Shanghai bourse launches consultation on ETF options

11 July 2014   Category: News, Asia, China, Global   By Hui Ching-hoo

The Shanghai Stock Exchange (SSE) has launched a consultation into the possible launch of ETF options, which market watchers anticipate could help to invigorate both the mutual fund and ETF markets.    

According to the Shanghai Securities Journal, the SSE has issued a circular that outlines guidelines on usage of the hedging tool.

The document reportedly lays out details for the utilisation of ETF options, including risk control, collateral management and position limit.

Local media has reported that the first ETF option will come on stream as early as late August this year. 

The SSE divides eligible ETF options’ investors into three categories: individual investors, general institutional investors, and special institutional investors. The bourse intends to put a ceiling on ETF option positions of no more than 10% of the total asset valuation of an investor’s account.

The maximum volume of a single ETF option for an individual investor is limited to 500 and 1,000 creation units for institutional investors, the circular says.    

Jian Yang, managing director of index and quantitative investment at China Universal Asset Management (HK), told Asia Asset Management that the impact of ETF options on the Mainland ETF industry would be significant, due to the current scarcity of these products: “Mainland ETF investors currently can only bet on index futures or margin trading when it comes to hedging against market risks, but the threshold is relatively high.”

Furthermore, not all securities brokerages are able to provide margin trading services because of the high operation cost.

Mr. Yang anticipates that ETF options will enable investors to pursue arbitrage in a more cost-effective way, and could help increase ETF market liquidity.

Analyst firm Z-Ben Advisors noted that the availability of ETF options could also help spur the launch of long-short mutual funds. The China Securities Regulatory Commission has been reluctant to grant approval for long-short funds in the absence of effective hedging tools, but the launch of ETF options could change this.