April 11, 2018 / 7:14 AM / 4 months ago

China suspends OTC options market to curb risks: sources

SHANGHAI (Reuters) - China has halted its loosely-regulated and fast-growing over-the-counter (OTC) options market in the government’s latest effort to reduce risk in the financial system, according to sources at brokerage firms.

Shanghai's financial district is seen at the Bund promenade as snow falls in Shanghai, China January 26, 2018. REUTERS/Aly Song

The Securities Association of China has ordered suspension of the derivative business, effective on Wednesday, two sources who had received the notice from the association told Reuters. No new option contracts will be allowed, while existing ones will be discontinued upon expiration.

It was not clear when the business will be resumed. The association declined to comment.

Demand for stock options - a risk-hedging tool that gives investors the right to buy or sell a security at a specified price on a specific date - has surged amid rising volatility in China’s stock market.

Trading turnover of OTC options jumped 44.2 percent last year to 501.1 billion yuan ($79.85 billion), according to Hwabao Securities, while options traded on the Shanghai Stock Exchange have also witnessed rapid growth recently.

The suspension comes after signs that options in the OTC market, which change hands among institutions including commercial banks, private funds and brokerages, have been sold to retail investors in some cases, according to the sources.

The move echoes other measures regulators have taken recently to eliminate risks, as Beijing makes financial stability a key priority this year.

In February, China suspended publishing its volatility index following a stock market rout, stepping up efforts to curb speculative trading.

The SSE 50 ETF Volatility Index, the Chinese version of Wall Street’s so-called fear gauge VIX .VIX, was based on SSE 50 ETF option.

Reporting by Shanghai Newsroom; Editing by Shri Navaratnam

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