The proposed financial derivatives exchange in Shanghai is planning to release a regulatory framework for the trading of stock index futures contracts by the end of this month.

 

Trading is scheduled to begin at the end of this year, several months later than earlier expected.

 

The market will trade financial contracts that obligate the buyer to purchase financial instruments at a specified future date at a pre-set price.

 

Details to be released mainly concern regulations on broking services and clearing methods, according to the official securities paper, China Securities News, yesterday.

 

But it is not clear whether other details, including contract size and maturity, tick values, margin levels and the price movement limit, will be released at the same time.

 

Contracts are likely to be based on the existing Shanghai & Shenzhen 300 Index, which covers about 60 percent of the market value in the Shanghai and Shenzhen markets, said China Securities News, quoting unnamed officials.

 

Officials confirmed earlier reports that futures brokerage companies are to take over the majority of the broking business for stock index futures contracts.

 

To become a full clearing member of the proposed futures exchange, a company must have a minimum registered capital of 100 million yuan (US$12.5 million), instead of 200 million yuan as earlier reported.

 

To conduct broking for clients, securities firms need to either acquire a futures trading subsidiary or register all clients as full members of the proposed futures exchange.

 

To prepare themselves for trading, talks are now being held between securities firms and futures companies, according to industry insiders.

 

"The introduction of index futures contracts will considerably increase M&As among securities firms and futures companies," said Dang Jian, president of Shanghai CIFCO Futures Brokerage Co.

 

Stock market sources expect stock index futures trading could generate a turnover of twice the amount of money traded in stocks. This could amount 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, trading could produce as much as 800 million yuan (US$100 million) in income for brokers.

 

The index futures market is initially likely to attract institutional investors such as mutual funds, social security funds, insurance companies and Qualified Foreign Institutional Investors.

 

(China Daily June 20, 2006)