China will impose a 10
percent daily price limit on its first stock-index futures contracts, seeking to
curb risks when the derivatives start trading on a new exchange as early as this
year, Bloomberg News reported.
The China Financial Futures Exchange also set an eight percent trading
margin, or the percentage of the contract value an investor must pay up front,
according to draft rules published Monday. The Shanghai-based exchange was set
up last month to introduce products including stock-index and interest-rate
futures.
The Chinese mainland is seeking to develop its financial system without
increasing volatility in the US$511 billion stock market, where the
reintroduction of warrants last year led to complaints of speculative and
irrational trading. The proposed price limit is stricter than trading rules in
Singapore and Hong Kong.
"Some of the clauses, such as the percentage of the margin, are a bit
risk-preventive," said Fan Dizhao, who helps manage the equivalent of US$1.8
billion at Guotai Asset Management Co in Shanghai. "After all, it's a brand new
product in China and needs to be prudent in the initial stage."
The price limit for index futures matches the 10 percent maximum movement
allowed for stocks listed on the Shanghai and Shenzhen exchanges.
China aims to introduce stock-index futures this year or by early next year,
Shang Fulin, chairman of the China Securities Regulatory Commission, said on
September 14. The draft rules, published in securities newspapers Monday, didn't
say when trading will start.
Index futures may encourage development of more financial products and spur
growth of China's US$50 billion fund industry. Fund managers use index futures
to hedge portfolios, a cheaper method than buying or selling the underlying
stock.
The Shanghai Composite Index has jumped 52 percent this year and its Shenzhen
counterpart has surged 57 percent after rebounding from eight-year lows reached
last year, encouraging the government to move ahead with equity-based
derivatives.
The draft rules mandate a cooling-off period when volatility reaches six
percent. Once prices have moved by that amount from the previous close and
maintained that level for one minute, trading will be held within that range for
10 minutes, according to the draft rules.
After that period, the 10 percent limit will take effect. The six percent cap
won't apply in the last 30 minutes of trading, the rules state.
The contract won't be the first based on China's yuan-denominated Class A
shares. Singapore Exchange Ltd began trading index futures based on yuan shares
last month, using the FTSE/Xinhua China A50 Index as the underlying gauge.
SSE Infonet Ltd, an information and data unit of the Shanghai Stock Exchange,
in August filed a lawsuit against index compiler FTSE/Xinhua Index Ltd, a local
venture of FTSE Group, contesting its right to provide information for the
Singapore futures contract. The first hearing ended on October 11 in Shanghai,
with no verdict announced.
