Under the central government’s policies urging steady development of the market, China’s futures market has been continuously developing its infrastructure systems, steadily rolling out new products and tightening supervision over market risks. The futures market has gradually entered a phase of continuous, steady and healthy development, and is increasingly inter-connected with the spot market and the real economy.

In recent years, the Shanghai Futures Exchange, through continuous improvement of contract and transaction rules, has promoted product upgrading, improved product quality and helped companies strengthen their risk-management abilities and promote their branding. This has led to better implementation of central government’s industry policies and national standards. The commodities market, through its price-discovery and risk-hedging functions, has played an active role in upgrading traditional industries, improving product quality and promoting low carbon emissions and environmental protection.

The contract’s underlying product is the starting point of Shanghai Futures Exchange’s efforts to promote technological innovation of the industry and the implementation of industry policies. During the R&D of new products, the Shanghai Futures Exchange has, through choosing the right underlying products, propelled technological innovation of the industry, and promoted product improvement and upgrading.

In selecting the underlying product for rebar contract, the Shanghai Futures Exchange has selected grade-3 rebar as standard product for delivery, in line with the central government’s policies that calls for steel conservation and the use of such rebar. Through market mechanism, the Shanghai Futures Exchange has promoted the use of grade -3 rebar and helped upgrade steel products used in construction. In choosing the underlying product for lead contract, the Exchange has chosen lead ingots with purity of 99.994 percent, which is higher than the international standard. Meanwhile, in accordance with government requirements against lead pollution via rain exposure, it’s stipulated in Detailed Rules for Delivery of Lead Futures that storage and delivery must take place indoors. In order to strengthen global competitiveness of China’s natural rubber producers, and promote their brand recognition, the Shanghai Futures Exchange has been promoting brand-based delivery of natural rubber products, rather than location-based. To adapt to changes in physical fuel oil market, the Shanghai Futures Exchange has gradually shifted to bunker oil futures from furnace oil futures. On Nov. 30 last year, a brand-new fuel oil futures started trading on market, after expiry of a grace period following the amendments to the fuel oil futures contract and implementation rules on fuel oil on the Shanghai Futures Exchange.

Meanwhile, in order to adapt to the new development in the spot market and better serve companies in that market, the Shanghai Futures Exchange has improved rules with respect to hedging activities and position limits. In a bid to ensure that market risk is fully under control, and to allow industrial clients with real needs to own as many hedging positions as possible in normal months, the Shanghai Futures Exchange has categorized hedging positions into two types: those in normal months and those near delivery months -- based on the difference in periods during which each contract is executed as well as on difference in materials required for approval of positions. In order to satisfy hedgers’ needs for hedge position, the Shanghai Futures Exchange has scrapped the ceilings on absolute value of futures firm members’ position limits in the delivery month as well as that during the previous month, and imposed a relatively loose proportional restriction on positions held by all these members.

The futures market has always been promoting effective price discovery and risks-management functions of the market, and propelling the transformation of the market from volume-driven to quality-driven, thus serving the real economy more broadly and deeply.

In terms of market operation, the Shanghai Futures Exchange has always treated as priority safe and smooth operation of the market. As a result, market volume has been growing every year. Although trading volume fell slightly in 2011, the market has evidently stabilized and trended higher since August. Prices of various products being traded on the market objectively reflect the situations in the domestic spot market, effectively fulfilling the price-discovery function of the futures market. The Exchange has also been constantly improving rules on hedging management, thus promoting industrial clients’ enthusiasm and willingness to participate in hedging activities.

In terms of product development, the Shanghai Futures Exchange, with a focus on quality and safety, has rolled out gold futures, steel futures and lead futures in 2008, 2009 and 2011 respectively, providing relevant industries with risks-management tools that effectively averted risks from price volatility. Currently , trading in these products have been smooth, with risks under control, participation from industrial clients active and the market functions being increasingly felt.

In terms of technology protection, the Shanghai Futures Exchange has accelerated the construction of disaster-proof centers based on the model of “two locations and three centers”. In February, 2011, the Beijing data center went into operation after 14 months of construction, finalizing the project based on the leading model of “two locations and three centers.” As a result, the Exchange's disaster-proof abilities, data processing abilities and the level of digitalising of market information have all been greatly enhanced.

In terms of innovation, the Shanghai Futures Exchange has successfully gone through the entire procedures of bonded futures delivery businesses. The pilot scheme has increasingly become influential, as the settlement price for bonded delivery has spread outside the bonded area and even into overseas markets. As bonded goods become warrants and with the information on relevant warrant disclosed, the spread between Shanghai and London markets are narrowing, giving Shanghai more pricing power. Currently, the publicly-quoted prices on the Shanghai Futures Exchange have already become a benchmark for pricing in many areas. Shanghai’s position as one of the world’s three biggest pricing centers for copper is being increasingly strengthened, as the copper futures prices in Shanghai and London have begun to show a two-way causal relationship. The rubber futures’ knock-down price are also gradually becoming an important guidance for production, consumption and circulation, attracting attention from the world’s top three rubber-producing nations – Thailand, Malaysia and Indonesia. These countries use the Shanghai pricing as a reference along with rubber price quoted on the Tokyo Commodity Exchange. Shanghai’s fuel oil price has already become the “China price” which is a good reflection of the supply and demand in the domestic fuel oil market, and also influences oil fuel pricing in Singapore.