New | Shanghai's option market launch shadowed by regulatory probes, brokerage suspensions
City's exchange chief wants focus on risk controls for hedging instrument amid rising market volatility and fears for small investors
A flurry of reform efforts to make the mainland's capital markets fit for global investors has sent uncertainty sweeping across the equity arena as brokers face probes into trading irregularities and exchanges struggle to get to grips with a fast-evolving marketplace.
The Shanghai Stock Exchange is counting down to next month's launch of the mainland's first stock option market, but bourse chief executive Huang Hongyuan told a financial forum in Shenzhen that more focus should be put on risk controls for the new financial instrument at a time when volatility is on the rise.
"In the mainland market, each new derivative would be greeted with an over-speculative mood from unseasoned investors," the official quoted Huang as saying.
The imminent launch of options trading has been overshadowed by news the China Securities Regulatory Commission barred leading brokerage Citic Securities and two other trading houses from opening new margin trading accounts for three months because they broke rules. Shares of mainland brokerages tumbled yesterday on the heels of the suspension.
Meanwhile, the China Banking Regulatory Commission issued draft rules yesterday aimed at tightening supervision of entrusted loan products, a risky instrument whose funds typically flow into assets such as property and stocks.
"Reforms and innovations in the mainland stock market are supposed to eventually benefit investors, but lots of the so-called innovations only benefit the institutions because they are given more chances of earning small investors' money," said Huatai Securities analyst Zhou Lin. "Take the margin trading business. The rapid growth helped brokerages increase revenue, but an expected boom-to-bust cycle would eventually hurt many small investors."
Shanghai will begin options trading on February 9 following almost two years of preparations. The derivative is aimed at helping equity investors hedge risks arising from volatility. The first stock option will be based on the exchange-traded fund (ETF) of the blue-chip SSE50 index, which covers the largest publicly traded firms on the Shanghai bourse.
The Shanghai exchange set a minimum capital requirement of 500,000 yuan (HK$631,000) for individuals, who must pass a written test to guage their basic knowledge of option products."
The mainland is moving step-by-step to reform the capital markets by introducing futures trading and short selling that offer a better foundation for the launch of stock options as more hedging tools are now available in the market," said Billy Mak Shui-choi, associate professor at Baptist University's department of finance and decision sciences.
It is estimated that about two million mainland retail investors will be qualified to trade stock options, but Mak forecast that not many would participate initially. The SSE50 ETF stock option should pave the way for other products such as stock options covering the SSE180 ETF and some single stocks.
"If there is chaotic trading at the very beginning, it has the flexibility to delay the launch of single-stock options," said Johnny Yu Ching-yan, managing director for equity derivatives sales at investment bank UBS.
