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Option the Dragon: Stock Options set for launch in China

On August 6, 2013, Chinese securities companies received ‘the notice of preparing the initiating stock options full simulating trading works’ sent by the Shanghai Stock Exchange. This information implies that SHSE is already fully prepared for the launching of stock options. Although there is no clear timetable for launching the stock options, it is likely that they will appear in Chinese capital markets in 2013 or 2014.

Exchange traded stock options are new to Chinese capital markets and these derivatives provide a number of benefits. For one, both long and short-term trading are accessible and, similar to other derivatives such as futures, t+0 is allowed. Another benefit, which is an advantage over futures, is that leverage is provided but buyers can only lose the amount that they paid for the option. Options traders can also execute more complicated strategies through the combination of buying and selling call and put options, including straddles and spreads. Moreover, stock options are perfect hedging tools for individual stocks. Currently, Chinese stock index futures can only hedge the risks of the CSI 300 index and can not directly hedge non-systematic risks from individual stock options. And, despite providing leverage, security companies charge high transaction fees and interest rates for customers interested in selling short and buying long. Furthermore, the introduction of stock options comes with a high minimum threshold, which may largely change the structure of investors in the stock market by increasing the proportion of institutional investors. Thus the introduction of stock options may largely change the landscape of Chinese stock markets and may stimulate trading volumes.

However, there are also potential problems and doubts from the public that my come with the introduction of Chinese stock options. One issue regards the minimum threshold for investors of stock options. Some market analysts estimate that this threshold could be as high as one million yuan, which is higher than thresholds for index futures and securities lending services from securities companies. Currently, only 1% of accounts in the stock market can meet this requirement. Critics argue that stock options may serve as a tool to short the market by institutional investors and rich individuals, who may be in a disadvantaged position. But there are also analysts stating that the threshold may be lower, which would give normal individual investors a better opportunity to participate. The minimum threshold will depend on the final decision from CSRC.

Another problem has to do with the underlying stock that stock options are based upon. Currently, it seems as though only very large blue chip listed companies can enjoy stock options, so not all stocks can be optioned. Because large-cap stocks fluctuate less dramatically than small-cap and medium-cap stocks, the meaning of stock options may not be as transparent as in the fully opened western markets. But for institutional investors like mutual funds, as large-cap stocks take larger proportions of their shares, stock options may be an ideal hedging tool for stabilizing the performance of their portfolios. As current stock markets have adopted t+0 and t+1 trading, short-term day trade for hedging is not feasible. Thus traders may either choose longer-term hedging strategies or speculate through high-frequency intra-day trading.

Furthermore, large amounts of speculation in stock options may lead to dramatic fluctuations in stock prices. Similar to trades within A-share markets, the cost of short-selling is much higher than longing the stocks. So under the current unbalanced system, both hedgers and speculators may choose short in the stock options and the performance of A-share markets in the future may weaken. This has already been proven from the stock index future’s impact on A-share stock markets.

In conclusion, despite the risks, the launching of stock options is important for the development of Chinese capital markets.

Source: KapronAsia, 20.08.2013

Filed under: Asia, China, Exchanges, News, Risk Management, , , , , , , ,

China Financial Futures Exchange & NYSE Euronext sign MOU

Exchanges enter agreement to develop futures and options markets in Europe, US and China

Beijing, Hong Kong, London, New York – NYSE Euronext (NYX) and the China Financial Futures Exchange (CFFEX) have signed a Memorandum of Understanding (MOU) to promote a bilateral partnership to support the development of the exchanges futures and options markets.

The agreement was designed to explore opportunities for extending the reach of both exchanges. The MOU will enable the two exchanges to explore opportunities for information sharing; exchanging and training employees; as well as business cooperation such as joint research into developing strategies for the derivatives market.

“Asia is a strategic priority for NYSE Euronext and we are delighted to partner with Mr. Yuchen and his colleagues at the China Financial Futures Exchange,” said Duncan L. Niederauer, Chief Executive Officer, NYSE Euronext. “This agreement deepens our long term commitment to the region, and by sharing best practices and working collaboratively, CFFEX and NYSE Euronext will further promote the development and advancement of both the Asian and global financial markets.”

Garry Jones, Group Executive Vice President and Head of Global Derivatives, NYSE Euronext, said: “We have customers who trade our derivatives contracts all over Asia and this MOU with the China Financial Futures Exchange – along with our physical presence in Hong Kong, Singapore and Tokyo – further illustrates our commitment to Asian markets. We look forward to unlocking efficiencies and trading opportunities in both markets by working closely and sharing expertise with the CFFEX.”

“This collaboration will further develop both exchanges derivatives markets and facilitate the experiences of our customers and NYSE Euronext’s,” said Zhu Yuchen, Chief Executive Officer , Chinese Financial Futures Exchange.

