Review on the Continuous Trading Program (III): More Timely Risk Management for Institutional Investors

Updated on Jul 04,2014

July 4, 2014

By Zhang Fan

Special Report III to Mark the 1st Anniversary of the Continuous Trading Program of the SHFE

With the launch of the Continuous Trading Program, or the Night Trading Session, by the Shanghai Futures Exchange (SHFE) last year, the price continuity of precious metals, nonferrous metals and other products in the domestic futures market have been improved remarkably, and all types of institutional investors including the industrial clients and commercial banks have been greatly motivated to hedge risks in the futures market.

“It used to be that when there were drastic price fluctuations in the foreign markets, we could do nothing but fret about,” said Li Yujuan, head of the trading department of Shandong Zhaojin Gold and Silver Refinery Co., Ltd., commenting on the awkward position of companies before the launch of the Continuous Trading Program.

The prices of precious metals often come under the influence of major economic policies and data of the US and European countries, but restricted by relevant regulations, Shangdong Zhaojin Gold and Silver Refinery Co., Ltd. is not allowed to trade in foreign markets. Thus before the Continuous Trading Program was launched, the company could only take on the risk incurred by the price fluctuations of foreign markets. Li Yujuan said that although there is a domestic overnight market for T+D trading of gold and silver, it is far less active than the futures market. Besides, the deferred charges in T+D trading are rather high, adding to the trading costs of the companies.

“By participating in the night trading of the futures market, the companies, in light of their own conditions of production, processing and sales, can carry out hedging measures more efficiently, adjust positions more timely, and thus better avert the overnight price risks,” said Li Yujuan.

Wei Liang, head of the futures department of Yuguang Gold and Lead Co., Ltd., said that his company used to trade in foreign markets to hedge the risk of price fluctuations overnight, but the problem remained that the exchange rate risk of trading in foreign markets could not be avoided. The overnight trading of the SHFE basically covers all the major trading hours of the US and European countries, and when the price ratio of domestic to foreign market is good, the company will transact most positions in the domestic market where it is easy to adjust positions. Wei Liang also remarked that since the launch of the night market by the SHFE, there have been more opportunities for space arbitrage, and more flexibility in trading.

“When there is an extreme market in the night market, we could follow up or cut losses in time, which facilitates hedging or arbitrage operations,” said the head of the import and export department of Zhuzhou Smelter Group Company Limited to the journalist. He pointed out that when the target price shows up during the huge price fluctuations of the market, some limit orders of the company are mostly transacted in the night period. The launch of the night market is beneficial for the companies to seize market opportunities and successfully fulfill the goals of hedging.

According to the statistics, in the first half of this year, the daily average positions of gold, silver, copper and aluminum futures held by unit clients grew by 45.17%, 103.11%, 28.59% and 55.64% respectively, and the daily hedging positions of these products increased respectively by 43.07%, 104.49%, 55.64% and 28.59%.

Since the launch of the Continuous Trading Program, the participation of special unit clients in the futures market has been noticeably increased. It is calculated that in the first half of this year, the positions of gold, silver, copper, aluminum futures held by special unit clients grew by 73.47%, 333.01%, 294.88% and 301.01% respectively. At present, there are 16 commercial banks qualified for proprietary businesses in gold futures, and 9 for silver futures.

Speaking of the positive changes the Continuous Trading Program has brought to the market, Lin Nian, head of the precious metals trading department of the financial market business center of Bank of Communications told the journalist that the Continuous Trading Program is basically synchronous with the trading hours in foreign markets and it increases the liquidity of the market. Both of these features facilitate the banks and other institutions to hedge risks in a timely fashion. After participating in the Continuous Trading Program of precious metals futures, the cross market trading strategies of Bank of Communications have become more effective than before.

With more and more institutional clients engaged in the Continuous Trading Program, the domestic prices of precious metals and nonferrous metals futures have steadily increased its influence on the global market. “Continuous trading enhances the price continuity, satisfies the demands of risk management of relevant companies and improves the pricing abilities of the domestic precious metals futures market,” Liu Shan’en, chief editor of the almanac China Gold said that there used to be two major gold trading markets of New York and London, and now Shanghai is gradually becoming an internationalized market. He added, “In this sense, it is not only the precious metals and nonferrous metals that call for the continuous trading, but other products too.”

Source: Futures Daily