China Securities Journal: Four Accesses for Overseas Investors to China’s Crude Oil Futures

                                                                                                           Date: May 17, 2017

Reported by GUAN Ping, Journalist of China Securities Journal

Shanghai International Energy Exchange (hereinafter referred to as INE), a subsidiary of Shanghai Futures Exchange, has recently released the INE Articles of Associations, INE General Exchange Rules and 11 detailed rules and regulations pertaining to the proposed crude oil futures. Yesterday, INE met the press regarding the rules and contract of crude oil futures. As the first product open to the outside in China’s futures market, there are 4 modes for global investors to participate in the trading of crude oil futures.

A Reflection of Supply-demand Relationship in Asia Pacific Region

According to INE, we are developing a local crude oil futures market with the purpose to provide enterprises with effective price risks management tools and also risk preventions for their long-term development. Moreover, despite of the well-developed crude oil futures markets in the Europe and US, their prices can hardly reflect the supply-demand relationship in Asia Pacific Region in an objective and comprehensive manner. To launch Chinese crude oil futures will help formulate a benchmark price system that reflects the supply-demand relationship in the oil market in China and Asia Pacific Region. Also it can optimize the resources allocation in a market-driven approach so as to better serve the real economy. To build up a crude oil futures market is one of the most important practices that we carry out to promote opening-up and internationalization in Chinese futures market.

As for why the medium sour crude oil is selected as the underlying product, INE explains that, the resource of medium sour crude oil is quite rich, the production of which accounts for around 44% of the total amount in the world. The supply-demand relationship of medium sour crude oil is not exactly the same as that of the light sweet crude oil and still there is no influential benchmark price for the medium sour crude oil. Furthermore, it is the major product imported by China and many other neighboring countries.

According to General Administration of Customs’ statistics, in the year of 2016, China imported 381 million tons of crude oil, among which, 183 million tons came from Middle East, accounting for as high as 49% of the total. So it is helpful in further promoting the international crude oil trade to formulate a benchmark price for medium sour crude oil.

4 Accesses for Global Investors

The crude oil futures contract is developed based on the fundamental framework described as “international platform, net price trading, bonded delivery and RMB denomination”. International platform means the internationalization of trading, delivery and clearing. Net price trading means the trading price is a net price excluding any duty or VAT. Bonded delivery means physical delivery based on bonded oil storage facilities. RMB denomination means RMB shall be used in trading and delivery, while USD and other foreign exchanges can be used as trading margin. INE aims at launching the contract within this year, after getting all the preparation work done in a proactive and prudent manner.

On contract design, the contract size of 1000 barrels per lot is just in line with the main-stream international crude oil futures. As for traders’ eligibility, the threshold is set at RMB 500,000 for individual investors and 1 million yuan for institutional investors respectively. Meanwhile, relevant trading experience and risk tolerance are also taken into account.

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.

In regard to how global investors can get engaged in trading, the INE said 4 modes would be available: One, to become an Overseas Special Non-Brokerage Participant (the “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.