Source: Automated Trader, 16.05.2012

Filed under: China, Exchanges, , , , , , ,

NYSE to sign contract to manage 3 Security Indices of China Security Indicies CSI

NYSE Euronext (NYX) today announced that it has agreed with China Securities Index Co., (CSI) to manage the calculation of three of CSI’s indices: Overseas China Internet Index, Overseas China Consumer Discretionary Index and Overseas China Consumer Staples Index. Leveraging NYSE Euronext’s operational and listed products expertise, this new initiative represents a significant milestone for the global index services of NYSE Euronext to further expand its index offerings in the Asian region meeting the growing demand to track the performance in Chinese companies.

CSI, the first Chinese index customer, will use the global index services of NYSE Euronext for the maintenance, calculation and distribution of its index values and data for the Overseas China Internet Index, Overseas China Consumer Discretionary Index and Overseas China Consumer Staples Index. Through these three indices market participants can track a portfolio of stocks covering varying sectors of the Chinese economy using the real-time calculation and dissemination services provided by NYSE Euronext. Furthermore, Exchange Traded Products that track these indices are anticipated to list and trade on NYSE Arca, NYSE Euronext’s all-electronic US trading platform.

Having CSI, one of China’s leading index providers, select NYSE Euronext’s Global Index Group as their index provider of choice is a testament to the growing momentum of our value in the indexing space,” said, George Patterson, Managing Director, Global Index Group. “This new relationship further underscores NYSE Euronext’s commitment to expand our index services to Asian markets and other key regions around the globe.”

For the methodologies for calculation of the Overseas China Internet Index, Overseas China Consumer Discretionary Index and Overseas China Consumer Staples Index, as well as more information on the indices, please visit the CSI website: http://www.csindex.com.cn/sseportal_en/csiportal/zs/indexreport.do?type=1

Source:MondoVision, 08.02.2012

Filed under: China, Data Management, Exchanges, , ,

Asia E-Trading: Electronic Trading in China – Webinar September 7th

Asia E Trading presents the free  1 hour web-seminar : Electronic Trading in China

  • Overview of the Electronic Trading industry
  • Buy-side Algorithmic Trading
  • CSI300 Index future
  • Latest news on QFII and QDII
  • High Frequency Trading and Colocation
  • Update: Shanghai and Shenzhen Exchange

Speakers are:

Lionel Sancenot – Sungard- MD NE Asia & Greater China

Bill LiuQing Ma Investments -Portfolio Manager

Zennon Kapron – KapronAsia- Principal

REGISTER HERE

Date: 07. September 2010

TIME: 5pm Hong Kong, 10am London, 5am New York

The seminar will be recorded and available on demand

Filed under: China, Exchanges, FIX Connectivity, Trading Technology, , , , , , , , , , , , , , , ,

CSRC outlines how funds can invest in CSI 300 futures

The regulator releases an early draft of the proposed rules for Chinese mutual funds that want to invest in CSI 300 index futures.

s fund analysts and managers continue to attend futures training courses organised by the China Securities Regulatory Commission, a draft of the CSRC’s proposed rules on how Chinese mutual funds can invest in the upcoming CSI 300 index futures hit the industry’s email inboxes earlier this week.

The regulator is encouraging discussion in the industry; it wants the public to provide feedback on the rules by this coming Monday, March 22.

A first glance through the five-page draft seen by AsianInvestor suggests the rules look straightforward, and its broad strokes read largely the same — both in language and spirit — to the rules for futures investing by fund managers in Taiwan. (This doesn’t come as a surprise; the regulations governing mutual-fund investments in securities, which went into effect in China in 2004, were also modelled after those in Taiwan.)

In the draft, the CSRC does not go into detail on how managers will qualify for futures-investing status. Fund houses, instead, are advised to review their fund prospectuses and contracts agreed with investors back at the fundraising stage and decide for themselves whether futures investing would meet their initial investment objective and risk exposure level as promised to investors.

For the fund industry, use of futures for the purpose of return enhancement is not permitted. The CSRC says the purpose of any fund activities in the futures market should be risk management.

The futures instruments for fund investment must be approved by and listed on China’s securities exchanges, and based on indices tracking only equity prices. (So notions of funds participating in bond futures or pretty much any other type of derivative would be futile at this stage.)

There are 559 mutual funds known to exist in China, according to the latest fund-registrar data tracking numbers published at the end of January. A quick search using the word ‘futures’ in Chinese in a fund database yields only 29 hits, in which ‘futures’ are specifically mentioned in the fund contracts or prospectuses as acceptable instruments for use by these funds.

Should these managers be willing to take up the challenge, they will theoretically be the initial 29 participants able to actually short A-shares domestically in China. (And there are 11 onshore brokerages authorised to serve them.)

Equity funds, balanced funds and principal-protected funds appear largely free to allocate to the CSRC’s approved list of futures instruments. The regulator thus far has made no mention on what it intends to do about segregated accounts and multi-client segregated-accounts, which went live in 2008 and 2009 respectively.

