* China asset management regulator tightens rules on risk
* Aimed at asset managers of financial firms, futures
* Prompts slump in structured product sales by brokers
* In turn, sales slump hits commodities futures volumes
By Ruby Lian and Engen Tham
SHANGHAI, Oct 17 New rules in China aimed at
curbing risk and speculation have triggered an exodus of
institutional cash from the country's commodities futures
markets and hobbled a thriving niche business for brokers.
Before the ban, futures brokers were launching hundreds of
structured products a month offering guaranteed returns, which
attracted institutional cash and fed billions of dollars into
the commodity futures markets.
Now, fresh launches are just a trickle as the brokers comply
with new rules that include a ban on guaranteed returns. With no
promise of big returns, the 100 brokers or so that run asset
management businesses offering these products are struggling to
"The new rules made the launch of structured products nearly
impossible," said Ni Chengqun, a senior manager with the asset
management arm of Hicend Futures in Shanghai.
The slump in trade is a blow for the likes of the Shanghai
Futures Exchange and the Dalian Commodity Exchange, which run
China's biggest commodity futures contracts.
Average daily volume in steel rebar futures, for example,
dropped to 5.3 million in September from 13.5 million in April,
while iron ore turnover dropped to 1.5 million from 4.7 million.
The rule changes by the Asset Management Association of
China (AMAC) prohibit asset managers at futures brokers from
guaranteeing returns, restrict leverage and include stricter
standards for funds acting as advisors. AMAC was taking aim at
highly-leveraged products that were offering the promise in many
cases of returns of 8-9 percent.
In one popular type of product, brokers pooled funds from
investors and deployed the capital in equities, fixed income and
commodity futures markets for a specified period. An outside
fund acted as an advisor to devise the trading strategy.
Futures were central to many of the products because they
offer the ability to leverage, one asset manager said, citing
the need to deposit as little as 10 percent of the contract
value on margin. So an investor pool of $10 million can wield a
notional position of up to $100 million in the market.
As a result, a relatively modest price gain in that market
can produce outsized profits on the initial deposit.
Such juicy returns attracted institutional fund managers.
Banks such as China Merchants Bank and some of the big-five
lenders flocked to the products, asset managers said.
BIG PROMISES, BUMPER LEVERAGE
In the first half of 2015, the hottest structured products
were tied to equity indexes like the Shanghai/Shenzhen CSI 300
Index, which surged roughly 50 percent from January to
June amid a retail investor buying frenzy.
Futures on the CSI 300 rallied by the same degree,
and volumes more than doubled from the year before to average
over 1.2 million contracts a day for the first half of 2015.
Alarmed by the prospect of a bubble, regulators then stepped
in to restrict trade, triggering an exodus from stocks and
effectively barring retail investors from trading stock futures.
CSI 300 futures volumes collapsed. Average trade in the first
half of 2016 was 80 times less than a year earlier.
That's when futures brokers steered investors into fixed
income, equities and commodities, sparking a surge in
commodities trading in early 2016. Iron ore and steel futures
prices jumped more than 60 percent by mid-April.
LOWER FEES, MORE COMPETITION
For brokers, the latest rules come just as a proliferation
of new rivals has intensified competition in their core business
of hedging risk.
An estimated 80 percent of brokers' asset management
business focused on leveraged structured products, people
working in the sector said.
Now, brokers like Huatai Futures, which manages more than 10
billion yuan ($1.5 billion) in assets, and Hicend Futures, are
finding only tepid interest from investors in products that
comply with the new rules.
"Since banks can't be guaranteed high returns, most of them
have lost interest, while a few are only willing to work with
big asset management firms," Hicend's Ni added.
Kang Lan, a senior asset manager at Huatai in the southern
province of Guangzhou, said her firm has only managed to launch
one fund under the new rules. In the month before the change,
the firm had set up as many as 10.
Of China's 150 futures brokers, more than 100, including the
nation's top names Founder CIFCO Futures, Guosen Futures and
Hongyuan Futures, have asset management units, AMAC says.
Their assets under management more than doubled to 227.3
billion yuan ($34 billion) in the first six months of 2016 from
the end of 2015.
"With strengthening supervision from regulators, (brokers'
asset management) business will definitely slow down," Liang
Lijin, a finance lawyer with Hiways Law Firm in Shanghai said.
"They will launch new products based on the new rules, but
they will be slow and business will not grow."
(Additional reporting by Samuel Chen; Writing by Josephine
Mason; Editing by Gavin Maguire and Neil Fullick)