The Shanghai Futures Market
The Shanghai Futures Market
China’s futures market came into being in the late 1980s and early 1990s. It was born when the new and old systems stood in opposition to each other and grew up gradually along with the exploration, establishment, and perfection of China’s socialist market economy. On October 12, 1990, China’s first commodity futures market, the China Zhengzhou Grain Wholesale Market, was approved by the State Council. Based on physical trading, the market introduced the futures trading mechanism.
China’s futures market is now in the stage of standardized development. Its size has shrunk from over 50 futures exchanges and about 1,000 futures brokerage companies to the current three futures exchanges and around 200 futures brokerage companies. Currently, there are three commodity futures exchanges in China, namely, the Zhengzhou Commodity Exchange (ZCE), the Dalian Commodity Exchange (DCE), and the Shanghai Commodity Exchange (SCE). ZCE initially engaged in forward trading, but on May 28, 1993, it launched forward standardized futures contract trading, covering wheat, cotton, green beans, and sugar. Established on February 28, 1993, DCE mainly engages in the futures of corn, No. 1 soybeans, No. 2 soybeans, and soybean meal. Among these futures, the No. 1 soybean is the most buoyant variety in the market.
At the same time, the opening-up of the futures industry has achieved substantial breakthrough. Since 2005, any intermediary agency holding the license of the Hong Kong Securities and Futures Commission or registered with the Monetary Authority of Macao, may establish joint-venture futures brokerage companies in the mainland of China in compliance with the provisions of the CSRC. In December 2005, the CSRC approved the ABN AMRO Financial Futures (Asia) Company, held by ABN AMRO to hold shares in Galaxy Futures Company.
China’s futures market has gone through decades of trials and tribulations and realized the transition from disorder to standardization and from slump to prosperity. The market has experienced three development stages: the trial stage, the stage of screening and rectification, and a stage of standardized development. After the two rounds of screening and rectifications in 1994 and 1998, the futures market has gradually stepped onto the right track. Its scale has expanded increasingly, the market subject is becoming mature, and the market function has gradually been brought into play.
The Shanghai Futures Exchange (SHFE) is the major ground for industrial derivatives trading in China. It was established in 1999 after the merging and restructuring of the original six futures exchanges, namely, Shanghai Metals, Construction Materials, Cereals and Oils, Petroleum, Chemicals, Coal, and Agricultural Materials.
SHFE established its rules and regulations on trading operation and market management in accordance with The Interim Provisions of the State Council concerning the Administration of Futures Trading and The Measures of CSRC and the Administration of Futures Exchanges. According to SHFE’s Articles of Association, the General Manager is the legal representative of the Exchange; SHFE consists of 17 functional departments. The Members Meeting is the authoritative organ of SHFE and the Council is the standing body of the Members Meeting, under which there are seven special committees, namely, the supervision, trading, delivery, membership qualification appraisal, mediation, finance, and technology committees. SHFE now has over 200 members, over 80% of which are futures brokerage companies. Also, it has more than 250 remote transaction terminals across the country.
2.1 Listed Variety
Currently, the commodities listed at SHFE include copper, aluminum, rubber, and fuel oil futures. China is the largest copper and rubber consumer in the world, and the rapid development of the Shanghai futures market has attracted the close attention of the international market. In particular, the copper and rubber futures of SHFE have increasing influence on the international futures market. Shanghai is considered one of the three pricing centers for copper in the world, and the influence of Shanghai rubber futures on the international rubber price has become increasingly strong.
SHFE mainly focuses on deploying the value of copper, aluminum, rubber, and fuel oil futures. The focus of copper futures is on the extension and perfection of the variety function and speeding up of the development of copper futures. For aluminum futures, the focus is on the thorough promotion of the product and the market development centering on key enterprises. In terms of fuel oil futures, the focus is on summarizing the experience accumulated since it was traded in the market, going to the enterprises for investigation, and promoting its maturity and perfection. For the rubber futures, the focus is on the recommendation of the rubber futures to enterprises with a physical trading background in view of the import quota policy, the changes in tariff policy, and the liberalization of import operation rights.
New product development can be divided into two aspects, metal and energy. The metal futures series is mainly engaged in the R&D of steel and zinc futures products. The energy futures series has carried out R&D on gasoline, kerosene, diesel oil, and crude oil by drawing upon the successful experience in the development and listing of fuel oil futures.
2.2 Members of the Exchange
Members of the Exchange must be enterprises registered as legal entities in China, which have gone through the review and approval by the Exchange, and have reported to the CSRC for filing. Members of the Exchange can be divided into members of futures brokerage companies (brokerage members) and members of non-futures brokerage companies (non-brokerage members). Any investor that entrusts the brokerage member to conduct futures trading must open an account and register at the brokerage member in advance.
Investors can be classified into either institutional investors or individual investors. The Exchange implements the investor trade coding system, in which both brokerage members and investors must abide by the system of one account with one code, and shall not trade by mixing the code. Brokerage members may accept the investors’ agency orders by means of writing, telephone, computer, online orders, and other ways stipulated by the CSRC. Brokerage members shall provide settlement reports to the investors after the market closing every day. Investors are entitled to know the content of the settlement reports at the agreed time and by means stipulated in the Client Contract. Non-brokerage members who want to conduct self-run futures trade must open special capital accounts at the clearing bank designated by the Exchange and credit sufficient funds into them.
