Futures Daily: Overheating in the Futures Market Has Been Significantly Alleviated

Updated on: May 3, 2016

Reported by Que Yanmei, Journalist from Futures Daily

Recently, the trading volume and turnover rate of some commodity futures in the domestic futures market, with ferrous products as a representative, continued to increase rapidly, price fluctuations became more intense, and transactions were overheated.

In this regard, China 's three major commodity and futures exchanges have introduced a series of measures to suppress excessive speculation and prevent and control risks. In the view of market participants, these measures have played a positive role. In addition to warning the market of risks and inhibiting some irrational emotions in time, they have also protected the market itself to a large extent.

The trading volume of ferrous varieties dropped

The journalist of Futures Daily learned that Shanghai Futures Exchange (SHFE) had implemented many market-oriented measures, including raising transaction fees, adjusting the margin ratio, increasing the intensity of investigating and punishing rule violations, reducing continuous trading hours, etc., to reduce the profit margins of overactive short-term speculative trading and strictly control excessive speculation in the trading of some varieties.

At the same time, the SHFE also increased the delivery capacity and delivery brand of relevant varieties. It is said that SHFE has increased in time the delivery capacity and delivery brand of nickel, natural rubber, bitumen and other varieties with fast-growing stock since the beginning of this year to meet the market demand for delivery.

In addition, the SHFE has also strengthened the front-line supervision, investigated 33 transactions that caused abnormal price fluctuations, and dealt with 715 "abnormal transactions", including 171 transactions that violated the limit on self-trading, 465 transactions that violated the limit on frequent declaration of withdrawal, 72 transactions that violated the limit on declaration of large-amount withdrawal and 7 transactions that violated the limit on the consolidated positions of the portfolio of accounts with actual control.

After the exchange introduced a series of measures, the market was cooled significantly, and the ferrous varieties of SHFE were obviously not as active as before. From the perspective of trading volume-position ratio, on April 29, the trading volume-position ratio of rebar and hot-rolled coil was 3.6 and 2.8 respectively, dropping by 50.9% and 53.1% respectively compared with April 22, and the trading volume of rebar and hot-rolled coil fell by 51% and 50% respectively compared with April 22.

"Based on the feedback from most clients, the series of measures introduced by the exchange is extremely necessary, and they have played an effective regulatory role in the market," relevant person in charge of Haitong Futures said to the journalist of Futures Daily.

Cai Luoyi, Vice General Manager of SHZQ Futures, said that ample liquidity was the basis for the futures market to achieve basic economic functions, but excessive speculation might make it impossible for futures prices to truly reflect the supply and demand and development trend of the market.

"When there is an increasing atmosphere of market speculation, exchanges should give timely and appropriate warning and take different cooling measures based on the stage of varieties, which put forwards higher requirements for exchanges and other market regulators," Cai Luoyi said. Based on the current conditions, these measures have not only played a good cooling effect, but also won the understanding and recognition of the market.

Someone from a private placement agency also said that although the series of measures introduced by SHFE seemed moderate, they had a clear aim. They have cooled the market, and have not completely denied and eliminated liquidity, which was acceptable to the market. "It helps to stop short-term speculation that follows the trend, and it will not accidentally hurt the market fundamentals-based momentum investors and hedging companies that enter the market to avoid risks."　

Companies have greater desire for hedging

In fact, with the sharp rise of prices of ferrous varieties, companies relating to the industrial chain maintain a fear in the face of high profits, and their desire for hedging has been fully stimulated, so statements such as a massive influx of idle money or stock market funds among outsiders are not true.

The data of Haitong Futures show that the company did not experience the so-called craze for account opening. The total number of accounts opened by Haitong Futures this year was at the same level with the same period of last year, and the number of new corporate accounts increased for three consecutive months.

"This round of rise in commodity futures price has attracted industrial clients to hedge." The above-mentioned person in charge of Haitong Futures said that the number of applications for hedging limit on ferrous varieties that were submitted by the clients of the company increased significantly in recent months.

Actually, since April 22, the prices of rebar, hot-rolled coil and other varieties fell for four consecutive trading days, some speculative funds gradually left, and industrial clients with hedging demand entered the market at proper time.

Data show that the trading volume of the dominant 1610 contract of rebar futures fell by 40% from the peak 22 million lots on April 21 to about 14 million lots on April 27; positions fell by 1.3 million lots from the peak 4.2 million lots on April 12 to 2.9 million lots, and about RMB2.4 billion flowed out correspondingly.

Insiders generally believe that the rise in commodity prices that have been at the bottom for a long time in the context of improved supply and demand fundamentals is a self-repair of the previous market pessimism, and clients in the industrial chain will be attracted to hedge when prices rise to a certain extent, which will then make prices down.

"The adjustment of night trading hours of the SHFE, which are connected with the night trading hours of relevant varieties, is helpful for futures companies to have unified control of risks, and more helpful for industrial clients to manage risks and promote effective risk management of the futures market," Chief Risk Officer Yang Lei of Guotai Junan Futures said.

The above-mentioned person in charge of Haitong Futures also told the journalist that industrial clients that participated in hedging welcomed the reduction of night trading hours, they said the measure conformed to the voice of industrial clients and connected the night trading hours of the exchange with those of other exchanges to a certain extent, which was more convenient for companies in the industrial chain to manage risks. 　

The relevant person of SHFE said that, the SHFE would pay close attention to the operation of key contracts, grasp spot fundamental, hedging approval, warrant holding, position increase and reduction and doubts, and strengthen the investigation of the relevance between position increase and reduction and positions to ensure smooth delivery. At the same time, the exchange would increase member inspection efforts, urge futures companies with membership to further strengthen their compliance management of clients, and focus on checking the following work of futures companies with membership: the management of frequent declaration of withdrawal and other abnormal transactions, whether they take the initiative to urge clients to report accounts with actual control and report on large accounts, etc. Next, the SHFE would further strengthen real-time monitoring, market operation analysis and inspection of major violation of laws and regulations to strictly prevent illegal funds from flowing into the futures market and actively prevent and control market risks.

Yang Lei said that, Guotai Junan Futures would continue to cooperate with the exchange to prevent and control risks, strictly implement the investor suitability system, strengthen the examination of applications for new accounts, actively communicate with clients and warn them against risks, and guide and urge investors to be rational and comply with regulations in trading to jointly maintain the market order and promote the safe and stable operation of the market.