doubled, still smaller than earlier consideration

China plans to relax curbs on stock-index futures trading that led to a 99 percent plunge in volumes and fueled concern over the government’s intervention in markets, according to people familiar with the matter.

China Financial Futures Exchange will cut transaction fees, lower margin requirements for non-hedging accounts and double the number of new positions such traders are allowed to open per day, the people said. The updated rules are set to come into effect next week.

The plan, which comes about 16 months after China’s $5 trillion equity crash prompted a controversial regulatory crackdown, signals authorities are growing more confident that the market has stabilized. While looser restrictions are likely to be welcomed by hedge funds who depend on futures to implement their investment strategies, the new position limits are smaller than what officials were said to have been considering in August.

“It’s a positive signal because they are a little bit more confident in the underlying strength of the market right now,” said Alex Wong, who helps oversee about $100 million as an asset-management director at Ample Capital Ltd. in Hong Kong. “It would make the market more efficient.”

Read more: A QuickTake explainer on China’s managed markets.

For CSI 300 Index and SSE 50 Index futures, CFFE will lower margin requirements for non-hedging accounts to 20 percent from 40 percent, the people said. The rate for small-cap CSI 500 futures will drop to 30 percent, while trading fees for contracts that are opened and settled on the same day for all three contracts will be adjusted to 0.115 percent. The new position limit for non-hedging accounts will rise from 10 to 20, with anything above that deemed as “abnormal trading.” CFFE had been considering a new-position limit of 100, people familiar with the matter said in August.

“China Financial Futures Exchange has always pushed the work of developing and normalizing the financial futures market, but there is no specific timetable for specific changes that it can share,” said an employee of the exchange who asked not to be named because he wasn’t authorized to speak publicly about the adjustments.

The CSI 300 increased 0.8 percent on Friday, bringing its gain over the past year to 5.7 percent.

China’s stock-index futures market, the most active in the world before the 2015 crackdown, was targeted by regulators in part because selling the contracts was one of the easiest ways for investors to make large wagers against stocks. It was also a favored product for short-term speculators because the exchange allows participants to buy and sell the same contract in a single day. In the cash equities market, there’s a ban on same-day trading.

MSCI Debate

Policy makers are trying to find the right balance between their desire for control and President Xi Jinping’s pledge to give markets a central role in Asia’s largest economy. While the relaxation on domestic index-futures trading is seen as a step in the right direction, many investors would like to see authorities loosen their grip on global investment products linked to Chinese indexes, including futures.

New products in overseas markets that track domestic Chinese shares currently need pre-approval from exchanges in Shanghai and Shenzhen. MSCI Inc. has cited the requirement as a reason for excluding China’s locally-listed equities from its global benchmark indexes.

The issue won’t be easily resolved, Fang Xinghai, vice chairman of China Securities Regulatory Commission, said in an interview in Davos, Switzerland, on Thursday.

"MSCI wants China’s index futures to be traded globally," Fang said. "It’s not that we totally object to it, but we believe it needs to be done step by step. We will talk to them about it."

Flash Crash

Futures are a popular tool among institutional investors, with long-term money managers using them to make cost-effective asset-allocation changes. For hedge funds, they provide an easy way to adjust exposure to market swings.

A typical strategy for so-called market neutral hedge funds involves selling futures and buying shares of individual companies that the manager predicts will beat the index. If she bets right, the fund profits from picking outperformers while limiting exposure to market volatility. Because China’s infrastructure for short selling and options trading is still relatively limited, the futures market had been the go-to place for funds in need of a hedge before the crackdown.

“To effectively implement long-short equity strategies, it’s often important to be able to hedge out the overall market risk by participating in the futures market,” said Jonathan Garner, the chief Asia and emerging-market equity strategist at Morgan Stanley in Hong Kong. “And now the cost of doing that seems as if it’s going to be falling.”

— With assistance by Tian Chen, Heng Xie, Gary Gao, Kana Nishizawa, and Steven Yang

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