The new regulations, issued by the State Council on March 16 this year, will lay a legal foundation for the introduction of stock index futures, foreign exchange futures and option and other financial derivatives, which will provide financial institutions with much-needed tools to hedge risks.

Objectives in a commodities futures trading include farm produce, industrial products, energy sources and related index product, while a financial futures trading involves securities, interest rates, exchange rates and related index products.

The regulations no longer prohibit financial institutions from doing futures trading or raising funds and offering securities for futures trading.

Seeing that securities dealers, fund management companies and commercial banks will become the major participants in the financial futures market, futures companies are considered as financial institutions in the regulations.

According to the regulations, the Chinese futures market is required to improve its risk control system by setting up a guarantee fund and an interest compensation mechanism for futures investors.

The regulations prescribe a series of measures to strengthen the supervision of the futures market in order to ensure its stable and healthy development, said Shi Jianjun, vice president of the China Futures Association.

The China Securities Regulatory Commission (CSRC), the country's securities market watchdog, has the authority to carry out investigations into the market participants and examine their transaction and financial data and bank accounts.

Fan Fuchun, vice chairman of CSRC, said last month that China is likely to launch the trading of stock index futures in the first half of 2007.

Simulation trading was started in October last year to test the trading system at the Shanghai-based China Financial Futures Exchange (CFFE), which was inaugurated in September 2006 to become the country's first financial derivatives exchange.

China's futures market, composed of Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange and CFFE, turned over a record 21 trillion yuan (US$2.69 trillion) last year.

Commodities traded on the country's futures market include corn, soybean meal, sugar, zinc and natural rubber.