Napoleon called China the “sleeping dragon”, and prophesied “when it awakes, the world will shake”. Could he have known the magnitude of his prediction in 1803? Today, in the year 2008, that mighty dragon rises. China’s economic expansion has made headlines, seen unprecedented direct investment and pushed it to trade barbs with the US and Europe over its boundless trade deficits. Its stock markets, the Shenzhen Stock Exchange and the Shanghai Stock Exchange, have risen to new heights this summer. China’s financial future will finally, at least insiders agree, be made available for trading on the new China Financial Futures Exchange (CFFEX) at the end of this year. The Shanghai Shenzhen 300 Index (CSI300) future is seen as the next step in the development of China’s capital markets. Kuran Malhotra

Currently investors can only profit when the stock index goes up. With the introduction of index futures, investors will be able to make money when the index falls. Additionally, fund managers will be able to hedge their portfolios more effectively. Leo Melamed, the legendary “father of financial futures” and founder of the worlds first financial futures exchange, the Chicago Mercantile Exchange (CME), said in a speech at a financial innovation forum recently held in China “The Chinese stock market seemed to grow too fast. I’m not sure if it is overheated. But how high the share prices are is not directly related with the kickoff of the index futures, because the derivative is itself a hedging tool.”

Last June the CFFEX announced that the China Securities Regulatory Commission (CSRC) had approved the trading rules of the CSI300, a crucial step toward the launch of the mainland’s first index futures market. The approved trading rules cover trading practices, clearing procedures, member rights and obligations, risk control, information management, hedging operations and the investigation of and penalties for irregular trading.

Each tick of the CSI300 Index future equates to 300 yuan with the margin level for trading set at 10 percent of the contract value. Based on the CSI300s recent level of 4400 the value of one futures contract would equal 1.32 million yuan making the margin level for each contract at 132,000 yuan. The minimum price movement, or tick of the CSI300 is set at 0.2 points while the daily price range limit is set at 10 percent of the settlement price of the previous trading day.

Trading system vendors have already begun developing trading platforms to take advantage of the impending arrival of index futures. In February, the CFFEX held a meeting for major brokerages and financial technology vendors to talk about system upgrades and risk management. “Index futures are a little bit different from commodity futures,” says Chen Jun, spokesman for SunGard Kingstar. “They require more risk management and concurrent performance because of huge turnover volumes.” SunGard Kingstar is a Shanghai-based financial software vendor recently acquired by SunGard Data Systems. Chen says that Kingstar took notice of the different demands when clients were running simulated index futures trading in early 2005, in preparation for the new regulations. To handle these demands, Kingstar developed the V6 futures trading platform, which comes with an enhanced risk management function, more capacity, higher speeds and can be used for both commodity and index futures trading, he says.