There will be limits on the holdings of futures by close-ended funds, open-ended index funds and exchange-traded funds. At the end of any given trading day, total value of securities held plus futures may not exceed 100% of a fund’s NAV — in short, leverage will not be permitted for these funds.

For open-ended funds, managers will be allowed to hold futures with a total outstanding value that exceeds 10% of the fund’s daily AUM at market closing. Net turnover of equity futures trading in a fund cannot exceed 20% of a fund’s NAV.

At the end of any given trading day, the total value of futures positions plus the value of the securities held in an open-ended fund may not exceed 95% of the fund’s NAV — with ‘securities’ defined as equities, bonds, options, asset-backed securities and repo instruments. Five percent of the fund’s assets must be allocated to liquidity instruments with maturities no longer than the equivalent of one-year government bonds.

Mindful that the funds industry at large is still poring over lecture notes and textbooks this month and that most firms have not yet hired the required techies for back-end support, the CSRC is advising caution and proper understanding; all participants should be adequately prepared before they enter the futures market. The CSRC wants fund houses to set up specific departments covering futures strategies and investments.

Other stakeholders, including guarantors to the ‘principal-protected’ funds (China’s version of CPPIs), are advised to get actively involved and aware of the potential value-at-risk for the funds they have given guarantee to; and that there should be sufficient assets to cover the principal-protected funds promised to investors should any potential losses occur.

Custodian banks are advised to review their own adequacy and strategies accordingly and develop risk-management and technological teams and platforms to support this development.

In earlier interviews with AsianInvestor, fund-rating agencies, including Morningstar and Lipper, have already taken a dim view of the opening moves that mutual fund houses will be able to make. Aside from the anticipated volatility to come, both predict a conservative and difficult early period, in which fund houses will be constrained by a lack of experienced staff and technical knowledge to draw on — for what is supposedly one of the most important chapters in the recent history of capital-market developments in China.

Nonetheless, for now, unregulated private funds, foreign investors with access to A-share markets and high-net-worth clients, and the 11 brokerages authorised to trade futures, are expected to be the largest beneficiaries.

For foreign players, though, CSI 300 futures will just be something to add to the toolbox. Overseas funds have long been able to express their views on A-shares using FTSE Xinhua A50 futures available in Hong Kong or Singapore.

Source:AsianInvestor.net, 18.03.2010 by By Liz Mak

Filed under: China, Exchanges, News, , , , , , , , , , , , , , ,

China: CSRC sets outs rules on CSI 300 margin trading

China’s top securities regulator on Friday unveiled regulations on the pilot programs for the soon to be launched margin trading and short selling business.

Securities firms must have at least 5 billion yuan in net assets and be rated as A-class in order to be qualified for the business. The regulator also required securities firms to have sufficient capital holdings and stocks of their own and have completed test runs of the trading network in order to conduct the business.

“We will gradually loosen the requirements and expand the pilot programs to more securities firms after the first batch of selected firms achieve successful results,” said an official from the China Securities Regulatory Commission (CSRC).

The regulator also asked qualified securities firms to choose clients carefully based on the review of their financial status, trading experience and risk preference. The purpose is to restrict investors with low risk tolerance and insufficient trading experience from the business, the CSRC official said.

In 2008, the CSRC picked 11 top brokerages for test runs of the trading network, including CITIC Securities, Haitong Securities, Guotai Junan, Shenyin Wanguo and Everbright Securities. It was reported that the CSRC would pick six to seven domestic brokerages from the 11 candidates for the initial phase of the trial program.

The CSRC did not reveal what stocks would be the target for margin trading and short Margin trading and short selling will allow investors to borrow money to buy securities or borrow securities to sell.

Once launched, the business is expected to account for 15 to 20 percent of the securities industry’s revenue, analysts said.

Source: http://www.sina.com/Citic-NewEdge, 26.01.2010

Filed under: China, Energy & Environment, Exchanges, News, Risk Management, Trading Technology, , , , , , , , ,

China braces for index futures; Fund experts sceptical about Chinese firms managing futures

China’s fund managers may get some nasty surprises once the newly approved stock index futures market finally kicks off. The main worries are a lack of expertise and limited investment in risk management.


China seems set on delivering market shocks at the turn of a new decade. Not only has it decided to rein in excess liquidity by raising bank reserve rates, it has finally announced its plan to develop stock index futures, after years of delay. (No doubt held back by some of the failed experiments with bond futures in the 1990s.)

On the upside, the general belief is that investors should benefit from enhanced transparency, deeper market development, product enhancement, and so on. This long-standing list was set out by market observers and foreign experts years ago. There’s no need to repeat it all here.

However, the is less consensus from consultants and fund-rating agencies on how stock index futures will affect the fund management sector. Analysts and research heads at Morningstar, Lipper and Z-Ben Advisors appear unconvinced about the ability of Chinese firms to manage these instruments.

Not that fund managers are authorised to join this new development yet. For now, only 11 authorised brokerages that have been approved to participate in the pilot schemes to trade the contracts have the qualifications to do so.

