Operational Manual

for

Fuel Oil Futures Contract Trading

2011

Shanghai Futures Exchange

Operation Manual for Fuel Oil Futures Contract Trading (2011)

This Operational Manual is for referenceonly. To learn more about the latest information, please consult Shanghai Futures Exchange (Tel: 8621-68400000) or visit SHFE website (http://tsite.shfe.com.cn)

Contents

Product Overview/01

Properties and Classification /01

Main Quality Indicators /02

A Glance at Domestic and Foreign Fuel Oil Market /03

China’s Fuel Oil Market Profile /04

Cost Calculation of Imported Fuel Oil /08

Characteristics of Price fluctuation onSpot Fuel Oil Market /09

Singapore Fuel Oil Market Profile /11

Application of Oil Futures to Hedging and Arbitrage /12

How to Hedge Oil Futures /12

How to Conduct arbitrage of oil futures /14

Guideline for Fuel Oil Futures Trading /17

Market-entering and Trading Diagram/17

Standard Contract /26

Futures Trading Rules /28

Appendices/44

SHFE Designated Quality Assayers for Fuel Oil Futures /44

Business Contact for SHFE Certified Fuel Oil Delivery Depots /44

The Fees Standard for SHFE Certified Fuel Oil Futures Delivery Depots /45

The Operational Guideline for Ship-to-Ship Delivery of SHFE Fuel Oil Futures /45

Detailed Rules on Inspection over Fuel Oil (Futures) /46

Product Overview

Properties and Classification

Generally, lighter component will be always separated at first during crude oil processing. As one of the refined oils, fuel oil is the heavier residual products that have been separated from crude oil after gasoline, coal oil and diesel during the oil processing. Fuel oil is mainly made of cracked residual oil and straight-run residual oil, with high viscosityand high contents of non-hydrocarbon compounds, colloids and bitumen. Fuel oil is mainly used for oil refining and chemical industry, transportation, building industry and metallurgical industry. Currently, there is a relatively significant decrease in oil consumption for boilers and power generation while the demand in marine oil market shows the trend of stable growth.

As the final product in the oil refining process, fuel oil is highly characterized by its quality control. The formation of final fuel oil product will be restricted by multiple factors including crude oil category, processing technology and processing depth etc.

Fuel oil can be classified as follows according to different standards:

According to whether it is commercialized when leaving the factory, fuel oil can be classified into commercial fuel oil and fuel oil for self use. Commercial fuel oil refers to fuel oil that is commercialized when leaving the factory; and fuel oil for self use refers to fuel oil that is used as raw materials or fuel for production by the refinery and is not commercialized when leaving the factory.

According to processing flow, fuel oil can be classified into normal pressure fuel oil, reduced pressure fuel oil, catalytic fuel oil and mixed fuel oil. Normal pressure fuel oil refers to fuel oil separated by fractional distillation using atmospheric distillation unit in the refinery; reduced pressure fuel oil refers to fuel oil separated by fractional distillation using vacuum distillation unit in the refinery; catalytic fuel oil refers to fuel oil refers to fuel oil separated by fractional distillation using catalytic cracking unit in the refinery; and mixed fuel oil refers to mixture of reduced pressure fuel oil and catalytic fuel oil.

According to its use, fuel oil can be classified into marine fuel oil, furnace fuel oil and other fuel oil.

Major Quality Indicators

Major quality indicators of fuel oil include viscosity, sulfur content, flash point, water content, ash content, sediment, aluminum + silicon, net heating value, sodium, waste lubricating oil, acid value, etc.

Viscosity:viscosity is the most important performance indicator of fuel oil and main basis for fuel oil grading. It is the measure of resistance to fluidity, and its measurement represents whether the fuel oils is easily flowable, pumpable and atomizable.Currently, the frequently used fuel oils in China are fuel oils of 40⁰C kinematic viscosity (distillate-type fuel oil) and 100⁰C kinematic viscosity (residual fuel oil).In the past, Engler viscosity (80⁰C and 100⁰C) was used as the quality control indicator in China’s fuel oil industry standard, and 80⁰C kinematic viscosity was used to classify the designation.The kinematic viscosity of oil products is the ratio of the dynamic viscosity of oil products to the density, which is denoted in mm²/s.

