Financial Times: Multiple Measures Are Taken to Refrain Speculation, and the Risk Control Measures Have Taken Initial Effect

Updated on: May 3, 2016

Reported by Gao Guohua, Journalist from Financial Times

“CSRC has requested the futures exchange to strengthen market supervision and take targeted measures to curb excessive speculation in the market. At present, the futures market speculative atmosphere has declined, and CSRC will continue to guide the futures exchange to adopt sound measures, and resolutely curb excessive speculation, crack down on illegal activities, and maintain a smooth and orderly operation of the market." At a regular briefing of CSRC last Friday, CSRC news spokesman Zhang Xiaojun says, in view of the recent sharp fluctuations in domestic commodity futures prices and excessive turnover."

Since April, the commodity futures market has been heating up, and the black series of futures trading volume and turnover rate have been increasing rapidly, and the price fluctuation has increased, and the market has been overheated. In this regard, the three commodity futures exchanges have taken such regulatory measures as releasing risk warning letter, adjusting the transaction fees, margin standards and price limits, and shortening the continuous trading time etc. to curb excessive speculation. After the implementation of relevant measures, the market cooling is more obvious, the volume dropped sharply, the settlement positions rate declined dramatically, and the overheating atmosphere has been reduced.

Transaction overheating eased

SHFE data show that, from the point of view of operation in the near future, the overall operation of the market is stable, the risk is basically controllable, and related varieties transaction activity has been significantly lower than the previous period, and the risk control measures have produced initial results. The transaction positions ratio declines day by day. On April 29, rebar and hot rolled coil transaction positions were 3.6, 2.8, decreased by 50.9% and 53.1% compared with April 22; the volume of fell by nearly 51% and 50% respectively. Varieties trading activity has dropped significantly compared to the previous period, and the excessively active short-term trading momentum has been initially curbed.

According to reports, as to the recent turnover overheating of some varieties, SHFE has implemented a number of market risk control measures including an increase in transaction fees, adjustment of margin ratio, increasing efforts to investigate violations and reducing continuous trading hours, made strict control of excessive trading trend of some varieties. The objective is to compress the accrual space of too active short-term speculative trading, and reduce the excessive turnover positions of some varieties, so as to maintain the smooth operation of the market, and ensure the effective development of the economic function of the market.

First, increase the margin and commission fees for some varieties. As of the liquidation settlement on March 15, the fuel oil and bitumen future contract 1606 trading margin standard had been adjusted to 10%, and the rolled bar daily liquidation transaction fees are resumed; after April 5, tin futures contract trading margin ratio is adjusted to 6%, and the price limit adjusted to 5%; rebar and hot rolled coil futures contracts trading margin ratio is adjusted to 7%, and the price limit adjusted to 6%. On April 21, SHFE issued the risk control tips and resumed hot rolled coil daily liquidation transaction fees. Meanwhile, hot rolled coil, rebar, fuel oil and bitumen transaction fees are adjusted to 1/10000. On April 26, SHFE issued the holiday risk control arrangements. As of May 3, the rebar, hot rolled coil and bitumen night trade time was adjusted.

Second, increase the delivery capacity and delivery brand. Since this year, SHFE has increased storage capacity and new delivery brands for rapidly growing stocks. For nickel, rubber, bitumen and other several varieties with faster growing inventory, the new delivery capacity and brand will be increased timely according to the market situation to meet the market demand for delivery.

Third, strengthen the front-line supervision. Investigate 33 transactions leading to abnormal price fluctuations, handle 715 unusual transaction behaviors; continue to investigate the actual control relationship accounts, and carry out relationship identification, investigation and reporting of a total of 105 groups of new actual control relationship accounts; pay close attention to the operation of key contracts, understand the spot face, the hedging examination and approval, warrant holding information, position holds changes and doubts, strengthen the investigation on the changes in positions; increase membership checks, urge the futures company members to further strengthen the compliance management of the customer; further strengthen supervision measures propaganda, and carry out special training themed by risk control.