These 11 firms will only be able to express market views at an index level for the CSI 300 index. They aren’t likely to be able to do much at the individual stock level. Indeed, regulators have said little about the actual schedule of the futures market’s development.

The question then arises: If only vanilla instruments are available, will the futures market lead to product diversification for Chinese fund managers now trapped in the strait-jacket of a plain-vanilla world?

Maybe. Li Haiqing, fund analyst at fund-rating agency Morningstar in Shenzhen, says some primitive form of 130/30 strategies is likely to emerge in China. But that will happen first among the private funds that are not regulated by the securities regulator or are under the radar of the State Council’s strategic plans — not among the fund management houses. (Long/shorts, serious forms of arbitrage strategies, are something much further down the road.)

The best fund managers in China work for private houses these days, not mutual fund managers. Because they are not regulated, they are able to put together more flexible products. And they have the support of high-net-worth customers, who can take higher risks and have deeper pockets to support investments in trading platforms and risk management expertise.

The scene at mutual fund houses, meanwhile, is at best uneven. Xav Feng, head of research for China and Taiwan at fund-rating agency Lipper, reckons most fund houses have done “studies” on the new-fangled ideas of hedging tools. More are working their way up the learning curve, and most are simply not ready.

The lack of experienced people who can even understand the risks is a big worry. Talent supply simply to deliver good results from plain-vanilla securities is stretched, let alone expertise in innovative instruments.

Among the industry’s 10 oldest mutual fund houses, for example, only three can claim to employ the local asset management industry’s longest-serving fund managers. China Asset Management Company has Fang Jun, who served as a portfolio manager at China AMC for some five years and Han Huiyong for around six years. Shanghai’s Hua An boasts Shang Jimin, who can claim a little over six years of experience. Harvest has Shao Jian, with close to six years.

There’s an increasingly common polarised structure at these older firms, with a handful of senior managers at the top and a base of young managers with short track records. Hua An may have Shang Jimin, but other than Shang, there is a long list of individuals with experience ranging from around 20 days to little more than a year.

Similarly, at Shenzhen’s China Southern, at the top there is Chen Jian, with nearly four years under his belt, and below him a group of managers, each with one to two years of experience.

“There is a long way to go,” Lipper’s Feng says. Apart from the talent factor, more importantly “there needs to be enough liquidity for index futures. If not, it would be a disaster for fund managers”. Both Feng and Morningstar’s Li reckon the underlying support of margin provisions — the availability to secure leverage — is key to the success of index futures.

As per usual in China, big securities reforms make great promises for the long term. In the short term, the picture lacks clarity and can be worrying.

“Index futures will increase the volatility of the Chinese market in the short term, because investors are not familiar with it,” Feng says. But the market shock likely to come from the launch of futures might just be a stimulus for managers to strengthen their risk management techniques for the longer haul.

At present, Chinese mutual funds’ risk exposure is overwhelmingly centred towards equity risk premium. Over the long term, theoretically, they would do better to diversify to other sources of risks — for example, through credit, liquidity and manager skill.

Yet the reality is that managers have little business in asset classes beyond equities, which is their bread and butter, and managers are mostly unable to deliver returns purely through skill (the fabled search for alpha) that are uncorrelated from market exposure (beta).

Their only current means of managing risk is through asset allocation — managers could sell equities and park their proceeds in cash, bonds or cash-equivalent instruments. (For that reason, overseas investors — or reporters — questioning Chinese managers about their risk management practices often proves futile.)

Stock index futures should help change that.

Zhang Haochuan, analyst at industry research house Z-Ben Advisors, has seen little movement in the hiring of professionals or in the investment in trading platforms specifically in preparation for stock index futures or margin trading.

AsianInvestor sources suggest Beijing-based Harvest and China AMC, Guangzhou-based E-fund and even Shanghai-based Hua An might have been the early movers. These firms have been trying hard to recruit quantitative risk management talent in Hong Kong in recent months, albeit sporadically.

Zhang says larger firms that have been caught in CSI 300 index fund launches over the past year will have more incentive and resources to mobilise suitable expertise.

There are 16 CSI 300 (largely identical) index funds on the market now. Two of these are enhanced products with built-in leverage.

As an unintended result of their multi-billion-renminbi launches last year, these 16 houses have more skin in the game than the rest of the industry. China AMC’s CSI 300 product, for example, raised Rmb20 billion ($2.93 billion) in July. It is their business to start paying attention to these new concepts of securities innovation and risk management.

Source: AsianInvestor.net, 15.10.2010

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China Index Futures get Regulatory approval

The government on Friday gave the green light for stock index futures, margin trading and short selling in a milestone move that ends the one-way trade in the capital market.

An official with the China Securities Regulatory Commission (CSRC) said on Friday that the State Council has approved stock index futures, short selling and margin trading “in principle”. The regulator said it would take three months to complete preparations for index futures.

