Hexun.com: Questions and Answers of “Shanghai Futures Exchange Commodity Index Series”

Updated on: December 14, 2016

1. Which indexes constitute the SHFE commodity index series?

A: The commodity futures price index series ((hereinafter referred to as SHFE commodity index series) of Shanghai Futures Exchange (SHFE) is composed of comprehensive index, plate index and single commodity index, each category includes the futures price index and excess earnings index, 30 indexes totally. Of which, plate index includes: Industrial metal, precious metal, energy and chemical industry; Single commodity index includes: Copper, aluminum, zinc, lead, tin, nickel, rebar, hot roll coil, gold, fuel oil, bitumen, natural rubber. These indexes and SHFE Industrial Metal Commodity Index (IMCI), SHFE silver futures price index and SHFE silver excess earnings index published in earlier phase constitute the intact commodity index series.

SHFE published the SHFE IMCI in December, 2012 to reflect the overall operation condition of domestic non-ferrous metal market. In January, 2016, SHFE published the SHFE silver futures price index and SHFE silver excess earnings index to reflect the entire price change situation of silver industry, and it can be regarded as evaluation criterion of fund investment performance.

In order to boost the development of commodity futures fund and meet the demands of indexing investment in market, now SHFE has completed the research and development of commodity index series.

There are 8 indexes to be published this time, respectively are: SHFE industrial metal futures price index (INCI), SHFE industrial metal excess earnings index (INEI), SHFE copper futures price index (CUCI), SHFE copper excess earnings index (CUEI), SHFE precious metal futures price index (PMCI), SHFE precious metal excess earnings index (PMEI), SHFE gold futures price index (AUCI) and SHFE gold excess earnings index (AUEI). Next step, SHFE will select to publish other indexes according to market needs and operation conditions.

2. What is the significance for commodity index series published by SHFE?

A: The Several Opinions on Further Promoting the Healthy Development of Capital Market (hereinafter referred to as “the New National Nine Articles” is published by the State Council on May 9, 2014, requiring to “develop commodity index and other trading tools, enhance the futures market to serve the substantial economy”; And the Guidelines No.1 for the Operation of Publicly Offered Securities Investment Funds - Guidelines for Commodity Futures Trading Open-Ended Funds published by China Securities Regulatory Commission (CSRC) in December 2012, it not only point out the development direction for commodity indexing investment in China, but also indicates the development of commodity index, makes the commodity index to be hopeful for becoming the important innovation-type trading tool of financial market in China.

The publishing of SHFE commodity index series is helpful to constitute the intact commodity index frame to reflect the commodity market comprehensively, hierarchically in different angles. Moreover, driving the development of commodity fund through the commodity index, attracting the institutional investors to orderly participate in the domestic futures market, on one hand can be beneficial to improve efficiency of futures market, perfect the investor structure of futures market, expand the depth and breadth for futures market serving the national economy, provide more selections of investment target to the financing institutions. On the other hand, can lay a solid foundation for innovation of futures market, beneficial to create the international pricing center, enrich the choice of investors, and provide more tools for systematic risk measurement and avoidance.

3. What are the compilation principles and core factors of SHFE commodity index series?

A: SHFE commodity index series adopts three compilation principles of scalable, investable and diversified properties for design. Fully consider the liquidity, continuity, anti-manipulation and other features of product during the design process of index. Liquidity refers to larger scale investment does not cause larger change in commodity index value, thus reduce transaction cost of commodity index investment to the greatest extent. Continuity refers to commodity index can reflect the market change and also can keep comparability with historical data. Anti-manipulation principle requires that the design index will not be easily manipulated by other people, and guaranteeing the index data can reflect the objective circumstances.

Core factors of SHFE commodity index published in this time includes four aspects.

Firstly, selection of product: Select three categories and 12 futures products with well-fluidity (industrial metal category: copper, aluminum, zinc, tin, nickel, rebar, hot roll coil; precious metal category: gold and silver; energy and chemical category: natural rubber, fuel oil and bitumen).

Secondly, weight design: Calculate the weight of each product based on monthly average position amount in past three years, and second-level architecture is adopted to limit the weight and guarantee the diversity between each plate and product. Upper limit of plate weight is 65%, upper limit of single product weight is 35%, and the lower limit is 2%.

Thirdly, contract selection and rolling arrangement: The form of contractual comparison table will be published and specified one year in advance as the scrolling standard of index dominant contract. In general conditions, dominant contract of contractual comparison table is determined based on the contract with maximum positions of corresponding month in past three years. Make rolling of index product in the proportion of 20% every day at the 10th natural day (inclusive of the day, postponed to the first trading day after the holiday in case of statutory holiday) and the following four trading days (5 trading days in total).