Strengthen supervision and ensure the healthy operation of the market

"Ample liquidity is the basis of futures market to achieve the basic functions of the economy, but excessive volume and speculation may make the futures price unable to reflect the relationship between supply and demand and the development trend of the market, and unable to really play the role of price discovery." Cai Luoyi, Deputy General Manager of Shanghai Futures Company says. Currently, SHFE has taken some cooling measures for some varieties by adjusting the deposit, fees and reducing the night trading hours, which have taken obvious cooling effect on the speculation, and been understood by the majority of futures investors.

Cai Luoyi says that, in recent years, with the emergence of futures fund management business and a large number of private institutions, the commodity futures market investors structure has undergone great changes. In the stage of the general equilibrium in the fundamentals of supply and demand, in the futures price formation, the commodity attribute has played a decisive role; once the supply and demand balance anticipation is expected to be broken, the investment funds will be quickly gathered; the impact of financial attributes on the formation of futures prices is significant, and the difference between the supply and demand of the commodity attribute is fully amplified. In the face of the new normal of futures market, when the market speculation atmosphere arises, the timely and appropriate remind and cooling measures, and different varieties to different market supervision measures at different stages put forward higher requirements on the futures market regulators. "SHFE's current risk control measures not only have a good market effect, but also have a greater understanding and acceptance of the market. This shows that timely and appropriate regulation and supervision are conducive to the long-term and healthy development of the futures market." Cai Luoyi says.

"From the feedback information of most clients, the timely introduction of risk control measures by the stock exchange is very necessary, and it has played an effective role in regulating and controlling the market. Especially the Shanghai Stock Exchange has adjusted the night trade time which is moderately consistent with other exchanges night trade time, which is conducive to risk control of futures company, and conducive to the risk management by industrial customers, and promoting the effective execution of the futures market risk management function." Yang Lei, Guotai Junan Futures Chief Risk Officer, says.

A private equity investment institutions also says that SHFE risk control measures seem gentle but pertinent and take the cooling effect on the market, but do not completely deny and eliminate the liquidity, which is acceptable for the market, helpful to discourage short-term speculation, but not hurt the trend investors based on the fundamentals and hedging companies to avoid risks in the market.

Relevant responsible person of SHFE says, SHFE will continue to strictly regulate the market management, further strengthen the real-time monitoring, market operation analysis and illegal behavior inspection work, strictly eliminate illegal funds to enter the futures market, actively prevent risk, and earnestly safeguard the fair and equitable market.

Futures market turns gradually rational, and hedging applications increase significantly

Since the beginning of this year, the supply side reform has achieved initial results, and the demand marginal improvement has resulted in the short-term supply and demand mismatch; the industrial enterprise economic data has warmed up, and the economic staged improvement has pulled the black metal industrial chain demand; credit data has exceeded expectations, and the market fund liquidity has been ample. Some variety cyclical rebound phenomenon is misread and exaggerated by the media, for example, such titles as “Potential dealers rush to open accounts” appear.

And this is not the actual case, and Haitong Futures data show that the so-called account opening queuing boom did not appear. This year, the total number of Haitong Futures opening accounts is basically the same with the same period of last year, of which the number of newly opened corporate clients rose for 3 consecutive months. Thus, the rising price of this round of futures did not lead to influx of potential dealers, but in fact attracted industrial customers to participate in hedging.

Data show that, in recent months, black variety hedging applications of Haitong Futures customers increased significantly, and the futures market hedging function is played. From the perspective of customer equity, there has been a slight increase this year, but the growth rate has not changed much compared with the same period of last year. It is a growth within the normal scope of business.

Insiders agree that a round of bull market of bulk commodity prices which had been at the bottom for a long time when the fundamentals of supply and demand are improved to rapidly correct the market pessimism is the market's self repair. When prices rise to a certain extent, the industry chain will attract customers to hedge, and the price drops. These are the two most important functions of the futures market: price discovery and hedging.