The new tools would protect investors against losses and also help them to profit from any declines. Until now, Chinese investors could only profit from gains in equities.  Analysts said the announcements are unlikely to cause any sharp volatility in the A-share market next week as the rumors have already been factored in.  “The market is unlikely to see huge fluctuations next week as the introduction of new financial tools has been discussed for years,” said Zhang Qi, an analyst with Haitong Securities.
Index futures are essentially agreements to buy or sell an index at a preset value on an agreed date. Investors can also borrow money to buy securities or borrow securities to sell under the business of margin trading and short selling.

Zhang said the move would be positive for blue-chips and heavyweight stocks as the contract would be initially based on China’s CSI 300 Index that tracks the 300 biggest shares traded in Shanghai and Shenzhen.

“Index futures are expected to bolster the market value of blue-chips,” he said.  Large listed securities firms such as CITIC Securities and Haitong Securities will also
directly benefit from the new business and could see a surge in their revenues, Zhang said.  Analysts expect the new tools to improve liquidity by attracting more capital into the equity market as the government plans to cut back bank lending to 7.5 trillion yuan ($1.1 trillion) in 2010 from last year’s 9.21 trillion yuan.

China’s securities regulator has been considering the introduction of index futures since 2006 when Shanghai set up the China Financial Futures Exchange to prepare for the running of the new mechanism. The plan had been held up till now along with the proposals for margin trading and short selling.

In 2007, CSRC chairman Shang Fulin said that the infrastructure and regulations needed for index futures and margin trading are in place.  Institutional investors are expected to be the mainstay of the new business as the threshold is high for retail investors who are more vulnerable to potential risks, said analysts.

It is estimated that the trading of stock index futures will take about three months to set up. Investors will need to deposit a minimum of 500,000 yuan in order to open an account to trade in stock index futures.

China will select high-quality brokerages to launch the short selling and margin trading of stocks on a trial basis.

Source: Sohu.com/CITIC NewEdge, 08.01.2010 by Liang Haisan

Filed under: Asia, China, Exchanges, News, Risk Management, , , , , , , , , , , ,

Shanghai Stock Exchange Corporate Bond 30, Overseas-listing A Shares, State-Owned 100 Indices Launched

The Shanghai Stock Exchange (SSE) and China Securities Index Co., Ltd. (CSI) have recently announced that nine new indices will be launched on the first trading day of 2010, namely, the SSE Corporate Bond 30 Index, the SSE Overseas-listing A Shares Index, the SSE Local State-owned Enterprises 50 Index, the SSE State-owned Enterprises 100 Index, the SSE Large & Mid & Small Cap Growth, Value, Relative Growth and Relative Value Indices and the SSE Shanghai Enterprises Index. All these indices will provide more targets for such index products as index funds and ETFs.

The SSE Corporate Bond 30 Index, the first real-time bonds index in China, is composed of 30 high-quality, large-scale and high-liquidity enterprise bonds from the SSE. The index, giving priority to the liquidity of the constituents, has adopted the weight restriction rule to reduce the influence of some constituents with large issuance volumes on the index. Besides, the duration matching rule is also designed to keep the deviation of the duration for the index and that for the market at or below 10%. The SSE Corporate Bond 30 Index is significant for the bond market development as it offers high-quality targets for bond ETFs and other bond products. On December 16, 2009, the index closed at 100.38, 0.38% higher than the beginning of the year.

A few overseas listed companies, upon returning to the A-share market in succession since 2006, have become an important sector in the A-share market and exerted a growing influence on the market. The constituents of the SSE Overseas-listing A Shares Index are listed companies’ stocks in the SSE 180 Index that are simultaneously listed on the SSE and exchanges outside the mainland. The 37 constituents boast the A-share total market capitalization and negotiable market capitalization of RMB9.1977 trillion and RMB4.5783 trillion, respectively, accounting for 50.38% and 40.79% of that of the SSE, respectively.

The SSE State-owned Enterprises 100 Index, composed of 50 constituents of the SSE Central SOEs 50 Index and 50 of the SSE Local State-owned Enterprises 50 Index, could reflect the overall performance of the listed companies of state-owned enterprises in Shanghai. Constituents of the SSE Local State-owned Enterprises 50 Index are 50 most typical stocks selected from listed companies in Shanghai that are controlled by local state-owned assets supervision and administration commissions, governments and state-owned enterprises.

The compiling method of the SSE Large & Mid & Small Cap Style Indices, basically the same with that of the SSE 180 Style Indices, is to select among the SSE Large & Mid & Small Cap Index the stocks of 150 companies with most remarkable growth features as the constituents of the growth indices, and the stocks of 150 companies with most remarkable value features as the constituents of the value indices. In terms of the SSE Shanghai Enterprises Index, with the constituent universe covering companies registered in Shanghai, have the constituents of 50 companies taking the lead in liquidity, scale and representativeness to reflect the overall market performance of Shanghai-based companies’ stocks.

Source: MondoVisione, 18.12.2009

Filed under: Asia, China, Exchanges, News, , , , , ,

E-Fund (GF Securities) ETF raises $2.8 billion, as Bosera gets ETF approved

The trend in China towards passive investing bodes well for both asset managers’ products.

