SHANGHAI: China plans to roll out derivatives based on the small-cap CSI1000 index, giving foreign and domestic stock investors additional hedging tools and potentially leading to new investment products.

Draft rules published by the China Financial Futures Exchange (CFFEX) on Wednesday will pave way for the launch of stock index futures and options based on CSI1000, which tracks 1,000 small caps listed in Shanghai and Shenzhen.

Currently, CFFEX only has three types of stock index futures products, tracking mega-cap SSE50 Index, blue-chip CSI300 Index and small-cap CSI500 Index respectively.

The new derivatives will help diversify portfolios and facilitate investment in small-cap stocks, Huatai Futures said in a note.

It also shows China continues to deepen its capital markets, by offering new tools to help investors mitigate risks. China has already allowed foreign investors to trade domestic index futures.

Chinese mutual fund houses have already launched over a dozen funds tracking CSI1000, and the planned derivatives will likely increase the number of investment schemes betting on small caps.

HuaAn Fund Management Co this month launched an index fund tracking CSI1000 that seeks enhanced returns.

China launched its first stock index futures product in 2010, but imposed draconian restrictions on index futures trading during the 2015 stock market crash.

It has been gradually loosening the trading restrictions over the past years, and the annual turnover of CSI500 index futures contracts already exceeded the 2015 peak, though trading in the other two index futures products remains small.

The draft rules for the new derivatives were published on CFFEX's website and solicits public opinions until June 28. (Reporting by Jason Xue and Brenda Goh; Editing by Kim Coghill)