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- SGX FTSE China A50 Index Futures gallops to a new single day volume high of 594,551 contracts and open interest record high of 591,501 contracts during January roll to start 2015 on a high note.
- SGX implemented a tick size change from start of January 2015 to help lower the bid-offer spread of the contract from 6.5 bps to 3.2 bps for market participants.
- Recent outflow of funds from leading China-related Hong Kong-listed Exchange Traded Funds signals receding of bullish interest by global investors, which has spilled over to the SGX FTSE China A50 Index Futures market.
SGX FTSE China A50 Futures sets New Volume and Open Interest Record
SGX FTSE China A50 Index Futures enjoyed a good start to 2015 by setting a new daily record of 594,551 contracts traded on 27 January during the roll period. Open interest also peaked at 591,501 contracts a day before, with 310,640 contracts being established in the February contracts by 27 January, two days before January expiry.
SGX FTSE China A50 Index Futures Notional Turnover
SGX Implements tick size change to improve cost efficiency
These new records were set after the SGX had reduced the tick size of SGX FTSE China A50 Index Futures from 5 points to 2.5 points from 5 January 2015.
As the world’s leading offshore futures market offering unbridled access to the Chinese A-share market, the contract has seen growth in all customer segments including asset managers, banks, hedge funds and proprietary trading groups.
The halving of tick size was helped reduced the bid-offer spread from approximately 6.5 bps to 3.2 bps (as illustrated in Chart 1), making the contract one of the most cost efficient offshore China A-share access products and enable these participants to more precisely manage their China exposure.
“The reduction in the SGX FTSE China A50 Index Futures tick size is a good response to the market dynamics and should improve market efficiency and reduce the cost of trading. We are happy with this change and look forward to the continuing success of the product,” said Richard Bagshaw, Co-Head of Trading, AHL.
“SGX has taken a step in the right direction to reduce the cost of transaction for customers by tightening the tick size. We are positive about the SGX FTSE China A50 index futures' potential to attract new flow.” Dustin Kuo, Managing Director, Global Markets Equity, Deutsche Securities Asia Limited.
“SGX’s reduced tick size in the SGX FTSE China A50 Index futures has allowed our clients to take advantage of additional trading opportunities while also increasing the efficiency of risk management and hedging.” Said David Friedland, Managing Director, Asia Pacific, Interactive Brokers.
Redemption trend in China-related Exchange Traded Funds (ETFs)
As a leading offshore derivatives contract for the Chinese A-share market, the trading prices of SGX FTSE China A50 Index Futures closely reflect the supply and demand factors that impact global participants in this contract.
Leading offshore China ETFs, the iShares FTSE China A50 Index ETF (2823 HK) and CSOP FTSE China A50 ETF (2822 HK) saw an outflow of funds in recent months as total assets under management shrank by approximately US$2 billion and US$806 million respectively from the beginning of January, after seeing growth in investor interest for most part of 2014.
AUM of Leading Offshore China ETFs
Source: Bloomberg
On the back of weak economic data coming out of China at the end of 2014, investors could have felt that the market rally on the launch of the Shanghai-Hong Kong Stock Connect is ebbing after an exuberant start and closed out their bets. These ETFs were also trading at a deeper discount to their net asset value.
Source: Bloomberg
Dampened cost of roll in January
This receding bullish interest by global institutional investors, who typically utilise these ETF vehicles to gain long-only exposure to the Chinese A-share markets, spilled over to the futures market on SGX as we observed a selling pressure in the February contract and in the January roll. On the back of this outflow, issuers of such structured products could have also turned to the futures market to hedge their exposures.
According to Bloomberg article on 27 January, PBOC pumped RMB30 billion (US$4.8 billion) into the banking system via the repo market, causing the China’s benchmark money-market rate to decline 10 basis points to 3.79% in the morning of 27 January 2015.
Together with the trend of redemptions, these imbalances have the largest impact on offshore global institutional flow that is strongly present in the SGX FTSE China A50 Index Futures – translating into a strong selling pressure which may have in turn contributed to the negative cost of roll.
The recent trading volatility in USD/CNY exchange rate could have further exacerbated the situation, given that the SGX FTSE China A50 Index Futures is denominated in USD, which heightened the quanto-effect.
Trading Opportunities ahead
Chinese equities remain a restrictive market for global investors although Beijing is taking a step in the right direction with the Shanghai Hong Kong Stock Connect and expansion of the QFII quotas. Being the world’s only futures contract on the Chinese A-share market, global institutional flows for Chinese A-shares manifests itself the most in the SGX FTSE China A50 Index Futures especially when there is a pressure on the short-side.
As such, this presents trading opportunities for various market participants such as those who wish to take a long-term exposure to China via the futures contract as well as those who have access to the onshore A-shares market and may arbitrage this mispricing between the markets.
Going forward, Beijing will rollout stock options for investors. Due to their risky nature, access will be limited but their launch may benefit the equity market. For the moment, the China Securities Regulatory Commission (CSRC) will allow investors to trade only options that track the SSE50 index of the 50 biggest firms on the Shanghai bourse. Index heavyweight stocks could see heightened interest, as investors wanting to use options to hedge or speculate could build up their position in the underlying companies. Besides the SSE50 index, FTSE China A50 Index will also benefit as both indices share 30 common members.
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