A single stock futures (SSF) market should not be a "strange" market. In fact, at first, it was expected that the market would be so big that the US Congress hastily passed the Commodity Futures Modernization Act (CFMA) at the last moment of the Clinton administration (2000) out of concern about Britain's preemptive action in stock futures. At that time, the London International Financial Futures and Options Exchange (Liffe) had decided to launch stock futures, including stocks listed in the United States. Although other countries have started to offer such futures products before, the London International Financial Futures Exchange is the first exchange to target American stocks. Therefore, the United States is worried that stock futures will become the next huge derivatives market, and London will replace new york and Chicago as the center of this market. In the United States at that time, according to the Johnson-Friedrich Hirth Agreement, single stock futures trading was even illegal, and this restriction was lifted in CFMA.
Differences in the Johnson-Friedrich Hirth Agreement
The US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) reached the Johnson-Friedrich Hirth Agreement in 1982, and defined their respective regulatory boundaries. 1977 10, Kansas city exchange (KCBT) formally submitted a report to CFTC, proposing to develop Dow Jones industrial average futures contracts.
Although CFTC attaches great importance to this report, due to the differences between the SEC and CFTC on who will supervise the stock index futures, it is impossible to make a decision. The SEC does not object to the fact that the cash-settled broad-base stock index futures are under the sole jurisdiction of CFTC, but believes that stock futures and narrow-base stock index futures should be under the jurisdiction of the SEC. In the end, the two sides reached a compromise-allowing the introduction of broad-based stock index futures, but prohibiting the development and trading of single stock futures and narrow-based stock index futures.
Legalization of single stock futures
After 18, the London International Financial Futures Exchange launched stock futures, which posed a serious threat to the United States, and the Johnson-Friedrich Hirth Agreement had to be abolished. In 2000, the Modern Commodity Futures Act was passed, which removed the restrictions on single stock futures and narrow-base stock index futures, gave CFTC and SEC the same powers, and established the same regulatory framework for single stock-related futures.
Futures trading rules and margin system are very different from securities. Compared with stock options, single stock futures have a competitive advantage and pose a threat to the lucrative stock loan business. However, compared with traditional futures products, single stock futures are subject to the following three points: the margin should not be lower than the stock option (that is, the minimum margin requirement is 20%); According to the provisions of the SEC, the transaction should pay the securities transaction tax; Trading does not enjoy the 60/40 rule-that is, "60% of futures trading profits are taxed as long-term capital gains".
Despite the above obstacles, in May 2002, the three major derivatives exchanges in the United States-Chicago Mercantile Exchange, Chicago Board Options Exchange and Chicago Board of Trade jointly established the Chicago Single Stock Futures Exchange (OneChicago) to trade single stock futures contracts and provide services through electronic platforms.
Two years later, Nasdaq Stock Exchange and London International Financial Futures Options Exchange jointly established Nasdaq-London International Financial Futures Exchange (NQLX), and started trading single stock futures. Although a series of trading rules have restricted the development of single stock futures, the turnover of OneChicago has achieved a slow and steady growth, and the products have been reset to meet the trading demand.
Product innovation
Once the initial stock futures contract was launched, it attracted many market makers. However, because ordinary customers can't participate in this kind of market investment, market makers soon realize that they are competing with themselves and encroaching on each other's interests. There is no liquidity provider in the whole market, and liquidity is scarce.
On 20 10, OneChicago made an important decision about the nature of products, and re-set the contract specifications, so that the returns of futures products were repeated and the total returns were exchanged. "When the single stock futures product was first introduced, people misunderstood it," said DavidDowney, CEO of OneChicago. "We don't need a single stock futures exchange to bring buyers and sellers together like other exchanges, but to act as a trading intermediary and provide liquidity to the market. People don't realize that this is an existing market. Securities and futures have actually been actively traded, but the market is not transparent enough. " Usually, as an intermediary structure, securities brokers are not keen on competition. Therefore, brokers are never willing to open a single stock futures market. As Downey said, brokers believe that a single stock futures market will pose a threat to their own interests, and they will not allow their clients to participate in market investment.
Downey realized this when he joined the board of directors of OneChicago in 2007, and soon he deleted the concept of "transaction" from all marketing materials of OneChicago. Downey said: "This is not a trading strategy, and stock futures investment is not an arbitrage behavior of buying early and selling late. On the contrary, like real estate investment, this is a financing transaction. We don't buy houses in the morning and sell them at night. Usually, when you buy a house, it will take several years to sell it. In the meantime, you must pay the financing fee. What stock options do is to let people maintain their stock positions while enjoying more favorable terms. "
Therefore, the challenge for OneChicago is to create a product that can provide more competitive interest rates. "People will always refinance their properties until they are finally sold, but they will not refinance their positions in the stock market, which is the biggest cost of stock market investment." For example, Downey said, "Suppose you borrow $654.38+million from a brokerage company at the interest rate of 5%, then your annual interest is $5,000. Although the cost of each transaction is $9.95, you have to pay the broker $5,000 a year later. If you borrow money from a trading account, you need to pay interest according to the loan interest rate. In addition, you can borrow money from a margin account (RegT account) and borrow $200,000 at a margin ratio of 50%. In fact, you are borrowing money from yourself, and the brokerage firm with another 50% balance will charge you interest. " On the other hand, stock futures enable investors to obtain stock positions at a more reasonable financing rate by designing contract objectives.
The requirements of Dodd-Frank Act
Theoretically, no financial asset can benefit from Dodd-Frank Act more than a single stock futures. The bill requires almost all OTC swap contracts to be traded through exchanges or swap executing agencies, and requires centralized liquidation. The whole bill emphasizes that transparency is the key to creating a more effective and fair market, but specific measures have not been implemented for a long time.
Five years after the passage of the bill, the Securities and Exchange Commission of the United States has not issued regulations on clearing stock swaps. When the SEC begins to perform its duties under the Dodd-Frank Act, these swap contracts will be cleared in the central counterparty clearing house (CCP). As the clearing institution of OneChicago and all American stock options, OCC is most likely to become the clearing center of these stock swaps.
Downey said: "We hope that securities lenders and stock repurchase transactions will be settled through CCP. This can not only avoid the situation that OTC bilateral transactions bring transaction costs to traders and securities firms benefit from them, but also respond to the requirements of Dodd-Frank Act and increase market transparency. However, the SEC has always turned a blind eye to the drafting of swap regulations, which is obviously dereliction of duty. "
Stock loan
Unsecured short selling of stocks is illegal. In order to short-sell stocks, traders must use the stocks to be short-sold as collateral (that is, borrow stocks), which is usually done through total return swap. One side of the swap borrows shares and gets the total return of stock trading, while paying interest to the other side. When OneChicago redesigned its stock futures products to replicate the total swap returns, it also eliminated the dividend risk of futures contracts.
For traders, securities with the same underlying assets do not need to pay transaction tax. The total return swap meets this requirement, and the stock futures contract of OneChicago should obviously meet the requirements. However, these innovative single stock futures contracts came into being after the transaction tax law, and traders are reluctant to think too much about these products before they are finally confirmed by the IRS.
When single stock futures were just born, the market had high hopes for them. Everyone expected that this market would have a huge development space, but they didn't expect it, and there were many obstacles-poor supervision and strong competition from the stock loan business limited its rapid growth. It is gratifying that the scale of stock futures trading has increased steadily in recent years, but the development and growth of the market ultimately depends on the clear supervision of the SEC, CFTC and other power and responsibility departments and the clear definition of tax bills.
(This article was compiled from)