China Securities Journal: SHFE Optimizes Calculation Method of Monthly Reference Prices

Updated on：Jan 5,2018

Reported by Ma Shuang

With the “Weighted Average Price” deleted, only the “Settlement Reference Price” will be published by SHFE in the table of the Monthly Reference Prices as of January 1, 2018.

According to information, SHFE announced on August 8,2017 that the Exchange would make amendments to the calculation method of the Monthly Reference Prices currently published under the column of Market Data on the website of SHFE. By adding the “Settlement Reference Price” into the table of the Monthly Reference Prices, the “Weighted Average Price” would be equally used with the “Settlement Reference Price” for a period. After several months of operation, it is decided by the Exchange that with the “Weighted Average Price” removed, only the “Settlement Reference Price” will be published by SHFE in the Monthly Reference Prices in order to ensure the authority and uniformity of pricing benchmark and facilitate the effectiveness of the risk management strategy of industrial clients at the same time.

According to a relevant head of SHFE, Price Discovery is the most important economic function of the futures market. Formed through the futures market with high level of maturity, transparent, standardized and authoritative futures market price system has gradually become the spot industry pricing benchmark, which not only enables the industrial clients to mitigate price risk through hedging, but also enhance the resource allocation efficiency of spot industry and provide the reference and basis for the macro decision-making of government sectors. With a long time of practice and development, many industrial clients have gradually cultivated the trade habit of signing spot contracts at current-month or the main contract prices of SHFE listed non-ferrous metal product family. In order to adapt to the spot industry trade and pricing habits and facilitating the industrial clients’ hedging against price risks, the Exchange further optimizes the calculation method of the Monthly Reference Prices.

It is known that the daily settlement price, previously disclosed by SHFE, is weighted average of intraday trading volume, which brings together the information on all transactions, ensures fairness and authoritativeness, and serves as the daily settlement benchmark of SHFE for daily settlement variation, trading margin, transaction fee, tax and others under all contracts. Monthly volume of purchased raw materials or monthly volume of product sales, made by industrial customers’ futures department under the long-term contract, are averaged to each trading day. Daily equal-volume hedging transactions are carried out so that hedging prices are close to daily settlement prices announced by SHFE. Compared with the monthly average calculated according to trading volume of every transaction, monthly average calculated according to arithmetic average of daily settlement price is more conducive to ensuring the effectiveness of the enterprise risk management strategy.

Take copper as an example. When signing spot long-term contracts, copper enterprises are accustomed to adopting monthly average price of futures market. As for pricing way of domestic copper long-term contracts, the mode of current-month contractual average price of SHFE minus processing fee is commonly used. As for pricing way of cathode copper long-term contracts, the mode of current-month contractual average price of SHFE plus spot premium/discount is commonly used. As for pricing way of copper processing materials, the mode of current-month contractual average price of SHFE plus processing fee is commonly used. Open and transparent pricing mechanism guarantees efficient and orderly market circulation of spot resources.

According to the industrial sources, mines and smelting and processing enterprises have currently referred to transparent and open prices of SHFE as a benchmark, and shaped up industry pricing model and trade mode. This not only ensures the stable production of spot enterprises, but also regulates and improves the spot market order. On the basis of extensive surveys and debriefing for opinions and suggestions of the whole industry, modification and improvement of such calculation method of “Monthly Reference Prices” adapt to the development direction of spot market, and help better meet the needs of the real economy.

In the next stage, SHFE will continue to uphold the tenet of serving the physical enterprises, concentrate on the integrative development and mutual promotion of both spot and futures markets, enhance the price discovery function, optimize the pricing system and carry forward the product innovation. Besides, the Exchange will intensify, refine and optimize the existing products and devote greater effort to the market cultivation and promotion so as to widely encourage industrial clients to manage their production and operation risks with futures instruments.