The proposed financial futures exchange in Shanghai is expected to introduce trading in stock index futures contracts as early as this summer, according to a senior official from the China Securities Regulation Commission (CSRC).

 

Although the comment made at a futures market forum over the weekend has not been officially confirmed, the selection of stock index futures contracts as the first instrument to be introduced at the proposed financial futures exchange makes sense, according to stock analysts and investment experts.

 

They said that the progressive opening of the domestic stock market to domestic and foreign institutional investors has created strong demand for hedging instruments. The share reform to be completed in a few months has also laid the foundation for a greater variety of investment opportunities.

 

What's more, the active trading in stock warrants has also demonstrated the popularity of high leveraged financial derivatives, including stock index futures.

 

It was reported the stock index futures are to be based on a new index covering 100 companies with the largest market capitalization listed in the Shanghai and Shenzhen markets, to be launched by the Shanghai-based Zhongzheng Index Co Ltd.

 

CSRC official Huang Yuncheng would not confirm the comment. Other authorities also declined to comment.

 

"Information regarding the index constituent stocks is sensitive as it would influence investment decisions," said a Shanghai Futures Exchange senior official, who declined to be named.

 

Chinese finance firms expect stock index futures trading could generate a turnover twice the amount of spot stocks, to as much as 8 trillion yuan (US$1 trillion). Given that commission fees would be charged at 1/10,000th of the transaction value, the trading would produce as much as 800 million yuan (US$100 million) in income for brokers.

 

"For sure we are eyeing a share of the brokerage market, even though it is still unclear how we are going to participate in it," said Zhan Biao, a product manager at Guotai Jun'an Securities.

 

The brokerage business of stock index futures is very likely to be taken over by futures companies, the Securities Times quoted a draft rule as saying. With registered capital of 200 million yuan (US$25 million), futures companies can become a clearing member of the financial derivatives exchange and clear directly via the exchange house.

 

Securities firms can only trade on their own behalf and clear via the exchange. To do broking on behalf of clients they need to acquire a futures subsidiary firm or become a futures company's introducing broker, according to the draft rule.

 

(China Daily May 23, 2006)