CTA funds look poised to take off in China after securities regulator CSRC put forward plans to permit domestic futures companies to roll out asset management businesses.
Although the pilot scheme was proposed by the China Securities Regulatory Commission last Friday as a draft discussion, it is only a matter of time before it is introduced. And given that futures firms have long had expertise in CTA funds, this is seen as a natural progression.
The country’s domestic futures market has developed rapidly over the past few years, with total trading volume hitting Rmb137.5 trillion ($21.7 trillion) last year.
China is home to three commodity exchanges (in Shanghai, Dalian and Zhengzhou) as well as the China Financial Futures Exchange, where the stock index futures (CSI 300) is traded.
At present, futures companies play an advisory role for fund management companies. China Merchants Futures, for example, provides research support and trading ideas to UBS SDIC on a segregated account fund adopting an arbitrage strategy.
But the draft CSRC regulation would allow futures firms to invest in equities, bonds, mutual funds, collective vehicles launched by securities companies, central bank bills, short-term paper and asset-backed securities. That is besides derivates such as futures and options.
Their fledgling asset management businesses would start on a one-to-one segregated account basis in line with strict risk controls. It could be expanded to several accounts at a later date.
Their clients would all be professional investors with a minimum commitment of Rmb1 million. The nature of the business is private placement since CSRC forbids futures companies from promoting or advertising their asset management businesses via media or public solicitation.
Futures firms have long been anticipating deregulation, knowing that diversifying into broader asset management will render their businesses less reliant on brokerage income. They will be able to apply their expertise in commodities futures to develop CTA capabilities.
The pilot scheme is expected to start this year, although the number of qualified companies will be limited by the CSRC’s high threshold.
The requirement on minimum net capital is Rmb500 million, while a company’s risk management indictors have to meet requirements in the last six months. Further, an applicant’s classified supervision rating should not be lower than Category B and Grade BB.
According to the CSRC’s rankings for 2011, only 49 futures companies are rated above Grade BB, among which only about 15 that meet net capital requirements will qualify to apply for an asset management licence.
The regulator will also enforce a strict risk management mechanism. It requires an applicant’s asset management department to report to its general manager and chief risk officer when a client’s assets decline more than 10% within a trading day.
Futures companies will also have to submit monthly asset management reports to the CRSC within seven days of the end of a month and annual reports within three months after the year-end.