Easing in index futures seen as key to liquidity

China's stock market regulator should consider relaxing restrictions on trading in index futures, to improve liquidity in the A-share market and help prevent systemic risks, experts said.

"It's now widely recognized that trading in stock index futures was not responsible for the A-share market slump last year. In fact, the index futures market helps prevent risks," said Ma Wenya, general manager of Sunday Fund Co Ltd, which manages assets worth 300 million yuan ($45.2 million).

In July last year, the China Financial Futures Exchange, where three stock index futures contracts are listed, announced it will adopt a system of differentiated charges based on trading volumes, to make speculation in index futures costlier.

Effective Sept. 7 last year, the CFFEX had raised the transaction fee for closing a position on every futures contract to 0.23 percent of the deal value from 0.015 percent. This led to a sharp reaction: the daily transaction volume decreased 92 percent to just 76,100 contracts.

Ma said the margin accounts of three stock index futures contracts were small last year. They could not possibly have caused the A-share market to plummet.

Agreed Hong Hao, managing director and chief strategist at BOCOM International Ltd. He said the main reasons for the stock market slump last year were high valuations of stocks and the use of high leverage in stock trading. And these were not at all related to trading in stock index futures.

The main function of stock index futures is hedging, which helps stabilize the market, said Ma.

A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment. For example, a fund manager will buy stocks in the A-share market, and have short positions in the stock index futures to lower risks.

"As the (A-share) market is now steady, I think it's a good time to ease the restrictions on trading in index futures," said Ma.

Hong echoed Ma's view. "Trading in stock index futures plays an important role of hedging risks in the market. In my opinion, easing of restrictions is necessary now."

There is another reason why easing is necessary now, said Ding Shengyuan, a managing director at Galaxy Securities. It would help develop China's wealth management industry.

"Chinese people have accumulated much wealth and trading in stock index futures can lower the risks of funds. The quantitative hedging products can become good wealth management products," said Ding.

Ma said if the Chinese stock market regulator relaxes restrictions on index futures, hundreds of billions of yuan at least will likely flow into the A-share market, improving its liquidity.

Market-people are hoping the CFFEX will consider their plea and reduce the transaction fee.

"My (Sunday Fund) equity position in the stock market is light now. But, if the restrictions on index futures are eased, I'd increase my allocation of funds to the stock market to about 90 percent," said Ma.

Hong of BOCOM said the regulator's concern now may be that if the restrictions are eased, it could be wrongly interpreted by some as the return of high leverage.

The CFFEX said on Thursday that it is fine-tuning rules and regulations so that trading in stock index futures can play an important role in the market. But it denied it is about to ease restrictions.

Hong said trading in the US stock index futures was suspended for several months in 1987 after a stock market crash, but it was resumed later, after it was established there was no link between the two.