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SGX: China A50 Futures Achieve New Volume Records

Date 05/02/2013

  • SGX FTSE China A50 Index Futures achieved new records in the month of January 2013 with average daily volume record of 97,984 contracts and a month-end open interest of 307,491 contracts.
  • SGX FTSE China A50 Index Futures are applicable to international portfolio managers who wish to hedge portfolios, reduce portfolio deviations from the associated index or make cost efficient short term transactions.
  • SGX also offers security products such as ETFs and Index Warrants that track China Indices in addition to China related American Depository Receipts.

As mentioned in the Market Update FTSE ST China Index gained 11.4% in January, SGX provides a number of opportunities to track and participate in China themed financial markets from Singapore. Four key means for investors to take China exposure are through China related stocks, Exchange Traded Funds (ETFs) that track China indices, FTSE China A50 Index Warrants and FTSE China A50 Index Futures.

SGX FTSE China A50 Index Futures

SGX FTSE China A50 Index Futures are based on the FTSE China A50 Index, which is a free float-adjusted, market capitalisation-weighted index representing the largest 50 A-share companies listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange, and compiled by FTSE Group.

SGX FTSE China A50 Index Futures achieved new records in the month of January 2013 with an average daily volume record of 97,984 contracts and a month-end open interest of 307,491 contracts. This open interest is almost triple the record of 108,112 contracts discussed in a Market Update almost a year ago.

The contract is relevant to investors who might wish to hedge China portfolio exposures, reduce exposure to ETF tracking errors or be more cost effective in short term investment scenarios. Futures and warrants are products designed for short term investors which can be used to complement longer term investment products such as ETFs that track Indices.

Portfolio Hedging

SGX FTSE China A50 Index Futures trades on a monthly and quarterly cycle. That is, all contracts eventually expire and investors must roll positions into the next month or quarter in order to maintain the position.

An investor who has attained a level of return in a China portfolio and wished to maintain some of that return to the end of the quarter could offset the bought portfolio by selling relevant futures contracts.

For instance, consider an investor who was content with the portfolio return early in the quarter in a market highly correlated to the FTSE China A50 Index. Using futures, the investor can attempt to lock some of the return in for the March quarter without closing the long term position. The investor could elect to sell an amount of March SGX FTSE China A50 Index Futures relevant to the size of the portfolio. By selling a similar dollar amount in futures, the investor might offset gains in the portfolio with losses in the futures. However, the investor might also offset losses in the portfolio with gains in the futures. At the last trading day of March, the futures contracts will expire. At any time before the expiry, the investor can lift the hedge or towards expiry, roll the hedge into a forward month.

Reduction of Portfolio Deviations from Index

If an Index has both cash based ETFs that track its performance and a futures contract based on its underlying value, an investor can use the futures contracts to minimize deviations from the Index. Investors who elect to use SGX FTSE China A50 Index Futures when tracking errors are observed can also make use of the settlement process of the futures contract.

All futures contracts have an expiry process and equity index futures are commonly cash settled. At expiry the price of the SGX FTSE China A50 Index Futures will converge with the underlying FTSE China A50 Index. For instance, on 30 January, January SGX FTSE China A50 Index Futures were settled at 8963.95, which represented the closing price of the underlying FTSE China A50 Index, derived after cash market closure at 3pm. Thus, had an investor previously entered into a futures contract to reduce the impact of tracking error will see that futures contract expire at the exact same level of the index according to the expiry schedule.

The Final Settlement Price is the official closing price for the FTSE China A50 Index rounded to two decimal places on the Last Trading Day. The last trading day of a contract is the second last China Business Day of the Contract Month. Note if the second last China Business Day of the Contract Month is a Saturday, the immediately preceding China Business Day shall be the Last Trading Day of the Contract Month.

Clearing Members holding open positions in the contract at the time of termination of the trading month make payment to or receive payment from the Clearing House based on the Final Settlement Price.

Cost Efficient Short Term Transactions

Given the comparatively lower transaction fees associated with futures to securities, in addition to the leverage aspect, investors can implement short term portfolio protection or portfolio enhancement strategies on a cost effective basis. The leverage consideration implies comparatively lower capital outlays. While the aforementioned portfolio hedging might come under this application, investors might have the appetite to enhance China portfolio returns.

For instance, investors might wish to engage in intraday trading or establish positions outside stock market trading hours could utilise the FTSE China A50 Index and its round the clock liquidity.

 

ETFs and Warrants

SGX also offers security products such as ETFs, Index Warrants that track China Indices in addition to China related American Depository Receipts. The table below details ETFs listed for trading on SGX that track Mainland and H-share Indices.

Exchange Traded Fund

SGX Code

Board lot size

Min. Bid Size & trading currency

Replication method

United SSE50 China ETF

JK8

100

S$0.01

Synthetic Replication P-Notes structure

db x-trackers CSI 300 Index ETF

KT4

10

US$0.01

Swap-based synthetic replication

db x-trackers FTSE China 25 ETF

HD8

10

US$0.01

Swap-based synthetic replication

db x-trackers MSCI China TRN Index ETF

LG9

10

US$0.01

Swap-based synthetic replication

Lyxor ETF China Enterprise (HSCEI)

P58

10

US$0.01

Swap-based synthetic replication

 

Macquarie provide a series of three call warrants and three put warrants on the FTSE China A50 Index. The terms of the new warrants are tabled below. The warrants offer investors leveraged exposure to the China domestic market and continuous bid-offer prices are provided by the market-maker during the underlying trading hours.

Warrant

SGX Code

Type

Strike

Conversion Ratio (WPS)

CN7200MBePW130429

R0PW

Put

7200

6000

CN7800MBeCW130429

R0QW

Call

7800

6000

CN8200MBePW130627

R6QW

Put

8200

6000

CN8800MBeCW130627

R6PW

Call

8800

6000

CN9200MBePW130829

RO8W

Put

9200

6000

CN9800MBeCW130829

RO7W

Call

9800

6000

Similar to other warrants, the A50 warrants will be cash-settled at expiry. The settlement price at expiry will be based on final settlement price of the underlying index futures, that is, the closing price for the FTSE China A50 Index on the second last business day of the contract month.

Futures contracts, ETFs and Index Warrants are Specified Investment Products (click here for more on SIPs).