Futures, or agreements to buy or sell the CSI 300 Index at a preset value, began trading on the China Financial Futures Exchange in Shanghai on April 16, while margin trading and short selling was introduced March 31. China has allowed qualified foreign institutional investors, or QFIIs, to invest in the country’s stock-index futures by issuing Interim Provisions on Administration of Domestic Stock Index Futures Investments by QFII. A brief summary of the provisions is as follows:

  1. QFII is only permitted to invest in Stock Index Futures (SIF) for hedging, complying with the regulations of China Financial Futures Exchange (CFFEX) and following the Risk Management Principles.
  2. The buying or selling hedging quota must not exceed 10% of a QFII’s investment quota approved by State Administration of Foreign Exchange (SAFE).
  3. The total value of SIF contracts held by a QFII must not exceed its total amount of investment within each trading day, as well as at the end of each trading day. The term “total amount of investment” refers to the approved QFII quota set by SAFE.  QFII has to adjust its investment position within 10 days for any nonconformity of the value of SIF contracts due to market fluctuation. QFII has to report to CFFEX within 3 working days if the total amount of investments has changed or the hedging quota needs adjustments.
  4. QFII  is allowed to appoint 3 domestic futures companies for SIF trading.
  5. QFII and its custodian bank have to specify the method of settlement, rights and obligatons in transaction, clearing, etc.
  6. QFII’s custodian bank and futures companies should supervise and audit the actions of the QFII’s SIF investments. The custodians have to report QFII’s trading status to the China Securities Regulatory Commission (CRSC) each month.
  7. CRSC will impose penalties on QFII if a violation occurs.

To open an account with CFFEX to trade Stock Index Futures, QFII has to comply with the following conditions:

  1. Sign a tripartite indenture with its custodian banks and the futures companies.
  2. Apply a trading code from CFFEX.
  3. Apply a hedging quota, which is only valid for 6 months after approval. The QFII’s futures companies have to assign a person to be in charge of the hedging quota.
  4. To apply for buying hedging quota, QFII must provide a Proof of Funds by its bank.
  5. To apply for selling hedging quota, the status certificate of stock assets, issued by the securities company, China Secruities Depository and Clearing Co. or QFII’s custodian bank, must be provided.

Related articles:

China Publishes Draft Rules Allowing QFII to Trade Stock Index Futures

What is QFII

China QFII Member List, March 2011