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Four questions about stock index futures
By Cai Muyuan (chinadaily.com.cn)
Updated: 2010-02-22 17:39
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Chinese investors could begin applying on Monday to open accounts for stock index futures trading, the China Financial Futures Exchange said, in a key step toward the long-awaited launch of index futures trade.
Will the high thresholds harm the liquidity of index futures? Will the new derivatives stimulate business growth in brokerage firms? What's the impact on the stock market? Here with the help of some securities analysts, we are trying to offer answers.
Controlling market risks at the expense of liquidity?
Individuals are required to have a minimum of 500,000 yuan ($73,237.54) to open an account, the margin requirement are set at 12 percent and the position limit at 100 contracts ... All these rules indicate the risk controlling of stock index futures trading is unprecedented. Some suspected that the strict controls would harm liquidity.
However, according to Dang Jian, the manager of Orient Securities Futures, the trading volume will reach at least 50,000 to 100,000 contracts a day on average in the first several days after launch.
Analysts argue that stock index futures is not a money managing product for the public but more of a tool for risk management. As the spot market is in large scale, investors should not be unduly concerned of the liquidity of index futures.
Will brokerage firms benefit from index futures trading?
During the three years of preparation for the launch of stock index futures, it is generally recognized that well-performed futures firms and big securities companies will be the ultimate winners, pushing share prices of these firms to skyrocket.
However, Dang disagrees with the above wisdom. He said that index futures is not necessarily a cash cow for these companies. Under current circumstances, when prices fall on the stock market, brokerage firms earn commissions when investors sell the shares. But after the launch of index futures, investors could sell short in the futures market and keep their position unchanged when stock prices drop, depriving securities firms of their commissions.
How will it influence the stock market?
Industry insiders believe that with the index futures, short selling will allow investors to significantly cut back on trading of securities. But analysts believe that new capital attracted to the market will vitalize the 300 A shares that compose the CSI 300 Index, especially blue chips. Trading contracts for index futures are based on the CSI 300 Index, which is composed of the 300 largest A shares listed on Shanghai and Shenzhen stock exchanges.
Zhong Bojun with Tobon Securities said that, index futures provides investors with an effective tool to curb risks, and will stimulate investors to be more actively engaged in the spot market. At the same time, it allows investors to profit from arbitrage practices, enhancing the scale and liquidity of the stock market.
Will the 'triple witching day' phenomena occur?
It is worthwhile to note that the expiring day of index futures is the third Friday every month, and it is a custom for regulators to announce major financial policies after market closing on Fridays. Thus investors are worried of huge market fluctuations on Friday when the index futures contracts expire and new policies come out.
However, the contracts of index futures are settled by calculating the weighted arithmetic average of index prices in the last two hours, largely reducing price volatility, according to Liang Shi, a senior analyst of Dalu Futures.