China’s E-Fund Management closed capital-raising for its Shenzhen 100 ETF feeder fund last Friday, having attracted a total of Rmb19 billion ($2.8 billion) in a month since October 28. Meanwhile, rival asset manager Bosera yesterday announced that it has received approval to launch a Shanghai mega-cap ETF and feeder fund.

As a result of the new inflows, E-Fund now ranks as the second-largest fund manager in China, with Bosera and Harvest dropping to third and fourth respectively, notes Shanghai-based financial consultancy Z-Ben Advisors. Zhang Haochuan, senior analyst at the firm, attributes the success of E-Fund’s products to “strong brand awareness and performance”.

However, Bosera may not prove quite as much of a hit, one fund manager told AsianInvestor, since it is launching a new ETF rather than setting up a feeder for an existing ETF. Lack of a track record will hurt the fundraising results, he says.

“Demand in China for funds remains firmly intact, if perhaps heavily skewed towards products with a passive investment style,” says Zhang. “And, for those fund managers with a following plus track record, demand can be significant.”

The consultancy feels it is no great surprise that E-Fund was able to attract so much demand, citing the “stunning” 101% return posted by the original E-Fund Shenzhen 100 ETF year-to-date. “Add this to the ability to tap into the bank channel for new inflows (which feeder funds are designed to do),” says Zhang, “and it makes considerable sense to launch fundraising on this scale.”

Moreover, not only was E-Fund’s new ETF launch the industry’s second largest for 2009, but the company can also claim the third-largest new launch, as the E-Fund CSI 300 Index Fund raised Rmb16.7 billion in August.

E-Fund’s success highlights the advantage of having direct access to fund flows from the banking channel, says Zhang. When issuing an ETF without a feeder fund, assets can only be raised either from direct sales initiatives or from securities firms.

To tap into China’s massive savings, fund managers must turn to the feeder fund, adds Zhang. Bank of Communications Schroders also recently demonstrated the benefits of this approach. The firm pulled in Rmb8 billion for its Shanghai 180 Corporate Governance ETF launch, nearly 90% of which came via the feeder fund.

Having completed the launch of the ETF feeder fund so quickly, E-Fund’s sales and marketing team can redirect their full attention towards its first qualified domestic institutional investment (QDII) product offering. With China’s State Administration of Foreign Exchange formally granting E-Fund $1 billion in quota in early October, E-Fund is ready to make its first offshore foray.

However, Z-Ben doesn’t expect QDII fund demand to be anything like it was in 2007, and fund managers’ QDII targets have become more modest as a consequence. E-Fund’s QDII product even includes a $1 billion quota maximum, thus limiting access and, perhaps, “turning up the heat on buyers”, says Zhang.

The consultancy had initially expected E-Fund’s QDII product to raise around $500 million at launch, with the quota balance to be applied to separately managed accounts. “Given the massive success of E-Fund’s feeder fund, however, a fast sell-out is now looking more possible,” says Zhang.

Source: AsianInvestor.net 01.12.2009

Filed under: Asia, China, News, Risk Management, , , , , , , ,

QDII:Chinese index products face obstacles

Meanwhile, Chinese investors should buy foreign assets, and ETF/index products are the most efficient way to do so, say panellists at a recent conference.

The development of index products has made some progress in China, but still faces key issues, according to panellists at an event this month in Shanghai. They also argued that Chinese investor education must be addressed before the qualified domestic institutional investment (QDII) market will really take off.

The SG China Markets Forum, organised by French bank Société Générale, focused primarily on the QDII, with one panel discussing index product development in China.

That panel comprised: Song Hong Yu, head of research at China Securities Index; Zheng Xu, director in the international cooperation and product development department at Yinhua Fund Management; Zeng Fan Qing, head of product development at Fortune SGAM; Joseph Ho, head of ETF sales and marketing at Société Générale; and Frank Benzimra, director of equity derivatives structuring at SGI Index, part of Société Générale.

The index market has continued to grow, they said, thanks to the high liquidity of indexed products, economies of scale, deepening of product knowledge, and increasing demand for both risk management and an improved legal framework.

However, there remain problems affecting the market’s development, including asset managers’ strategies of seeking higher commissions by selling actively managed funds, said the panellists. The situation is exacerbated — as in Japan and South Korea — by regulations allowing the same securities house to sell active funds and exchange-traded funds (ETFs), the former with a significantly higher profit margin.

Nor do system limitations help matters. The separation of the Shanghai and Shenzhen stock exchanges are slowing the pace of ETF development in China, argued the panelists. And ultimately there is a lack of dedicated market educators — again, as in Japan and South Korea — since industry players are unwilling to take up this role due to the aforementioned conflicts of interest over active/passive fund selling.

