Chinas Capital Markets-The changing landscape 11 The first and the only stock index future is based on the csI 300 Index, which covers about one-sixth of all stocks listed in China and accounts for about 60 percent of ket capitalisation. There are currently four active contracts for the front month ne month behind the front month and then the next two months in the march June, September, December cycle. The future is also subject to a +/-10 percent price band based on the previous close. At the end of 2010, 46 million contracts had been traded, and average daily volumes had stablised at around 250,000 spot contracts(with approximately USD 38 billion notional equivalent) The index futures market has generated huge interest from retail investors. by the third day of trading, the traded value of stock index futures already exceeded the value of stocks traded on the ssE. Though the CSrc has imposed strict instructions for proper regulation of the market, it is clear that the market is highly influenced y speculation, which has heightened volatility and limited its ability to truly reflect he direction of the underlying stock market. Further developments are taking place towards a mature index futures market, and liquidity should continue to increase QFlls allowed to participate in stock index futures trading As part of the governments efforts to further open up Chinas financial markets, the ecently unveiled"Rules on Index Futures Trading for Qualified Foreign Institutional Investors(QFlls)"allow for QFlls' participation in the domestic stock index futures KPMG comment market by offering them a new hedging tool, a further investment option and a level playing field with domestic investors tock index futures are a sign of the maturation of capital markets Stringent limits set out in the Rules, however, are indicative of the government's although some stringent rules are caution regarding the nascent financial derivatives market. As retail investors have attached OFlls will be allowed always regarded investments by QFlls as an indicator of sensible diversification to trade stock index futures for the a-share market, QFlls' participation in the stock index futures market could hedging, but not for speculative prove influential. With their index trading experience gained in the international purposes, in a similar manner markets, QFlls could help broaden the investor base of Chinas financial markets to their domestic counterparts QFlls are also prohibited from Regulatory change issuing financial derivative Chinas regulatory bodies(most notably the CSRC) are playing a critical role in the products in offshore markets with changing composition of the investor base and in allowing specific production index futures as an instrument nnovations. With so much pent-up demand for new financial products, when the are limited in the daily value of government and regulators act, the market can often respond extremely quickly tures contracts they can hold and can only open accounts with Prospects for a new Fund Law one bank for custodian services In order to improve market transparency, China is moving closer to revising the and no more than three futures brokerages for futures trading current law governing the fund management business by circulating a consultation paper within the industry. a new Fund Law may involve several amendments to the current legislation which was promulgated in 2003. This may include allowing fund managers to trade equities and derivatives for personal accounts, something whic currently prohibited in China The government continues to explore how deregulation can enhance the market without increasing the risk of insider trading The csrc has indicated that it may expand the supervision of fund managers and include on-site investigation of fund Other significant developments include proposed regulation of non-public funds by the CSRC, granting non-public funds access to the public retail fund market. By registering with the CSRC, non-public fund managers may offer public funds subject to approval. This may lead to further market competition with public fund managers due to the expertise and service non-public fund managers can offer, especially in wealth management business. 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG international"), a Swiss entity. All rights reserved.The first and the only stock index future is based on the CSI 300 Index, which covers about one-sixth of all stocks listed in China and accounts for about 60 percent of market capitalisation. There are currently four active contracts for the front month, one month behind the front month, and then the next two months in the March, June, September, December cycle. The future is also subject to a +/- 10 percent price band based on the previous close. At the end of 2010, 46 million contracts had been traded, and average daily volumes had stablised at around 250,000 spot contracts (with approximately USD 38 billion notional equivalent). The index futures market has generated huge interest from retail investors. By the third day of trading, the traded value of stock index futures already exceeded the value of stocks traded on the SSE. Though the CSRC has imposed strict instructions for proper regulation of the market, it is clear that the market is highly influenced by speculation, which has heightened volatility and limited its ability to truly reflect the direction of the underlying stock market. Further developments are taking place towards a mature index futures market, and liquidity should continue to increase. QFIIs allowed to participate in stock index futures trading As part of the government’s efforts to further open up China’s financial markets, the recently unveiled “Rules on Index Futures Trading for Qualified Foreign Institutional Investors (QFIIs)” allow for QFIIs’ participation in the domestic stock index futures market by offering them a new hedging tool, a further investment option and a level playing field with domestic investors. Stringent limits set out in the Rules, however, are indicative of the government’s caution regarding the nascent financial derivatives market. As retail investors have always regarded investments by QFIIs as an indicator of sensible diversification in the A-Share market, QFIIs’ participation in the stock index futures market could prove influential. With their index trading experience gained in the international markets, QFIIs could help broaden the investor base of China’s financial markets. Regulatory changes China’s regulatory bodies (most notably the CSRC) are playing a critical role in the changing composition of the investor base and in allowing specific production innovations. With so much pent-up demand for new financial products, when the government and regulators act, the market can often respond extremely quickly. Prospects for a new Fund Law In order to improve market transparency, China is moving closer to revising the current law governing the fund management business by circulating a consultation paper within the industry. A new Fund Law may involve several amendments to the current legislation which was promulgated in 2003. This may include allowing fund managers to trade equities and derivatives for personal accounts, something which is currently prohibited in China. The government continues to explore how deregulation can enhance the market without increasing the risk of insider trading. The CSRC has indicated that it may expand the supervision of fund managers and include on-site investigation of fund managers. Other significant developments include proposed regulation of non-public funds by the CSRC, granting non-public funds access to the public retail fund market. By registering with the CSRC, non-public fund managers may offer public funds subject to approval. This may lead to further market competition with public fund managers due to the expertise and service non-public fund managers can offer, especially in wealth management business. KPMG comment Stock index futures are a sign of the maturation of capital markets although some stringent rules are attached. QFIIs will be allowed to trade stock index futures for hedging, but not for speculative purposes, in a similar manner to their domestic counterparts. QFIIs are also prohibited from issuing financial derivative products in offshore markets with index futures as an instrument, are limited in the daily value of futures contracts they can hold, and can only open accounts with one bank for custodian services and no more than three futures brokerages for futures trading. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. China’s Capital Markets - The changing landscape | 11