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February 21, 2010

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China gives all clear to trading in stock futures

China's securities regulator yesterday gave final approval to design of the country's first stock index futures contract, saying it will allow people to open accounts in the next few days.

This means the stock watchdog has wrapped up drafting rules and regulations for the financial derivative, paving the way for its debut as early as March, analysts said.

The China Securities Regulatory Commission has approved the futures contract, which will be based on the CSI 300 index that tracks the top 300 mainland-listed firms, it said in a statement on its Website.

The regulator also gave the nod to the product's trading regulations and measures to deal with rule-violating activities, the statement said. The futures contract will be traded on the China Financial Futures Exchange.

The watchdog has finished preparation for an account opening system and will issue a notice in the next few days to allow qualified investors to set up their accounts, the Xinhua news agency reported yesterday, citing an unidentified CSRC official.

"Trading of index futures will likely start in March after investors open their accounts in the coming weeks," said Wu Ke, a Zhongtian Investment Consulting Co analyst. "But the market will be dominated by institutions and turnover may not be heavy initially."

Index futures are an agreement to buy or sell an index at a preset value on an agreed date. Often used as hedging tools, they allow an investor to make bets on the direction of an entire index rather than individual stocks.

However, the futures product may also lead to speculative trading and require sophistication on the part of investors, analysts said.

China established the financial futures exchange in 2006 in preparation for the debut of index futures with an aim to help investors hedge against risks. But worries about speculation and global financial turmoil delayed the product's launch several times.

The regulator has already introduced strict entry requirements for investors. Investors must have a minimum 500,000 yuan (US$73,000) to open an account and have to participate in mock trading for at least 10 sessions.

In an apparent move to contain risks, the CSRC in January raised the minimum margins for index futures to 12 percent from a previously-set level of 10 percent. Also under the revised rules, an investor can only hold up to 100 futures contracts for any single day, down from 600 as stipulated earlier.

"People should never imagine that they now have the tool to steer the market's trend as the new product may go far beyond the knowledge of laymen," said Bank of China analyst Luo Junhe.

"Those engaged in speculation eventually will be left high and dry."


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