QFIIs welcome approval of index futures trading

A batch of five qualified foreign institutional investors (QFIIs) has become the first group to be approved to trade stock index futures in China after a 20-month wait.

The guidelines were released in May 2011, but the practice was not made official until this month on the China Financial Futures Exchange (CFFEx). According to local media, five QFII licence holders have had applications to trade stock index futures approved.

CICC carried out the first trade for a QFII client at 9.14am on Friday, January 25, report local media. The note did not specify the trading amount or the name of the QFII licence holder.

Fund managers have welcomed the development as something that will give them greater flexibility in their trading strategies. Essentially it allows them to use the type of hedge they employ in international markets.

However, the guidelines state that QFII holders are only allowed to use index futures for hedging, and not for speculative or arbitrage purposes or as a way to sell derivatives offshore.

QFII holders must update the China Securities Regulatory Commission of their investment plans before they can conduct index futures trading. They then need to have their broker and bank futures transfer agreement reviewed and signed off, before applying for a hedging quota from the CFFEx.

One QFII adviser in Beijing says QFII holders will now hope to generate absolute return when there is a market downturn.

But as some QFII quota is allocated to mutual funds, their investment mandates might not allow them to invest in such derivatives.

Trading in index futures could also become meaningful for ETF issuers and market-markers. At present, A-share market-markers most commonly use the liquid iShares A50 ETF to hedge their market exposure risk.

But stock index futures on the CSI300, for instance, would mean QFIIs could hedge their inventory exposure at lower cost, therein enhancing the efficiency of their hedging.

Freddie Chen, managing director of China AMC (Hong Kong), expects trading of its RQFII ETF on the CSI300 to increase. “Market-makers now have more tools to hedge their risk, so they can be more active in market-making, and this will help trading volume,” he says.