Shanghai Securities News: Preparation Work at Full Steam in Expectation that Crude Oil Future Will be Rolled Out This Year

Date: May 17, 2017

Reported by SONG Weiping, Journalist of Shanghai Securities News

Along with the official release of crude oil future’s rules and regulations, the preparation for the final launch of the contract is also accelerated.

On May 16, Shanghai International Energy Exchange (hereinafter referred to as INE) held a Q&A session with press on hot issues relating to the rules and regulations of crude oil futures. According to the INE, they will get engaged in full preparation work for the contract listing based on the rules and regulations, including verifying qualifications of members and NSPs and certifying banks, designated storage facilities and designated inspection agencies, as well as carrying out a mock trading across the market. The INE will try every best to list the contract within this year, with all preparation work done in a proactive and prudent manner.

Threshold for Individual Client is RMB 500,000

It’s said that the fundamental framework of crude oil futures is designed as “international platform, net price trading, bonded delivery and RMB denomination”. Compared to the opinion-soliciting version released earlier, what major amendments have been made in the final version?

According to the person familiar to the situation at INE, first of all, the contract size of 1000 barrels per lot is designed largely in line with the mainstream international crude oil futures contracts. Secondly, on the investor eligibility, the threshold is set at RMB 500,000 for individual investors and 1 million yuan for institutional investors. Meanwhile, relevant trading experience and risk tolerance shall be taken into account. Lastly, on the settlement of delivery default, penalty will be used, replacing “deferred delivery” in the early version.

According to INE, required trading margin for one contract will be calculated based on the trading unit, contract price and trading margin. If calculated according to the current oil price in the international market, one INE crude oil futures contract is worth around 350,000 yuan. If 5% trading margin is required by the Exchange while 7% required by the futures firm, investors who meet the account opening criteria, will need 24,000 yuan in place as trading margin when they trade one INE crude oil futures contract.

Apart from the threshold set for investor’s minimum account balance, INE also requires on minimum clearing deposit for its members. Minimum level for a futures firm member is set at 2 million yuan, while 500,000 yuan is required for a non-futures firm member. Meanwhile, in order to enhance risk tolerances of members, when undertaking authorization from oversea intermediaries, the minimum level of clearing deposit will be raised in accordance with the number of overseas intermediaries it carries. If one futures company gets engaged in the trading of crude oil futures on behalf of a domestic investor as INE member, the minimum clearing deposit balance will be 2 million yuan. However, if it clears for one NSP at the same time, the minimum level shall be raised to 4 million yuan. Calculation can always be done in the same manner.

This person pointed out that the featured international platform not only requires the internationalization of trading and delivery, but also for the clearing, which gives domestic and foreign investors a free, efficient and easy access to the local market. With the support of spot crude oil market, INE will introduce international investors including multinational oil companies, oil traders and investment banks to trade in this market. So that they can better build up a benchmark price that reflects the supply-demand relationship in China and the Asia Pacific Region.

Same SFE mode for the domestic traders

The reporter was told that, trading mode for domestic traders and futures firms will be the same as it is now. Whereas for global traders, there will be 4 modes available: One, to become an Overseas Special Non-Brokerage Participant (OSNBP) and trade directly on INE; Two, to become a client of an Overseas Special Brokerage Participant (OSBP);Three, to become a client of a local futures firm member (FF Member); and Four, to trade through an oversea intermediary, who will entrust its clients to local futures firm members or OSBP. The above-mentioned OSNBP and OSBP shall conduct their clearing with the INE through local futures firm members. In practice, overseas intermediaries are allowed to introduce overseas investors to local futures firm members and then trade as their clients.

Besides, the INE’s role as a central clearing counterparty is also drawing great attention in the market. According to this person, as a central clearing counterparty, INE interposes itself between the buyer and seller when each transaction is done, acting as buyer to every seller and seller to every buyer, making settlement in the amount of net value and providing centralized performance bond to all transactions. Meanwhile , it’s been explicitly stipulated in the General Exchange Rules that, “the legal attributes of property rights or derived from activities such as trading, clearing and delivery of executed orders, positions closed, cash received as margin, assets either pledged or transferred as margin collateral, standard warrants paired for delivery, or those actions adopted by the Exchange against any default event, shall not be revoked or considered null and void due to the commence of bankruptcy proceedings against any Member”. And, “in the event that a Member enters into a bankruptcy proceeding, the Exchange may still conduct net settlement for such Member’s holding positions in accordance with the General Exchange Rules and the related implementing rules thereof.”