Futures Daily: Shanghai Futures Exchange Optimizes Calculation Method of “Monthly Reference Prices”

Updated on: August 17, 2017

On August 16, 2017, SHFE issued an announcement to modify calculation method of “Monthly Reference Prices” under “Data and Quotation” Column on official website, with a view to adapting to the spot industry trade and pricing habits and facilitating the industrial customers’ hedging against price risks.

According to this announcement, since issuance date of this announcement, “Settlement Reference Prices” has been added into the table of “Monthly Reference Prices”, which is calculated as arithmetic average of daily settlement price under contract in current month (within three months). In addition, since January 1, 2018, “Weighted Average Prices” will be removed from the table of “Monthly Reference Prices”, and only “Settlement Reference Prices” will be disclosed.

It is reported that 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. On this basis, after monthly hedging results are collected, the monthly average price is close to arithmetic average of the daily settlement prices. The daily settlement price, disclosed by SHFE, is weighted average of intraday trading volume, 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. Compared with the monthly average calculated according to trading volume of every transaction, monthly average calculated according to daily settlement price is more conducive to ensuring the effectiveness of the enterprise risk management strategy.

“Specifically speaking, from January 2010 to February 2017, at the time of monthly delivery date (15^th day), when the current-month average price and average price of nonferrous metals varieties under three-month contract, as calculated by means of the above two ways, undergo price fluctuations, the difference between two average prices is not wide. But in case of the market volatility, the difference between two average prices significantly expands”, The relevant person-in-charge took copper as an example. The difference between weighted average price of current-month copper contract and arithmetic average price generally ranges from RMB-300/ton to RMB300/ton, which reached RMB874/ton in October 2011, RMB-914/ton in November 2011 and RMB-1,102/ton in November 2016. The difference between weighted average price of three-month copper contract and arithmetic average price narrows after 2012 and ranges from RMB-500/ton to RMB500/ton, which reached RMB2,620/ton in November 2016. Corporate hedging strategy result is closer to arithmetic average of daily settlement price, but difference between such result and weighted average price is difficult for hedging especially under the circumstance of market volatility. With the innovation and development of high-frequency trading and other new trading models, trading volume (as a weight) may have a greater impact on the monthly average price, thereby causing greater difficulty for spot enterprises to hedge price fluctuation risks.

According to this person-in-charge, with rapid development of China’s real economy and increase in convergence of spots and futures, enterprises are more skilled at utilizing futures as a marketization instrument to achieve business management objectives. Hedging strategy enjoys higher and higher specialization and flexibility. 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 meet the needs of the real economy.

Price Discovery is the most important economic function of the futures market. Whether futures prices can become the benchmark price of spot trade is an important criterion to measure the maturity degree and function exertion of futures market. Formed through exchange-based floor trading, transparent, standardized and authoritative futures market price system has gradually become the spot industry pricing benchmark.

As introduced by the abovementioned person-in-charge, many industrial customers have trade habit of signing spot contracts at current-month or the main contract prices of SHFE listed varieties and hedging to avoid price risks in practice for a long time. 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 minus processing fee is commonly used. Open and transparent pricing mechanism guarantees efficient and orderly market circulation of spot resources. Along copper industry chain, mines and smelting and processing enterprises refer to transparent and open price of SHFE as a benchmark, and shape 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.