Index futures, options to deepen capital market reform

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An investor checks stock prices at a brokerage in Fuyang, Anhui province. [Photo by Lu Qijian/For China Daily]

Trading in stock index futures and options based on the CSI 1000 small-cap tracker is expected to begin on Friday, which will better meet investors’ risk hedging needs, in addition to deepening reform capital market, experts said on Tuesday.

The China Securities Regulatory Commission said in an announcement on Monday that trading of the above derivatives will begin trading on the China Financial Futures Exchange on Friday.

Four exchange-traded funds based on futures and options on the CSI 1000 index, which are managed by industry leaders including E Fund Management and China Universal Asset Management, will open for subscription on Friday. It has been a month since the CFFEX published the draft regulations and solicited public opinion on the trading of the new derivatives.

Futures and options based on the CSI 1000 are an integral part of building a tiered capital market in China. They are also part of the country’s ongoing efforts to deepen capital market reform. The stock market stabilizing mechanism will thus be completed, the CSRC said in the press release.

Three stock index futures contracts are currently trading on the CFFEX. They are based on the SSE50 mega-cap index, the blue chip CSI300 index and the CSI500 index which tracks mid to small cap A-share companies.

Wang Zhaoyu, chief analyst of quantitative strategies at CITIC Securities, said stock index futures and options will not overlap with existing futures. The CSI 1000 Index is made up of companies excluded from the SSE50, CSI300 and CSI500 indices. In other words, the newly introduced products will solve the dearth of derivatives tracking small cap A-shares.

“Investors thus have tools to hedge the risks associated with investing in small capitalization companies. Market-neutral or arbitrage strategies will be better implemented,” he said.

The development of the over-the-counter market for derivatives will also be advanced with the newly introduced futures and options. More innovative products can thus be anticipated, Wang said.

Luo Guoqing, an asset manager with GF Fund Management, said the top 10 heavyweights included in the CSI 1000 index only account for 4.85% of the portfolio. In this sense, investors will be able to better diversify risk with futures and options replicating this index.

As of June 30, the CSI 1000 index tracks 67 STAR Market companies and 243 ChiNext companies. As many as 185 members of the CSI 1000 have made their stock market debuts in the past three years. The focus on hard tech and growth companies is pretty evident on this index, Luo said.

The performance of the CSI 1000 index has recently caught the attention of market connoisseurs. While the large-cap SSE50 index gained 4% over the past two months on Tuesday, the CSI 1000 index gained 9% over the same period.

“Mutual fund managers have increased their exposure to the constituents of the CSI 1000 over the past four years, showing their positive outlook on opportunities in these small caps. With liquidity and market expectations improving amid rising supporting policies, the bullish performance of small caps is likely.The introduction of futures and options is also good news for the long-term performance of the CSI 1000 index,” Luo said.

Cui Lei, portfolio manager at China Southern Asset Management, said small-cap companies would be better helped by direct funding with the introduction of derivatives. More vitality will thus be injected into the real economy, promoting the high-quality development of state-owned enterprises, she said.

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