As for investing in overseas assets, ETFs/indices are the most efficient and cost-effective way to manage a global portfolio, argued panellists. And despite the strong performance of the Chinese market this year, there are still good reasons for investors to buy foreign assets, including: sharing of growth in global economic developments, diversification, limited local investment tools apart from equity investments, and expensive pricing of shares on Chinese stock exchanges.

So how much Chinese money is likely to flow overseas — and where — under the revised QDII scheme? That was the subject of another panel at the event. The participants were: David Chang, assistant president at GuoTai Asset Management; Dong Bin, head of QDII at Citic Securities; Sandru Lu, a lawyer at Llinks; and Du Jun, head of institutional investment at Fortune SGAM.

The consensus was that there will be a huge increase in product applications under the QDII scheme, which now stands at $90 billion. However, the main issues hindering the market’s growth are insufficient investor education and expertise.

Local investors should not only take a close look at the legal framework of all the investable products when considering overseas assets and should not only focus on returns. More, panellists felt that the Lehman Brothers bankruptcy and aftermath has affected local investors’ understanding of overseas markets, meaning there will be a discrepancy between local and foreign investors’ understanding and execution, even for very simple products.

For overseas markets, it was pointed out, there are more stringent rules and strategy, whereas for the local market there is more flexibility in execution. The panellists felt that a better way to approach this situation is to combine the two approaches.

As for where domestic investors should put their money, participants felt commodities is a promising asset class, due to dollar weakness and the lack of precious metals/resources. They also suggested making some allocation to overseas structured products/derivatives to help achieve a stable return, and for those with a higher risk tolerance making use of statistical/quantitative strategies.

With reference to managing a full global/China portfolio, Citic said it will put 30% in the local market, 30% in overseas markets, 20% in hedge funds and 20% in strategic products. GuoTai will put a large portion in China and India.

Source: AsianInvestor.net, 30.11.2009

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Hong Kong: First A-share Industry Sector ETFs to Debut on HKEx

Hong Kong’s Exchange Traded Fund (ETF) market further expands with a series of five Mainland A-share industry sector ETFs setting to debut on Wednesday, 18 November on the Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx).

The new Mainland A-share index ETFs are:

Stock Code Name of ETF Benchmark index
2846 iShares CSI 300 A-Share Index ETF CSI 300 Index
3050 iShares CSI A-Share Energy Index ETF CSI 300 Energy Index
3039 iShares CSI A-Share Materials Index ETF CSI 300 Materials Index
2829 iShares CSI A-Share Financials Index ETF CSI 300 Financials Index
3006 iShares CSI A-Share Infrastructure Index ETF CSI 300 Infrastructure Index

With the listing of these five new ETFs, there will be a total of eight ETFs on Mainland A-share indices listed on the Exchange, and HKEx will be the first exchange with Mainland A-share industry sector ETFs.

All ETFs listed on the Exchange, including these five new iShares listings, are designated for market making and for short selling with tick rule exemption.  The market makers for these five ETFs are Citigroup Global Markets Asia Limited, Credit Suisse Securities (Hong Kong) Limited and UBS Securities Hong Kong Limited.

On 18 November, the Exchange will have listed 42 ETFs.  There are eight ETFs on Mainland A-share indices, seven on Hong Kong equity indices, 22 on other regional and international equity indices, two on commodities and three on bonds and money markets.

The three other Mainland A-share index ETFs are:

Stock Code Name of ETF Benchmark index
2823 iShares FTSE/Xinhua A50 China Index ETF FTSE/Xinhua China A50 Index
2827 W.I.S.E. – CSI 300 China Tracker CSI 300 Index
3024 W.I.S.E. – SSE50 China Tracker SSE50 Index

Investors should note that all A-share ETFs use derivative instruments to synthetically replicate the performance of the underlying benchmarks.  These ETFs are subject to counterparty risk of the derivative instruments’ issuers and may suffer losses if such issuers default or fail to honour their contractual commitments. For a better understanding of the risks involved, investors are advised to read the ETFs’ prospectuses in full prior to making any investment decisions.  Information on the various risks of ETFs and their structures is available on the HKEx website.

Source: MondoVisione 17.11.2009

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Tokyo Stock Exchange lists Indian ETF – S&P CNX Nifty linked ETF

Today, the Tokyo Stock Exchange approved the listing of the “NEXT FUNDS S&P CNX Nifty Linked Exchange Traded Fund” managed by Nomura Asset Management Co., Ltd.. The ETF is planned to be listed on Thursday, November 26, 2009.

This is the first ETF linked to Indian stocks to be listed on markets in Japan. The “S&P CNX Nifty Index” to which the ETF is linked is comprised of the 50 premier issues of the National Stock Exchange of India.

Code 1678 (ISIN JP3047100007)
Name NEXT FUNDS S&P CNX Nifty Linked Exchange Traded Fund
Fund Administrator Nomura Asset Management
Listing Date November 26, 2009
Trading Unit 100 units
Underlying Index S&P CNX Nifty Index

TSE entered into a memorandum of understanding with the National Stock Exchange of India on October 15, 2006. Through this ETF, TSE hopes to supply investors with better access to the Indian securities market and contribute to the development of the markets in both of our countries.

