SGX – FTSE China A50 Index Futures Geoff Howie

11 October 2011

Version 1.0 Outline – The FTSE China A50 Index Futures

. China Economic Update – Required Reserve Ratio – GDP Growth – CPI

. FTSE China A50 Futures – Sectors – Major constituents – Correlation to CSI 300 – Average bid/ask spread – Counterparty advantage

SGX The Asian Gateway 1 China Required Reserve Ratio

. The Required Deposit Reserve Ratio currently stands at 21.5% for major banks and 19.5% for smaller banks. The chart below illustrates the hike that have been initiated since June 2007.

SGX The Asian Gateway 2 China GDP Growth

. Gradual easing of growth since March 2010, as illustrated in the chart, has been attributed, to the effect of successive rounds of policy tightening.

SGX The Asian Gateway 3 China Inflation

. Monetary policies have largely focused on inflation this quarter as China grappled with consistently higher year-on-year rates.

SGX The Asian Gateway 4 Investor appetite for China

. Financial reform and stability remain key objectives of the China economy.

. As the world’s second largest economy, offshore investor long /short access to the price performance of a China equity index exists at a multitude of levels and complements existing capital inflows.

. The China A50 Futures and the Index provide the means for offshore investor to take and maintain a level of China equity risk within their portfolio without the cost of QFII and without influencing the required schedule of reform and liberalization of financial markets within China.

SGX The Asian Gateway 5 The FTSE China A50 Index

. Represents the performance of the mainland Chinese market that is available to “A” share investors (traded by Chinese or international investors under the China Qualified Foreign Institutional Investors – QFII regulations).

. Provides coverage of 50 stocks listed on both Shanghai and Shenzhen stock exchanges.

. Stocks are free-float weighted to ensure that only the investable opportunity set is included within the index & stocks are liquidity screened to ensure that the index is tradable.

SGX The Asian Gateway 6 FTSE China A50 & CSI 300 Index Sector Weights

China A50 CSI 300

Consumer Consumer OtherDiscretionaryConsumer 5% Discretionary Materials 3% Staples Industrials 8% 7% 8% 18% Consumer Staples Energy 8% 8%

Industrials 11% Energy 9%

Materials 14%

Other 10% Financials 33% Financials 58%

SGX The Asian Gateway 7 FTSE China A50 Index: Recent top 16 weights & performances

Security Name 30-Jun 29-Jul 31-Aug Weight Close Weight Close % Index Impact Weight % Close % Index Impact % % Chg Chg

Ping An Insurance Group Co 8.95 48.27 8.59 44.5 -8% -0.67 8.14 40.73 -8% -0.69 Co Ltd 6.69 13.02 6.61 12.35 -5% -0.34 6.57 11.85 -4% -0.27 Shanghai Pudong Development Bank 5.33 9.84 5.30 9.4 -4% -0.24 5.43 9.29 -1% -0.06 Co Ltd 4.80 5.54 4.77 4.81 -13% -0.63 4.89 4.76 -1% -0.05 Co Ltd 4.23 13.48 4.37 13.36 -1% -0.04 4.51 13.33 0% -0.01 CITIC Securities Co Ltd 3.78 13.08 3.72 12.37 -5% -0.20 3.79 12.17 -2% -0.06 China Minsheng Banking Corp Ltd 3.76 5.73 3.72 5.44 -5% -0.19 4.24 5.99 10% 0.43 China Co Ltd 3.17 8.45 3.18 8.15 -4% -0.11 3.30 8.15 0% 0.00 Co Ltd 3.11 212.63 3.46 206.69 -3% -0.10 3.73 214.77 4% 0.15 Industrial & Commercial 2.72 4.46 2.70 4.25 -5% -0.13 2.72 4.14 -3% -0.07 Sany Heavy Industry Co Ltd 2.65 18.04 2.62 17.09 -5% -0.14 2.56 16.15 -6% -0.14 Co Ltd 2.63 35.72 2.91 38 6% 0.19 3.20 40.40 6% 0.20 Suning Appliance Co Ltd 2.60 12.81 2.63 12.42 -3% -0.08 2.60 11.85 -5% -0.12 China Pacific Insurance Group Co Ltd 2.18 22.39 2.13 20.91 -7% -0.14 2.18 20.72 -1% -0.02 Haitong Securities Co Ltd 2.16 9.02 2.12 8.52 -6% -0.12 2.08 8.05 -6% -0.11 Co Ltd 2.12 30.14 2.17 29.69 -1% -0.03 2.04 26.95 -9% -0.19

SGX The Asian Gateway 8 China A50 & CSI 300 closing prices (Jan 2011 – Sep 2011)

10500 3600 China A50 CSI 300

10000 3400

9500 3200

9000 3000

8500 2800 8000

2600 7500

2400 7000

6500 2200

6000 2000 31/12/2010 31/01/2011 28/02/2011 31/03/2011 30/04/2011 31/05/2011 30/06/2011 31/07/2011 31/08/2011

