- The SGX FTSE China A50 Index Futures contract (“SGX China A50 Futures”) doubled its volume in November from a year ago to record its highest-to-date monthly and average daily volumes of 4.8 million and 238,447 contracts respectively.
- Interest in the SGX China A50 Futures’ extended trading session has also been growing throughout the year. The contract saw a spike in trading volume during the T+1 session on 21 November following the PBOC’s surprise interest rate cut announcement that came after the closure of the cash market.
- To further reduce market impact cost and facilitate more precise management of the China exposure of our global investors, the tick size of the SGX China A50 Futures will be reduced from 5 to 2.5 index points with effect from 5 January 2015.
Prompted by an unprecedented interest in Chinese equities following the Stock Connect launch, the SGX China A50 Futures saw a record jump in trading volume. Monthly and average daily volumes doubled from a year ago to set a new record of 4.8 million and 238,447 contracts in November respectively. This translates to approximately US$1.8 billion in average daily notional turnover. Open interest as of end November stood at close to US$3.3 billion notional.
Interest in the SGX China A50 futures contracts has also extended into the T+1 session as investors took advantage of the extended trading session to manage their China A-share exposure. With 16.5 hours of trading time spanning Asia, Europe and partial US timezones, the SGX China A50 Futures is well suited for traders who need a global hedging tool to respond to surprises during post Asian market hours.
Spike in SGX China A50 Futures’ T+1 Activity Following Surprise Rate Cut
In a move that came as a surprise to market watchers, the People’s Bank of China (PBOC) joined its European and Japanese counterparts in taking an active stance in promoting growth - cutting benchmark interest rate on 21 November for the first time since July 2012.
As shown in the following chart, the announcement which was made after 6pm, Singapore time, quickly resulted in a spike in trading activity on the SGX China A50 Futures market.
Chart 1: Price Movement of SGX China A50 Nov14 Futures on 21 November 2014
Source: Bloomberg
Liquidity during the extended trading session has improved considerably in recent months following the onboarding of new market makers and liquidity providers who provide continuous and competitive bid offer spreads throughout the T+1 session. The SGX China A50 futures currently trades at an average bid offer spread of 6.7 basis points (or 1-2 tick spread).
Source: Singapore Exchange
Offshore Demand for China A-share Investments Soars
Despite the measured response seen towards the Stock Connect so far, demand for offshore China A-share passive investment products has gone unabated. Turnover of SGX China A50 futures, CSOP FTSE China A50 RQFII ETF and iShares FTSE A50 China synthetic ETF registered month-on-month growth of between 60 to 90%. On the other hand, turnover in the U.S. listed H-shares based iShares China Large-Cap (FXI) ETF fell by 30%.
Source: Bloomberg
Demand for the largest US ETF that tracks China A-shares, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, had been so overwhelming that its manager had to cap new creations at 50,000 shares, or one unit as it has exhausted its Renminbi Qualified Foreign Institutional Investor (RQFII) quota for the second time in less than 3 months. The US$633.5m ETF closed 5.1% above the value of its holdings on 24th November 2014.
Table 1 : ETFs Trading at Premium
ETFs | NAV | Price on 27 Nov 14 |
Deutsche X-Trackers Harvest CSI China A -shares | US$28.55 | US$29.67 |
Market Vectors China AMC A-Share ETF | US$36.11 | US$36.54 |
KraneShares Bosera MSCI China A ETF | US$38.04 | US$38.65 |
Source: Bloomberg
Reduction of SGX China A50 Futures’ Tick Size
To help reduce market impact cost and allow market participants to more precisely manage their China exposure, SGX will be reducing the tick size of the SGX China A50 Futures from 5 index points to 2.5 index points with effect from 5th January 2015.
The halving of tick size will help reduce the bid-offer spread from approximately 6.5bps to 3.2 bps, making the contract one of the most cost efficient offshore China A-share access products.
|
Current Tick Size |
New Tick Size |
Outright Market |
5 index points (US$5) |
2.5 index points (US$2.5) |
Calendar Spread Market |
5 index points (US$5) |
2.5 index points (US$2.5) |
Negotiated Large Trade (NLT) facility |
No change |
|
As narrow as 0.01 index point (US$0.01) |
Source: Singapore Exchange
The latest contract specifications of the SGX China A50 Futures can be found here.