With this listing there will be a total of 69 ETFs listed on the Tokyo market, bringing us closer to the goal of 100 listed ETFs by fiscal year 2010, as laid out in the Medium-Term Management Plan. TSE will continue working to diversify the ETF market and improve the convenience of our market for all investors.

Additional ETF’s listed in Tokyo include Brazil’s IBOVESPA, China A Share CSI300 as well as  ETC (Exchange Trade Commodities) like Gold, Silver, Platinum and Palladium. See also TSE lists Brazilian ETF.

Tokyo Stock Exchange officel ETF site
ETFs on TSE November 2009 (.doc and .cvs)

Source: Tokyo Stock Exchange 06.11.2009

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Shanghai Stock Exchange Central SOEs ETF launched

October 27 witnessed the 1st ETF, namely, the SSE Central State-owned Enterprises ETF Index Fund, on the market in 3 years after General Manager Guo Tehua of ICBC Credit Suisse Asset Management Co., Ltd. (ICBCCS) and President Chen Geng of Guotai Junan Securities Co., Ltd. stroke the gong to announce the opening of trade on the Shanghai Stock Exchange (SSE) that day. The new product provides the investors who keep their eyes on the sector of the state-owned enterprises (SOEs) with another high-efficient investment instrument. All this will further activate the SOEs sector and ETF trading and attract more investors by offering more opportunities for investment in the SOEs.

Relevant officials from the SSE and China Securities Index Co., Ltd. as well as nearly a hundred of guests from several securities dealers and assets management institutions extended their congratulations. ICBCCS General Manager Guo Tehua and SSE Vice President Liu Xiaodong signed the “Agreement on Listing”.

It is learnt that the SSE Central SOEs ETF, the 1st listed ETF in 3 years and the first of its kind ever in China, tracks the SSE Central SOEs Index, which pools 50 stocks of listed companies of SOEs with large market capitalization and sufficient liquidity on the SSE. So, it is also called the “super SOEs blue chip”. Benefited from the RMB4 trillion economic stimulus plan of the state and the increasingly speeding process for reorganization of SOEs, the value of investment in SOEs has long been cherished by the investors. Statistics show that in 2009, such indicators as the P/E and P/B ratios of the SSE Central SOEs Index are the lowest among the main indices. By October 21, 2009, the average P/E ratio of the SSE Central SOEs 50 Index had been 22.16 times, lower than that of the SSE Composite Index of 26.63 times, that of the SSE 50 Index of 23.24 times and that of the CSI 300 Index of 25.75 times. Over RMB3 billion were achieved through online cash subscription in a single day, raising 4.5 billion units from a great many excited subscribers during the period of issuing SSE Central SOEs ETF.

The securities code for listing and trading of SSE Central SOEs ETF is “510060”, with the code for subscription and redemption of “510061”. Investors can trade the fund on the secondary market in the same way of purchase and sale of stocks. Besides, they can also make subscription and redemption for the fund through the package portfolio of constituent stocks of the SSE Central SOEs Index on the primary market, with a minimum requirement of 1 million fund units for each lot.

Source: MondoVisione, 29.10.2009

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UBS SDIC introduces leveraged CSI 300 index fund to China

The funds JV is looking to tap into Chinese appetite for more exotic products; meanwhile, it also finds a new CIO.

Asian Investor

UBS SDIC, the Swiss bank’s 49:51 joint venture with the State Development and Investment Corp in China, plans to list its index-tracking CSI300 fund on the Shenzhen Stock Exchange. The fund is 95% benchmarked to the CSI300 index, which tracks prices of the 300 most active stocks listed on the Shanghai and Shenzhen bourses. The remaining 5% follows the local interbank interest rate benchmark.

Daily tracking error will be limited to under 0.35%, or 4% on an annualised basis. A level of 1.6x leverage is built into the fund giving investors magnified returns from the index’s movements.

The fund prospectus says calculation of the fund NAV will be performed annually. ICBC is the fund’s appointed custodian.

Wednesday marked the last day of the initial fund raising effort, but the result has yet to be announced. UBS SDIC is generating good media buzz in China for venturing into the land of exotics in an otherwise overdone product idea based on the CSI300. A dozen funds tracking the CSI300 already exist in the market.

Meanwhile, the JV has also found a new CIO after a year-long search. Marc Tan is a Singapore native who has previously served as an executive director at UBS AG; as assistant general manager at China Merchants Fund (a JV with ING Investment Management); CIO and interim general manager at OUB-Optimix; and senior fund manager in charge of China strategy at the Overseas Union Bank.

According to statistics provided by Z-Ben Advisors, as of end-August, UBS SDIC has a total AUM of Rmb25.5 billion ($3.74 billion) and a market share of 1.16%. It is the 29th largest firm in an industry of 60.

Source:AsianInvestor, 02.10.2009

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