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China tightened restrictions on equity-linked options trading, people familiar with the matter said, the latest sign that authorities are acting to contain market turbulence after the biggest stock slump in two years.
Active options traders face a volume limit of three times account holdings, along with restrictions on the amount of orders they can cancel, the people said, without specifying over what period the volume and assets will be measured. Failure to comply after oral and written warnings will result in accounts being frozen, said the people, who asked not to be identified discussing private information.
The measures were said to take effect on February 12, following a burst of global market volatility that sent the Shanghai Composite Index to a 9.6% tumble last week.
Officials targeted options in part because they were alarmed by a gain of as much as 2,250% in the price of one bearish contract on the China 50 exchange-traded fund, the people said. The ETF is China’s only equity-linked product with options.
While China’s clampdown on stock-index futures in 2015 triggered a 99% tumble in volume and spooked many international money managers, this week’s options curbs appear much less restrictive.
Policy makers are primarily using the limits to signal their desire for stable markets, said Eddie Cheng, Taipei-based senior fund manager at Cathay Securities Investment Trust.
“It’s like telling investors to drive straight forward on the road and don’t zigzag,” Cheng said.
Chinese regulators have also urged controlling investors in listed companies to boost their holdings and have called on some mutual funds to limit selling, Bloomberg reported on Monday, citing people familiar with the matter.
The Shanghai Stock Exchange didn’t immediately respond to a request for comment.
Until this week, options had been largely absent from official measures to contain swings in China’s stock market.
Policy makers allowed volume and open interest in the contracts to grow even as they clamped down on the futures market and curbed the activities of short sellers and algorithmic traders in 2015.
Options are now a much more important tool for domestic hedgers and speculators than when the contracts were first introduced three years ago.
Scrutiny of the derivatives has increased worldwide this month after a surge in equity turbulence sent the so-called VIX index soaring and wreaked havoc on several volatility products.
While the implied volatility of China 50 options has jumped as investors price in the prospect of bigger market swings, positioning in the contracts is far from extreme. One measure of sentiment known as the options skew suggests traders don’t have a strong view on whether the market will rise or fall over the next month, data compiled by Bloomberg show.
The China 50 ETF, which tracks the SSE 50 Index of large-cap stocks in Shanghai, rose 0.6% yesterday. China’s markets will be shut through February 21 for the Lunar New Year holiday.