2.3 Exchange Settlements
The Exchange only settles with its members, whereas the brokerage member settles with investors. The clearing of the Exchange implements the margin system, the daily debt-free clearing system, the risk reserve system, etc. The margin can be divided into settlement reserve and trading margin. The settlement reserve refers to the capital in the special Exchange settlement account for the settlement, and it is the margin that has not been tied up by the contract. The minimum balance of the settlement reserve of a futures brokerage member is RMB 2 million, which shall be paid in full with the self-own capital of the futures brokerage member. The minimum balance of the settlement reserve of a non-futures brokerage member is RMB 0.5 million. The Exchange calculates the interest according to the capital in the balance of the settlement reserve and the interest rate of the current deposit as released by the People’s Bank of China in the same period, and transfers the interest to the special capital account or the settlement reserve of the member on March 21, June 31, September 21, and December 21 (it will be prolonged during a statutory holiday). The trading margin refers to the capital deposited in the special Exchange settlement account to ensure the performance of the contract. It is the margin that has been tied up by the contract. When the purchaser and the seller strike a deal, the Exchange collects the trading margin at a certain proportion of the contract value from both parties.
The daily debt-free clearing system (also called Mark-to-Market) means that the Exchange settles the profit and loss, trading margin, commission charge, and tax of all contracts after the end of each trading day, and transfers the net amounts of accounts receivable or payable at one time. The Exchange also correspondingly increases or decreases the member’s settlement reserve, transfers the profit of the day to the member’s settlement reserve, and debits the loss of the day from the member’s settlement reserve.
Risk reserve refers to funds set aside by the futures exchange to provide financial guarantee and compensate losses brought about by unforeseeable risks, so as to maintain the normal running of the futures market. The Futures Exchange collects a risk reserve equal to 20% of the commission (including the discounted parts to members) from its members by drawing from the management fee.
2.4 Risk Control in the Exchange
The Exchange implements the price limit system. When a certain futures contract has only a call (or put) declaration at the price limit yet without a put (or call) declaration at the price limit within five minutes before the closing, or the deal is concluded as soon as the put (or call) declaration is made although the price has not reached the price limit, the Exchange deems that the daily price limit occurs when the trading day closes, and handles it according to relevant provisions. When the price limit of the same direction appears continuously or the market risk has increased obviously, the Exchange may avoid the transaction risk by adjusting the price limit, increasing the trading reserve, and unloading according to certain principles. In the case where the risk cannot be avoided despite the above measures, the Exchange announces its entrance into the abnormal situation, and then it is up to the Council of the Exchange to decide if further risk control measures need to be taken.
The Exchange practices a position limit system, but does not set limits on the hedging position. It sets a position limit on general month contract and month contract a month before the delivery month by the code of its member and the investor. It sets the position limit of a brokerage member according to its registered capital, credit, risk resistance capacity, previous trading, and the number of investors. The delivery contract sets limits on the absolute quantity of the positions of the member and the investor. For an investor who opens accounts at different brokerage members, his position is the sum of his positions in different accounts. The detailed rules for the implementation are formulated separately.
The Exchange implements the forced sale system. The Exchange adopts forced sale measures if members violate the regulations. This is done when a member or an investor has violated the regulations, exceeded the position limit, not superadded the margin in time, or committed other irregular activities.
The Exchange adopts a large position-reporting system. When the position of a certain contract held by a member or an investor exceeds 80% of the maximum position limit set by the Exchange, the member or the investor reports his funds and position to the Exchange through the brokerage member. The Exchange may adjust the position-reporting standard according to the market risk status.
3.1 Trading across the Country
After years of rapid growth, China’s futures market underwent adjustment and consolidation in 2005. Generally speaking, the futures market had run smoothly and the turnover was heavy. In 2005, the total futures trading volume was 323 million contracts, a 5.61% increase over the previous year, with a turnover of RMB 13.44 trillion, a decrease of 8.50%. The turnover of SHFE reached RMB 6.54 trillion, accounting for 48.64% of the total, down 22.44% from the previous year. The turnover of the Dalian Commodity
|Table 8.1 Trading of futures exchanges across China in 2005|
|Exchange||Variety||Turnover (RMB 100 mil.)||Trading volume (10,000 contracts)|
|Source: Shanghai Securities Regulatory Bureau|
|Zhengzhou||Cotton No. 1||15,671.05||2,172.07|
|Commodity||Strong gluten wheat||5,653.62||3,323.61|
|Exchange||Hard winter white wheat||304.93||196.18|
|Commodity||Soybean No. 1||23,130.63||8,007.14|
|Exchange||Soybean No. 2||291.61||108.22|
Exchange reached RMB 4.74 trillion, accounting for 35.27% of the total, a 6.97% decrease from the previous year. The turnover of the Zhengzhou Commodity Exchange was RMB 2.16 trillion, accounting for 16.09% of the total, up 85.82% from the previous year.
An overall analysis of the futures markets in 2005 shows that the old varieties like copper, soybean, and soybean meal remained the main forces in the market. Their turnovers were heavy. The three varieties—fuel oil, cotton, and corn put forward in 2004—were traded steadily and vibrantly, becoming the three fastest growing commodities in the 2005 market.
3.2 Trading at SHFE
SHFE has achieved positive outcomes through strengthened infrastructure development and constant innovation. The aggregate trading volume of 2005 was 67.58 million contracts, down 16.73% compared to 2004, but accounting for 20.93% of the national total. Also, the aggregate turnover throughout the year hit RMB 6,540.2 billion, down 22.44% over the previous year, but still accounting for 48.64% of the national total.
|Table 8.2 Trading at Shanghai Futures Exchange (2003–2005)|
|Trading volume (10,000 contracts)||Turnover (RMB 100 mil.)||Trading volume (10,000 contracts)||Turnover (RMB 100 mil.)||Trading volume (10,000 contracts)||Turnover (RMB 100 mil.)|