Fourthly, index calculation and adjustment: Weighted arithmetic average method is adopted by the index. January 7, 2002 is the base period, and 1,000 point is the base point. Simultaneously, calculate the price index and excess earnings index. The annual weighting adjustment in each year is based on data as of June 30 of that year to the past three years to calculate relevant weighting parameters, and complete the weighting adjustment at the rolling window in next month (August) after the parameter is published (July). For the new products listing, we can consider to incorporate it into index after stable operation for three months in accordance with the rule, and complete the adjustment at the rolling window in next month after the incorporation result is published.

4. How is the development of the commodity index fund in foreign countries?

A: Bulk commodities are less related to other classes of assets, and able to achieve the diversification of asset allocation well, and meanwhile, bulk commodities are closely related to currency inflation, and able to circumvent the risk of inflation well; additionally, the investment of bulk commodities can avoid the fat-tail risk to some extent. According to the experience of American market, the total scale of commodity market in America experienced rapid development over the past decades, which quickly expanded from USD 6 billion in 2000 to more than USD 400 billion in 2013.

Internationally, the investment of commodities implemented in the form of indexation, the open and transparent indexing investment is widely accepted by investors. In America, the development of the commodity index series of Standard & Poor's & Goldman Sachs and Dow Jones & UBS is most mature, the total scale of management fund for tracking index reaches about USD 200 billion. Therefore, the investment pattern of commodity index with the important investment carrier of commodity index is the only way which must be passed for the development of China’s commodity futures market in the future. But in the domestic market, the development of commodity index and indexing investment still stays at the start-up stage, and there will be great development space in the future.

5. How about the implementation of SHFE commodity index fund services?

A: On May 22, 2015, China Securities Regulatory Commission approved the first silver futures fund in China that introduced by the fund company UBS SDIC Fund Management Co., Ltd., which achieved the innovative breakthrough in the field of commodity futures fund. The silver futures fund LOF of UBS SDIC has been listed for transaction at Shenzhen Stock Exchange since August 2015, the initial raising amount of which was RMB 347 million and the fund is operated well at present. Such fund is mainly invested in the silver futures contract of SHFE, has many advantages, such as low threshold, less cost and easy operation, and becomes the simple investment tool for investors in China to invest in silver, and fill in the blank of the investment field of fund industry in China. The fund was jointly declared by SHFE and UBS SDIC and won the “Second Prize of Shanghai Financial Innovation Award in 2015”.

Because of the market demonstration effect of the silver futures LOF fund of UBS SDIC plus the gradual recovery of domestic economy, the bulk commodity market gets more attention of various institutions, various kinds of fund companies obviously speed up to develop the commodity futures fund in China. 18 fund companies clearly express their intention of cooperating with us. In addition, SHFE and fund companies also deeply communicated on the development of commodity futures fund, the department of derivative products of SHFE successively investigated and visited over 20 fund companies and other financing institutions, and received visitors from fund companies more than 30 times.

In order to understand market demand more deeply, in the end of the year 2015 and the first half of the year 2016, we respectively held seminars on commodity futures fund with Shanghai Stock Exchange and Shenzhen Stock Exchange, and invited the representatives from 10 and14 fund companies to attend the seminars, to promote the product innovation positively.

According to public information, at present, China Securities Regulatory Commission (CSRC) has accepted our raise application on 14 commodity futures fund products in regard to our Exchange.

6. How to control the risk of the operation of commodity index fund?

A: In order to promote the development and listing of commodity index fund, and introduce institutional investors to participate in the commodities futures market in domestic more scientifically. Based on the principle of “steady development and long-term development”, SHFE analyzed the market risk and capacity of various kinds of future products in different angles, and made corresponding risk assessment measures. At the earlier stage of market development, we encourage the institutions in market to try to develop the products with lower concentration ratio of market risk, and master the development pace of various fund products from an overall perspective; And meanwhile, we also encourage large, small and medium-sized fund companies to participate jointly, in order to increase the diversity of the institutions in market; We will give priority to develop the products that have larger capacity of the market, the higher proportion of clients of hedging quota and stronger international linkage.

In addition, we also standardize the development services of the open-ended fund products of commodity futures trading, realize the standardized and orderly development of innovative business, formulate the “Operation Procedures for the Letter of Consent on the Development of the Open-Ended Fund Products of Commodity Futures Transaction” according to the Guidelines No.1 for the Operation of Publicly Offered Securities Investment Funds - Guidelines for Commodity Futures Trading Open-Ended Funds, in order to standardize the listed products to carry out the development services of the fund products of investment underlying. After the fund products are listed, we also continuously follow up the investment operation and market operation of the funds products, analyze and supervise the possible influence of the fund products on underlying commodities futures market, enforce the advanced research and anticipation on risks, and maintain market stability.