MSCI China A50 Connect Index Futures: One Year On
Oct 17, 2022
10 mins

The MSCI China A50 Connect Index Futures product has had a strong start, seeing wide adoption and taking meaningful market share over the past year. As appetite for exposure to China grows, the addition of the MSCI China A50 Connect Index Futures product strengthens HKEX’s role as the world’s most extensive and competitive offshore A-share equity and derivatives trading venue.

The MSCI China A50 Connect Index Futures contract launched on October 18, 2021 and introduced a new A-share risk management tool to meet growing investor demand, widening the already extensive offshore A-share equity and derivatives trading ecosystem at HKEX.

The launch was the best-ever for a futures product here in Hong Kong, hitting US$1.6 billion in open interest in the first full month of trading. Since launch, monthly ADV has grown from 3,500 contracts in October 2021 to about 20,000 contracts in July 2022.

While the macro environment has presented challenges in recent months, the contract has maintained its share of the offshore A-share index futures market, taking between 18% to 20% between July and September. This is testament to both the strength of the product and the appetite from investors

We have significant interest from regional and international investors, with the bank Delta-1 community, proprietary trading firms, sovereign wealth funds and pensions funds across Asia and outside of the region all adopting the product in a relatively short time frame.

Five key factors

We believe the strong performance we have seen in such a short timeframe is down to five specific factors:

The first, is the products’ composition - the A50 contract has broad exposure to China’s ‘real’ economy.

Second, the product has support from regulators in Hong Kong and China, as well as certification from the US-based Commodity Futures Trading Commission. Next there is high level of correlation between the contract and the CSI 300 Index - the definitive, broad-based benchmark for A-share markets. Finally, the MSCI China A 50 Connect Futures contract is part of a rich ecosystem here at HKEX, offering derivatives products as well as access to the A-share universe, all in a one-stop shop.

One year may seem like a long time in markets, but it’s a relatively short time in the life of a product. And we are excited about the future – we still have scope to grow this product and the broader risk management ecosystem.

Quant funds are one of the segments that we think there is much more potential: Quant funds rely on product data – and lots of it – to feed their strategies and we think that as the product matures, we have much more scope to grow product usage in this segment of the market.

Also, the product still had the opportunity to ‘cross the chasm’ into the retail market; and the growth on the supporting product side, such as with the ETFs launched in the past year – these are all part of driving the product in the future.

Investor interest in A-shares is growing

We also think that the fundamentals driving interest in the A-share space are strong and long-term in nature.

International investors are underinvested in Chinese assets compared with China’s weight in the global economy, owning only 5.3% of the A-share free-float in 2021, compared with 30% of the Japanese market.

A gradual rebalancing process is already playing out and driving interest in the A-share market. For instance, average daily volume in the Northbound channel of Stock Connect has increased from RMB 9.6 billion in 2017 to RMB 112.7 billion in June 2022.

But we believe this trend has further to run as the Connect programmes grow with new reforms, as new innovative companies emerge, as China’s influence grows and as the A-shares’ representation increases in global benchmarks.

Numerous improvements made to market structure and product ecosystem

Over the past year, we have made a series of market structure improvements to meet investors’ needs. And we have been pleased to see the positive impact of these.

Most recently and most notably, we launched Derivatives Holiday Trading in May 2022, allowing international investors to trade non-HKD denominated futures and options products on Hong Kong public holidays.

Further, there has been reforms to closing auctions, increases in daily quotas, the introduction of real-time DVP and Master SPSAs and we have seen a reduction in onshore trading suspensions, as well as improved CNH liquidity.

On top of these advances, the product ecosystem here in Hong Kong has continued to grow.

For instance, four onshore and three offshore ETFs tracking the contract were launched last year, and MSCI China A50 Connect Index Derivatives Warrants were listed here in Hong Kong in August 2022.

A50: part of Asia’s Risk Management Hub

And more than existing as a solitary product, the MSCI China A50 Connect Futures contract is one part of the whole MSCI suite and ecosystem here in Hong Kong totaling 38 futures products and two options products.

As well as offering exposure to China, the products in this suite track underlying throughout Asia, underlining Hong Kong’s position as a risk management centre for the region more generally, as well as China.

That suite of products has performed well – with monthly ADV tripling in the past ten months, from 11,000 contracts in October 2021 to about 29,000 contracts in July 2022, with encouraging growth in the MSCI Taiwan futures contract, increasing from 6,000 contracts in October 2021 to 9,000 contracts in July 2022.

But there’s still more to do to improve both the MSCI China A50 Connect Futures product and the market structure side, such as extending trading hours and improving capital efficiencies for clients, but, given our track record of enhancement, I believe we will get there.

So while we are very pleased with the progress made over the past year with our MSCI China A50 Connect Futures product, we believe that the product and markets’ positive fundamentals, coupled with the market structure improvements made in the past year and the increasing depth and richness of the broader ecosystem, will mean that we are very well-positioned to continue to grow as Asia’s risk management centre in the future.