SGX The Asian Gateway 9 Index Relativity in 2H11

110.00

105.00

100.00

95.00

90.00

85.00

80.00

75.00

70.00

China A50 SGX EURO STOXX 50 SiMSCI SGX Nikkei SGX Nifty

SGX The Asian Gateway 10 Spreads average 11bps during onshore trading hours

Bid/offer spread and volume at time intervals Week of 5 Sep - 9 Sep 11 140 800

120 700

600 100 500 80 400

60 Volume 300 Bid/Offer Spread 40 200 (as % of Bid Price) in b.p. Price) Bid of % (as

20 100

0 0 09:00 to 09:29 09:30 to 09:59 10:00 to 10:29 10:30 to 10:59 11:00 to 11:29 11:30 to 11:59 12:00 to 12:29 12:30 to 12:59 13:00 to 13:29 13:30 to 13:59 14:00 to 14:29 14:30 to 14:59 15:00 to 15:30

Volume - XUU1 Volume - XUV1 Spread - XUU1 Spread - XUV1

SGX The Asian Gateway 11 Futures Pricing

. The China A50 futures derive its value from the Index, cost of carry and general investor sentiment.

. Global investors who maintain long or short positions in the Futures have no ownership right to the underlying fifty shares that comprise the Index, rather they simply own price performance of these fifty shares as apportioned by the Index weightings.

. At a price of 8,200, the notional value per contract is US$8,200 with an initial margin requirement of US$413.

. The Futures are open for trading before, during and after the A50 Index open, from 0900-1525 and overnight at 1610-0200 (next day) Singapore time.

SGX The Asian Gateway 12 Relative Basis: November 2010 - 9 September 2011

iShares FTSE A50 China ETF Premium / 3.00% 2.50% CSI 300 Futures Premium / (Discount) Chart 20% (Discount) Chart 2.00% 1.50% 15% 1.00% 0.50% 10% 0.00% -0.50% 5% -1.00% 4.88% -1.50% 0% -2.00% -2.50% -0.7% 11 - 10 - 10 11 - - Sep - - Nov Sep Nov 9 1 - iShares FTSE China A50 ETF… - IFB1 / Cash (Onshore) 9 1

2.50% SGX FTSE China A50 Futures Premium / 2.00% (Discount) Chart 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% 10 11 -

-0.40% - Sep Nov - - XU1 / Cash (SGX) 9 1

SGX The Asian Gateway 13 Futures Expiry

. Cycle is the two nearest serial months and March, June, September and December months on a one year cycle.

. The last trading day is the second last business day of the contract month.

SGX The Asian Gateway The Evolution of the SiMSCI 14 Counterparty Points

. P-notes are currently adopted by some fund managers to gain access to the A-share market.

. P-note holders are exposed to the credit risk of the P-note issuer and investors are encouraged to complete due diligence on the P-note issuer’s mitigating risk measures against counterparty risk.

. SGX Futures have a standardized approach to counterparty risk. The counterparty to each Futures position is SGX-DC (Derivatives Clearing). SGX-DC Members consist of reputable financial institutions that clear SGX-DT (Derivatives Trading) trades and collectively under the SGX-DC Clearing System guarantee all matched trades executed at the Exchange.

SGX The Asian Gateway The Evolution of the SiMSCI 15 SGX FTSE China A50 Futures Participation

. Open interest has increased in 3Q11, on hedging application, particularly the hedge overlay advantage on market implementation cost and compatibility of investor access and risk management.

. On 30 June, combined open interest stood at 48,867 contracts, increased to 52,669 contracts on 29 July, before standing at 56,566 on 31 August. This represents a 15% increase in the course of the last two months.

August 2011 Daily Average Month End Volume Open Interest Volume Open Interest Market Share Market Share (contracts) (contracts)

SGX FTSE China A50 futures CN 13,093 56,566 0.4% 10%

SGX The Asian Gateway 16 Correlation & Cross Margining

Correlation with FTSE China A50 Index (XIN9I Index) over the last 30 days

Equity Margin Savings Delta Spread Ratio 0.50 0.45 Derivatives Pair 0.45

0.40 IN vs SG 49% 5 IN vs 1 SG 0.38

SG vs TW 49% 10 SG vs 19 TW 0.35 0.32 CN vs SG 43% 6 CN vs 1 SG CN vs IN 37% 7 CN vs 6 IN 0.30

IN vs TW 37% 8 IN vs 3 TW 0.25 CN vs TW 35% 3 CN vs 1 TW 0.22 0.20

0.15

0.10

0.05

0.00 Nikkei 225 Index MSCI Taiwan S&P CNX Nifty Index MSCI Singapore IndexSM IndexSM

SGX The Asian Gateway 17 China Financial Sector

. The ‘finance hub’ by 2020 was first proposed by the Central Gov 15 years ago and was intended to be symbiotic with Shanghai achieving the status of Asia’s largest industrial/trade hub.

. External and Internal factors have meant that the industrial and trade growth have outpaced financial reform, thus the trade surplus & USD/CNY debate.

SGX The Asian Gateway 18 Conclusion

. To the investor, the Index provides price formation and a benchmark on fifty of the top China stocks, with the Futures providing an efficient participation medium in terms of transaction costs, timing costs, transparency. and counterparty risk.

. Other products that provide China access include ADRs and ETFs.

. Financial reform and stability remain key objectives of the China economy. The A50 Futures and FTSE China A50 Index provide the means for offshore investor to take and maintain a level of long or short China equity risk within their portfolio without the cost of QFII and without influencing the schedule of reform and liberalization of financial markets within China.

SGX The Asian Gateway 19 Thank you

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SGX The Asian Gateway 20