The State Council, or China's cabinet, published on Friday, March 16, the country's new regulations on futures trading, extending its coverage from commodities futures trading to financial futures and option contracts trading.

The new regulations, which will come into effect on April 15 this year, no longer prohibits financial institutions from doing futures trading or raising funds and offering securities for futures trading.

Futures companies will be considered financial institutions when securities dealers, fund management companies and commercial banks become the major participants in the financial futures market, said an official with the Legislative Affairs Office of the State Council.

The Chinese futures market is required to improve its risk control system by setting up a guarantee fund and an interest compensation mechanism for futures investors, according to the regulations.

The regulations, with the scope of application expanded, lay a legal foundation for the introduction of stock index futures and strengthen the supervision of the futures market, said Shi Jianjun, vice president of the China Futures Association.

The new rules may help pave the way for the introduction of stock index futures and options on Shanghai's 7-month-old derivatives exchange. China's 180 futures brokers are currently restricted to earning commissions by trading commodities for clients on the nation's $2 trillion futures market.

New futures exchanges can be set up only with the approval of a regulator controlled by the State Council, according to the rules. The government in 1999 cut the number of futures exchanges to three from 14 to curb excessive speculation.

China's three futures exchanges in Shanghai, Dalian and Zhengzhou now trade contracts only for commodities, including copper, aluminum, rubber, fuel oil, soybeans, corn and sugar.

Fan Fuchun, vice chairman of the China Securities Regulatory Commission said earlier this month that the country is likely to launch the trading of stock index futures in the first half of 2007.

Simulation trading was started in October last year to test the trading system at the Shanghai-based China Financial Futures Exchange, which was inaugurated in September 2006 to become the country's first financial derivatives exchange.

Currently investors can only profit when the stock index goes up. With the introduction of index futures, investors will be able to make money when the index falls.

Market watchers believe the introduction of such derivatives will provide financial institutions with a much-needed tool to hedge risks but may also spur speculation and widen volatility.