Shenzhen stock exchange nears equity options launch

The Shenzhen stock exchange is poised to launch equity options by the year-end, according to state media, in what would be the first new equity derivative product to debut in China since the global financial crisis.

The Shenzhen Stock Exchange is launching advanced testing - which involves all the elements of trading - of stock options based on shares of China Vanke, the country's largest listed developer, the official Shanghai Securities News reported on Friday.

It will also test options based on the Shenzhen 100 exchange-traded fund, composed of the 100 largest Shenzhen-listed companies, the paper said, citing an unnamed source.

The Shenzhen stock exchange did not answer calls seeking comment.

China's commodity futures market has developed swiftly in recent years but equity derivatives have lagged. Launched in 2008, equity index futures based on the CSI300 are the only equity derivatives approved for trading on mainland markets.

The Shanghai Financial Futures Exchange, where the index futures trade, is also conducting simulated options transactions based on the CSI300, which is an index of the largest companies traded in Shanghai and Shenzhen, as well as options based on the Shanghai 50, another widely used index.

The chairman of the Shanghai Stock Exchange, where most Chinese large-cap stocks trade, said last year that the bourse planned to roll out options based on individual stocks within the year, but that never materialised.

Dozens of new hedge fund-style investment vehicles have popped up in China in the past few years under new regulations that officially license "sunshine funds" - a name that connotes an effort to draw out such investment funds from regulatory grey areas.

But nearly all such funds pursue long-only strategies due to a lack of equity derivatives and other tools for taking short positions. Securities lending, which fund managers use to conduct short selling, totalled Rmb4.2bn ($686m) as of late October, according to Choice, a financial data provider.

Chinese regulators have taken a cautious approach to derivatives, especially financial futures and options. Such products can be used for hedging risk but can also amplify risk by enabling investors to add leverage to their portfolios.

Options are contracts that give an investor the right, but not the obligation, to buy a security at a particular price on or before a given date. A futures contract obligates the two parties to buy or sell the underlying asset on a particular date.

Twitter: @gabrielwildau

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