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Leading brokerage Huatai Securities has bought 49 percent of Great Wall Futures, the latest sign of securities firms' growing interest in futures houses as the trading of financial futures approaches.

Both sides declined to reveal the financial terms involved in the deal, which was approved by the securities regulator on July 21.

Securities brokerages, under existing regulations, can only buy less than 50 percent of futures firms.

The latest acquisition "could provide Huatai with a much-coveted access to the upcoming financial futures trade," an official from Huatai Securities told China Daily yesterday.

"It is a shortcut to lucrative stock index futures and other financial derivatives trading which are increasingly coming closer," said the official, declining to be identified.

China decided earlier this year to set up a financial derivatives exchange in Shanghai, where only stock index futures and other financial derivates will be traded. The exchange is yet to be officially inaugurated, but is widely expected to make its debut later this year.

Under the revised draft of the futures regulation, only futures companies will be allowed to trade stock index futures and other financial derivatives, while securities firms will be banned from directly conducting derivatives trading.

However, an Introducing Broker (IB) arrangement, under which securities firms could indirectly involve themselves in financial futures trading by introducing their clients' business deals to futures houses in exchange for a commission, will be introduced.

Only securities firms classified by regulators as "innovative securities brokerages" will be able to obtain the IB licence, a move that is designed to minimize the risks involved in financial futures trading.

Currently, only 17 securities brokerages fall into that category, of which seven firms already have stakes in futures companies.

Furthermore no new futures company licences will be issued in the future, according to an internal meeting held by the China Securities Regulatory Commission (CSRC) last Friday, an arrangement that experts and industry players say will make futures brokerage firms much more alluring to securities houses.

"Under such circumstances, it is not surprising that securities firms' interest in buying into futures companies has grown dynamically recently," said Chen Shuyun, assistant manager at Huachuang Securities.

Securities firms "are encouraged to buy or take over futures companies in order to be involved in the brokerage business of financial futures trading," according to the CSRC, the country's top securities and futures regulator.

The current 50 percent stake buyout ceiling will be relaxed in order to encourage securities firms to buy futures companies, according to the regulator.

Some financially powerful securities brokerages with sound risk-control management mechanisms will even be allowed to take full control of futures companies.

Currently, about 30 securities firms have taken stakes in 46 futures companies, according to industry players.

Huatai's acquisition of Great Wall is the latest move by a securities firm to take over or buy stakes in the futures trade.

Other leading securities firms such as Guotai Jun'an Securities, China Merchants Securities and CITIC Securities, are also considering or are already in the process of buying stakes in futures companies.

Huatai, with a registered capital of 2.2 billion yuan (US$276 million), is currently embarking on an ambitious plan to develop itself into a multi-functional financial conglomerate covering asset management, securities, futures and investment banking.

Great Wall Futures Co, which is 15 percent owned by Great Wall Securities, was ranked fourth by trading volume among the country's 183 futures companies in 2005.

Founded in 1994, the Guangzhou-headquartered futures company has six branches.

Huatai, which has just acquired another securities firm, Union Securities, is aiming to expand its outlets from around 100 to 150.

Last year, the Nanjing-based securities firm acquired Asia Securities.

In 2004, it teamed up with US financial giant AIG Global Investment Corp to set up AIG-Huatai Fund Management Co, which is now 49 percent owned by Huatai.

One year earlier, it bought 45 percent of the China Southern Fund Management Co, becoming its largest shareholder.

(China Daily August 1, 2006)