Hedging its bets, CSRC looks to limit futures risks

09:17, March 17, 2010      

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The China Securities Regulatory Commission (CSRC) Tuesday released the first guide for fund investment on index futures for public feedback, which it will accept till next Monday. The preliminary rules clarify the role of the index futures as a hedging tool for risk control, rather than an instrument for profit.

The regulator approved the futures index in January and the China Financial Futures Exchange (CFFEX) started accepting futures accounts on February 22, but trading is not expected to start until mid- April, according to the CFFEX.

The rules state that public funds mainly invested in the stock market can participate in index futures for hedging purposes. In any single trading day, the total value of a long position can't exceed 10 percent of a fund's net asset value, and the total value of a short position can't be less than 20 percent of the value of the stocks that the fund is holding, according to the guide.

By the end of any given trading day, the aggregated value of the futures contracts and the securities held, including stocks, bonds and warrants, can't be more than 95 percent of the net asset value of open-end funds, and a maximum 100 percent of net asset value of closed-end funds, the rules state.

The percentage for trading index futures is not very high, which is aimed at risk control, said Wang Rui, an analyst with Morning Star.

She noted that the limit will make it hard for public funds to manipulate the stock and futures markets.

However, the detailed measures on how to match stocks and the futures market on clearing and settlement is still not yet available, she said, as public funds are currently entrusted to and managed by commercial banks, and capital is required to be kept under accounts of futures brokers for trading on futures. Internally, public funds also need to have a decision-making mechanism, such as consent from a majority of fund holders.

Despite the measures, risks still exist for public funds involved in the futures index, and bad decisions could erode investment returns. In addition, "there is no evidence showing that futures indexes are helpful (to public funds) over a long period of time," said Hu Jianqiang, a professor with the School of Management at Fudan University.

"It may not be necessary for all public funds to participate in the index futures," Hu said. He said the number of public funds participating in the instruments will be limited.

Source: Global Times
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