So far, 2019 is shaping up to be a big year for the equity index futures market in Shanghai. Trading volume during the first half of the year in the equity Index futures offered by the China Financial Futures Exchange is running far ahead of the previous year, thanks in large part to the steady unwinding of restrictions put in place in 2015 in response to a stock market crash.
Meanwhile, the two main offshore markets for China-related derivatives are moving in opposite directions in terms of trading volume. The equity index futures listed on the Hong Kong Exchanges and Clearing have seen a slowdown in trading activity after a record 2018, while Singapore Exchange is enjoying rapid growth in the trading of its FTSE China A50 futures.
The FTSE China A50 Index tracks the A share market, which consists of securities listed on the Shanghai and Shenzhen stock exchanges. The SGX futures contract therefore provides an efficient way for international investors to create a synthetic exposure to the ups and downs of the Chinese stock market. HKEX has two main equity index futures, the Hang Seng and the H-Shares. Both are a more indirect play on the Chinese economy, in that they track shares listed on the Hong Kong Stock Exchange rather than the mainland exchanges.
Shanghai's CFFEX currently offers futures on three equity indices representing different sectors of the mainland markets. The CSI 300, the oldest and best established of the three, consists of the 300 largest stocks listed on the Shanghai and Shenzen stock exchanges. The CSI 500 consists of small and mid cap companies on those two exchanges, and the SSE 50 consists of the 50 largest companies listed on the Shanghai stock exchange.
During the first half of this year, all three CFFEX equity index futures enjoyed exceptionally large surges in popularity. Volume in the CSI 300 futures reached 12.3 million contracts in January to June, up 365% compared with the same period in 2018. The CSI 500 and SSE 50 were up 461% and 174% to 8.97 million and 5.29 million contracts, respectively.
Open interest also has increased dramatically. At the end of June open interest in the CSI 300 contract stood at 115,000 contracts, up by almost 140% compared to June 2018. The CSI 500 and SSE 50 futures enjoyed similar triple-digit increases in open interest.
The biggest factor fueling CFFEX's growth has been the re-normalization of the rules governing the equity index futures market. In 2015 the Chinese government clamped down on all forms of shorting and imposed very strict restrictions on the trading of equity index futures. Gradually those restrictions have been eased as the stock market settled down and the value of futures as a hedging instrument became more apparent. In early 2019 CFFEX lowered margin requirements and raised daily trading limits, and in April it made another round of changes, lowering margin changes again and reducing certain trading fees.
Despite the rapid growth this year, the overall level activity remains significantly below the prior highs set in 2015. That year more than 267 million CSI 300 futures changed hands, making that contract one of the most actively traded equity index contracts in the world. This year's trading volume is still less than 10% of that peak volume.
In contrast, Hong Kong and Singapore have maintained a high level of liquidity through the period and currently the volume and open interest in their equity index products are well above their 2015 levels. SGX is on pace to finish the year roughly with 20% more volume in its A50 contracts than it tallied in 2015. And the Hang Seng index futures, the flagship equity index contract at HKEX, is on pace to more than double its 2015 volume.
Both exchanges are also competing to expand the range of contracts on offer. In 2017 SGX introduced futures on the China NTR index published by MSCI, the global index provider. That index tracks the net total return on the stocks in the MSCI China index, meaning that it includes dividends and taxes as well as changes in prices. That makes the index attractive to institutional investors looking for a benchmark for their China funds. More than 400,000 MSCI China NTR futures traded in the first half of 2019, a small amount compared to the rest of the complex, but a good start for a new contract.
HKEX is preparing to add another contract this fall in partnership with MSCI. In March it announced plans to launch futures contracts tied to the MSCI China A Index, which will track several hundred large and mid-cap A shares listed on the Shanghai and Shenzen stock exchanges that are accessible via the exchange's Stock Connect program. According to HKEX, the new contracts will give international investors a risk management tool that will complement their use of Stock Connect to access mainland China's equity markets. The contract launch date is currently set for November, pending regulatory approval.