21^st Century Business Herald: Exchanges Join Hands to Control Risks of Futures Market

Updated on: April 29, 2016

Reported by Chang Liang, Journalist from 21^st Century Business Herald

It's been a long time since the last bullish futures market, which put the niche market under closer scrutiny.

Recently, the prices of rebar futures have risen sharply with expanded trading volume. Market worries about overheating have begun to increase, and the three major commodity futures exchanges have also jointly introduced policies to control risks. In fact, many comments were from those who are not in the futures market, while professionals said that there was a deep misunderstanding.

"No matter from the perspective of supply and demand of variety fundamentals, the rationality of the difference between spot price and futures price of the variety, the normal performance of variety risk management function or other perspectives, the recent rise in rebar prices is in line with the objective price law. We believe that the rebar futures market has fully played the role of rational price discoverer and risk manager," CITIC Futures researcher Liu Jie said.

Futures exchanges join hands to control risks

Dalian Commodity Exchange (DCE) has introduced four waves of measures to cool the market since the 21st day of this month. Among them, coke and coking coal transaction fee has risen to 12 times the original standard in the last three days. Consequently, the trading volume of several "ferrous" futures varieties continued to fall.

DCE announced on April 20 that coke and coking coal transaction fee was restored to 0.6? of the turnover since April 22; on April 21, coke and coking coal transaction fee was adjusted from 0.6? of the turnover to 1.8? of the turnover since April 26; on the night of April 26, DCE adjusted coke and coking coal transaction fee again from 1.8? of the turnover to 3.6? of the turnover; on the next night, the transaction fee was adjusted to 7.2? of the turnover.

In addition to coke and coking coal, DCE also raised iron ore and polypropylene transaction fees on April 25 and April 26 respectively.

For the series of regulatory measures that were recently introduced, a spokesman for DEC said that the measures were aimed at further strengthening supervision, resolutely curbing the excessive speculation trend of some varieties, effectively preventing risks and ensuring the safe and stable operation of the market.

In addition to adjusting the transaction fees, exchanges also prevent market overheating by reducing trading hours.

Shanghai Futures Exchange announced on the night of April 26 that the continuous trading hours of rebar, hot rolled coil and fuel oil and bitumen futures were adjusted from 9p.m. of every Monday to Friday to 1a.m. of the next day to 9p.m. to 11p.m. of every Monday to Friday.

On the night of April 26, Zhengzhou Commodity Exchange (ZCE) also announced that the trading margin of PTA futures contract was adjusted from 5% to 6% and price limit was adjusted from 4% to 5% since the settlement time of April 27.

"The result of cooling measures of exchanges is mainly based on the trading volume-position ratio, and ferrous varieties are the focus. We have reminded key clients who account for over 0.5% of the trading volume of risks again," a worker from the Sales Department of Haitong Futures said, "The Settlement Department asks the backstage workers of the Sales Department to await orders. Workers in the Settlement Department of major futures companies have been well prepared. They wait for instructions after closing every day."

Spot fundamentals is the key factor

For the market logic of rebar varieties that people are most interested in, industry insiders think that fundamentals is the main driving force, and the entrance of idle money is only a secondary factor.

Zhu Shiwei from Yongan Futures thought that the current round of rise in rebar futures is essentially driven by the fundamentals.

After a sharp decline in prices for two consecutive years, steel-related industries dropped to a very low level at the end of 2015 in profitability, capacity utilization rate and stock; the steel industry experienced substantial supply-side adjustment, and some steel plants were closed or stopped production," Zhu Shiwei said.

"As economy stabilized, policy incentives increased and credit cycle was expanded after 2016, steel demand has rebounded. Due to increasing demand and decreasing supply, a short-term mismatch between supply and demand has formed. Coupled with low stock, steel prices will inevitably rise after a two-year depression," Zhu Shiwei said.

"This round of impressive comeback of ferrous products has continued for nearly 5 months. In terms of rally logic, it is dominated by the substantial change in its market rather than purely driven by capital. The determinant of commodity prices is the supply-demand relationship in the market, so the fundamental reason for this round of rally is the tight supply-demand relationship in the rebar market," SHZQ Futures researcher Huang Huiwen said.

"Since the beginning of March, Tangshan billet prices began to skyrocket, increasing by RMB240/ton within two ways. Steel companies followed actively the rise in the price of raw materials to raise their product prices, and the spot market became strong first. In addition, we can also find from the rally process in the last five months that billet price adjustment is usually ahead of futures prices. If billet prices are raised on the weekend, the futures market will open high on Monday. Therefore, this round of rise in the rebar futures market is based on the spot market," Huang Huiwen analyzed.

The particularity of futures trading leads to outsiders' misinterpretation, especially the news that the volume of rebar transactions has exceeded the total volume of the Shanghai and Shenzhen stock markets, which is spread in some we-media.

“The trading volume of rebar has really hit a historical high, but the main reason is that: 1. Companies have great hedging enthusiasm and demand for the current hedging profits in the current context of real economy; 2. This is an inevitable trend as the futures market gradually stabilize and grow. On the other hand, futures implement the margin system, so its trading volume is the nominal value after leverage rather than the actual amount of money invested,” The research team of Galaxy Futures pointed out.

"Unlike the stock market, the futures market has a physical delivery mechanism. The spot warrant delivery after the contract expires makes futures price and spot price complement each other. Futures price is a prediction about the trend of future spot price. Due to a variety of factors, it is normal for the futures price to have appropriate rise or decline. In addition, once the spot month of the contract is approaching, the futures price and the spot price will begin to converge. The reason for price convergence is that the futures market has a forced price corrector, namely physical delivery," Huang Huiwen said.

"Despite the recent sharp fluctuations in the price of rebar futures, we don't need to panic about the influx of funds because the futures market exists to serve the spot market. Furthermore, there is a robust risk management system, so it is difficult for substantial  funds to control the market. In addition, exchanges have the ability to control risks of varieties. The measures to raise the margin and transaction fees that were introduced on Tuesday have played some inhibitory effect on the speculation atmosphere in the market. I believe that with the joint supervision efforts of all parties, the futures market will achieve healthy and orderly operation and development," Huang Huiwen said.