Frankfurt launch of CSI 300 index futures under review

The impact of Chinese volatility reaches all the way to Europe with latest delay

Shanghai Stock Exchange, in Shanghai's Pudong district

The introduction of CNH-denominated equity derivatives on the co-established platform by Shanghai Stock Exchange (SSE), China Financial Futures Exchange (CFFEX) and Deutsche Börse in Frankfurt will be suspended due to the recent Chinese stock market volatility, according to Michael Peters, Eurex executive board member.

The Shanghai Composite Index has dropped by 40% from the record high of 5,166 in mid-June to 3,114 on September 14. Volatility has shot up dramatically over this time, with the average implied volatility of options on SSE 50 exchange-traded funds jumping to 52.89% in the first week of September, from 29.77% the previous week, according to Southwest Securities.

Risk.net reported in May that Deutsche Börse, Eurex's parent firm, was looking to use the joint venture it has formed with the two Chinese exchanges to launch a series of Chinese bonds, cash equities and derivatives products in Frankfurt. The first batch of products was due to go live as early as October. Deutsche Börse and its joint venture partners will the review the timeline of the launch as a result of the recent difficult market conditions, Peters says.

"We intended to launch exchange-traded funds in October followed by CSI 300 index futures in Frankfurt, but we currently see this will be delayed given the strong market volatility in the last eight weeks," said Peters, on a panel discussion at the Asia Risk Congress in Singapore on September 9.

"The potential in China is gigantic, but after the recent big price movements, the authorities will be more careful over the decision of opening up the financial market. They will do it step by step in order to control the volatility level. The delay of launching CSI 300 futures is understandably part of protective measures from the onshore Chinese market," he added.

A source from CFFEX confirmed with Risk.net the delay to the cross-listing of CSI 300 index futures in Frankfurt: "We're afraid the current market situation is not a good timing for us to introduce futures products in offshore markets. The plan will be back on the agenda only after domestic futures trading gets back in order."

Chinese authorities have taken firm action to reduce activity on local derivatives markets as they look to dampen the recent bout of volatility. CFFEX introduced emergency measures on equity futures in early September: margin requirements for non-hedging futures contracts were raised from 30% to 40% of contract values, and from 10% to 20% for contracts with hedging purpose.

Also, opening more than 10 contracts on a single index-futures product on the CSI 300, SSE 50 and CSI 500 indexes will be considered abnormal trading, according to the CFFEX announcement.

The CFFEX source says that these requirements will be withdrawn after the equity market stablises.

While the launch of derivatives will be delayed, CNH-denominated cash market products, such as short-term commercial paper, CSI 300 index ETFs and Chinese bond ETFs will be introduced on the Frankfurt platform as scheduled, according to the source. "You may expect it as soon as this November," the source says.

The financial market turbulence in China also impacted Deutsche Börse's schedule of activating its Asian derivatives and clearing business. Reuters reported that there will now be an 18-month delay to this service.

SSE, CFFEX and Deutsche Börse did not respond to interview requests by the time of publication.

Correction, September 16, 2015: The original version of this article stated that Eurex was reviewing the launch timeline; in fact the project is led by Deutsche Börse and its joint venture partners.