The product was launched in 2006 but has failed to trade well until now. It offers exposure to China’s ‘A’ share market and was the first contract of its kind to be traded outside China.
Critically, SGX did not impose harsh restrictions on the types of trading firms that could participate.
SGX secured its deal to licence the FTSE Xinhua index in July 2006 and futures based on it were immediately listed for trade.
The index tracks the 50 largest ‘A’ shares by market capitalisation on the Shanghai and Shenzhen stock exchanges. The contract is open to all traders, not just local players.
When it was launched, trading volumes were low. Monthly volume in the early years peaked in November 2007 when 3,260 contracts were executed. After that it fell steadily and often failed to reach 1,000 contracts.
Trading touched a new high in March 2008 with 6,660 contracts traded, but volumes soon slipped again and the contract had stopped trading by the end of 2008.
When it was traded just once in 2009, many wrote it off altogether. The instrument continued to attract no interest until August 2010.
Back from the dead
Then, out of nowhere, 10,900 contracts were traded in the month. Volume reached 42,100 contracts in September and soared to 143,000 futures in October. It grew once again in November, to 203,000, though fell back in December to 132,000.
What prompted this revival? According to the head of futures, it was the launch in April of the China Financial Futures Exchange’s CSI 300 Future.
Despite heavy barriers to entry for the CSI 300 Future, trading volumes exceeded 120,000 contracts a day, catching up with levels of activity achieved in some of the Western exchanges’ leading equity index products.
The Singapore FCM executive said there were now real arbitrage opportunities between the CFFE product and SGX’s FTSE Xinhua Index contract.
“You’ve got high frequency traders in China, which might be a so-called domestic market, but there are guys pushing the envelope and trading the two,” he said.
Besides arbitrage with the CSI 300, growth in SGX’s product is also being driven by a clampdown by Chinese regulators.
Because much of the trading in the CSI 300 is speculative day trading, with open interest less than 1% of monthly volume, the China Securities Regulatory Commission sought in June to damp down volumes by telling brokerages to limit the number of orders each of its accounts was permitted to make.
Investors wishing to trade more than the restricted amount may have moved some of their trading to SGX’s contract.