Improved QFII and increased electronic trading opens China swaps market

Market changes are providing more access to derivatives markets in China to international investors and altering the domestic landscape for the local buy-side.

Market changes are providing more access to derivatives markets in China to international investors and altering the domestic landscape for local buy-side firms.

A new report from research firm Celent suggests the nation’s derivatives markets will grow as regulation becomes more positive and electronic trading takes hold.

Hua Zhang, analyst with Celent’s Asian Financial Services group, said while qualified foreign institutional investors (QFII) are now allowed to participate in Chinese stock index futures, they are not permitted to use more than three brokers. But while QFII futures assets are currently limited to less than 10% of total assets, this cap was soon to be increased.

“The trend of regulation is favourable to the derivatives market,” said Zhang. “Trading technology is also advanced. The China Financial Exchange system can now process 7,000-8,000 orders per second, and provides co-location services.”

According to Celent, the proportion of Chinese derivatives trading by institutional investors has grown steadily, with the major drivers being the launch of new proprietary firms and asset management institutions, and well as an increase of activity by QFIIs needing to hedge risk.

Zhang said since algorithmic trading was introduced to futures trading, it now accounts for about 10% of total volume. The introduction of high-frequency trading to the Chinese futures market also promises increased growth of the market, said Zhang.

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