China may allow securities houses to trade financial futures contracts as early as this month but will likely restrict the business to brokers that have strong capital, industry sources said on Tuesday.

 

Selected securities firms will also be able to introduce brokers to futures companies for a commission, according to the sources.

 

Authorities are also looking into letting mutual funds, insurance funds and qualified foreign investors join futures brokers in tapping the potentially lucrative business.

 

Financial regulators are on track to launch the country's first stock-index futures contracts on its new financial derivative bourse by the end of the first half of the year.

 

Securities houses should have at least 1.2 billion yuan (US$155.23 million) in net capital before they can apply for licenses that allow them to introduce brokers, the sources said, citing a document which regulators are seeking industry opinions.

 

Candidates must also control a futures subsidiary and have capital that accounts for not less than 70 percent of net assets, according to the sources.

 

"Regulators think trading of financial futures contracts is not for everyone," said a Shanghai-based brokerage source. "In the initial stage, only big players with sufficient capital and proper risk controls will probably be interested."

 

China's capital market has long lacked a mechanism to permit investors to bet on declines in share prices to gain a profit, making it hard for investors to hedge against trading risks in a bear scenario.

 

Regulators are also set to allow brokers to lend money or securities to investors as early as this year to bolster liquidity and introduce short selling to help curb market volatility.

 

Earlier media reports said that several qualified foreign institutions will likely be approved to trade index futures among the first batch of investors as the regulator seeks to tap overseas expertise.

 

Initially, mutual funds will likely trade the derivatives via futures brokers and may later be qualified to apply for separate licenses, according to the sources.

 

(Shanghai Daily April 4, 2007)