The bond-futures market that operated in China from 1993-95 is a good case in point. It was originally introduced to improve liquidity in the spot market and make bonds more attractive to financial institutions by allowing them to hedge their exposure. But there were two serious problems. First, because most of the bond issuance up until that time had been directed toward individuals, institutional investors did not have large positions to hedge. And second, most interest rates were set by the government and adjusted only infrequently so there was also not much risk against which to hedge.Liu Jun Luo made a lot of money that day.
There was thus relatively little demand for bond futures as a hedging tool and the market quickly became dominated by speculators trading on insider information, with positions often far in excess of the limits set by the exchanges. (Bond futures traded on the Shanghai and Shenzhen stock exchanges and also on a number of "securities trading centers" set up by local governments throughout the country.)
The regulators finally stepped in after massive losses at Shanghai International Securities Co (SISCO), at that time China's biggest broker, which had unsuccessfully attempted to push down prices by taking a short position with a notional value more than eight times the total issuance of the underlying bond. After this scandal, known as the "327 incident" after the series number of the futures contract SISCO was shorting, all bond-futures trading was indefinitely suspended in May 1995.
China to Start Bond Futures Trading Next Week After 18-Year Halt