THE operator of Hong Kong’s stock exchange will launch its first derivatives product based on Shanghai and Shenzhen-listed A shares, which its partner, index provider MSCI, said would help resolve a major issue for international institutions investing in the Chinese mainland.

The new futures contract, to be launched in October, will be based on the MSCI China A 50 Connect Index, made up of 50 of the largest A shares — Chinese shares traded onshore — including at least two stocks from each industry sector, Hong Kong Exchanges and Clearing (HKEX) said Friday in a statement.

HKEX said it had signed an agreement with MSCI Inc. to launch the futures contract, which will track performance of 50 Shanghai and Shenzhen stocks available via the stock connect program. The product will be launched Oct. 18, according to the statement.

The “new product will act as a key risk management tool for investors in managing their A-share equity exposure,” HKEX’s chief executive officer Nicolas Aguzin said in the statement.

International investors have been increasing their exposure to onshore-listed Chinese stocks in recent years, but often complain that they have limited access to derivatives products like futures to manage their risk. MSCI said this is one factor preventing it from increasing the weighting of China A shares in its benchmarks.

The move came after HKEX was granted approval by Hong Kong’s Securities and Futures Commission (SFC) and the mainland regulator.

The SFC said in a statement that the instruments will provide a significant new risk management tool and enable further growth of capital flows into the mainland.

In a separate statement Friday, the China Securities Regulatory Commission (CSRC) said the launch of the new product would help attract more long-term foreign capital into Chinese mainland stocks.

The CSRC said it and Hong Kong’s Securities and Futures Commission had improved their cooperation mechanisms related to supervising derivatives to enable the launch of the new product.

The regulator also said it would deepen reforms in China’s domestic index futures market, to promote coordinated development of onshore and offshore derivative markets.

(SD-Agencies)