Sulfur content: Too high sulfur content in the fuel oil may cause erosion of metal equipment and environmental pollution. According to the sulfur content, fuel oil can be classified into high-sulfur fuel oil, middle-sulfur fuel oil and low-sulfur fuel oil.

Flash point: Flash point is an indicator involving use safety. Too low flash point may cause hidden fire danger.

Water content: Water content may affect condensation point of fuel oil. With increase in water content, the condensation point of fuel oil will rise gradually. In addition, water content also may affect combustion performance of the fuel-oil powered machinery, resulting in accidents such as flameout in furnace chamber and furnace blowout.

Ash content: Ash content is thenon-inflammable residual content after combustion. Ash may cover the heated surface of the boiler, thus affecting heat transmission adversely.

Total sediment: Sediment may block the filter screens, resulting in wear and tear of defueling pumps and blockage of oil nozzles, and affecting normal combustion.

Aluminum + silicon: Silicon/aluminum catalyst powder may cause accelerated wear and tear of pumps and valves. When this indicator is beyond the standard, it may cause severe wear and tear of the cylinders, resulting in the engine failure and economic losses.

Net heating value: Subject to relatively diverse and uncertain factors, net heating value is the indicator to evaluate final heating work by fuel oils, which is also the economic indicator valued most by fuel oil users.

Sodium: Sodium indicator is used to identify whether the salt content is increased due to the inlet of sea water because salt may cause equipment erosion. When residual fuel oil is used as the fuel, sodium compound of low-melting point is one of the reasons for erosion due to the generation of sediments on valves, nozzles of marine diesel engines, hence the requirement that the sodium content be less than 50mg/kg.

Waste lubricating oil (Calcium + Zinc or Calcium + phosphorus): Marine fuel oil shall not contain any additives and chemical wastes that endanger ship safety, have adverse effects on mechanical properties, or cause harm to personnel onboard, thus adding air pollution as a whole, and shall not be mixed with waste lubricating oil.

Total acid value: Acid value represents the degree of oxidizing deterioration. Inorganic acid may corrode equipment, resulting in pollution by oil spill, hence the requirement that the content shall not be higher than 2.5mgKOH/g.

Currently China has no compulsory national quality standard for fuel oils. In order to be geared to international standards, China Petrochemical Corporation formulated SH/T0356-1996 as China’s industry standard by reference to the ASTMD396-92 Fuel Oil Standard of American Society for Testing Material (ASTM), the widest used internationalfuel oil standard.

On July 1, 2010, new marine fuel standard (ISO8217:2010) of International Organization of Standardization became effective officially. On this basis and in combination with the development of Chinese fuel oil market, Shanghai Futures Exchange revised the quality indicator for the fuel oil futures contracts.

Domestic and Foreign Fuel Oil Market Profile

Currently fuel oil is a kind of highly commercialized product among oils and oil products in China. According to new oil pricing method as issued by State Development Planning Commission on October 15, 2001, fuel oil prices wereliberated officially, circulation and prices of fuel oils were adjusted completely by the market, domestic prices were basically linked with international market, and products were relative highly internationalized. Since January 1, 2004, the State cancelled the import and export quota of fuel oils and implemented administration of automatic import license. As a result, Chinese fuel oil market was basically linked with international market. In 2009, fuel oil consumption tax was increased from RMB0.1 Yuan/liter to RMB0.8 Yuan/liter. In order to facilitate healthy development of olefine chemical industry and fair competition among enterprises, the Ministry of Finance and State Administration of Taxation released Notice on Adjustment to the Policy on Certain Fuel-Oil Consumption Taxes. According to the Notice, consumption taxes are to be exempted for domestically-produced fuel oil used as raw material for production of ethylene, aromatics and other chemicals or refunded for imported fuel oil used as raw material for the production of ethylene, aromatics and other chemicals. Consumption taxes are to be levied on fuel oil sold by fuel-oil producers, which is not used as raw material for production of ethylene, aromatics and other chemicals. Consumption taxes are to be imposed on tax-free fuel oil purchased by chemical enterprises producing ethylene, aromatics and other chemicals for sale instead of being used as raw material for production of ethylene, aromatics and other chemicals.

Chinese Fuel Oil Market Profile

The nation-wide apparent consumption of fuel oil in 2010was 34,273,000 tons, down 0.2% on a year-on-year basis. Domestic output achieved a year-on-year increase of 11.6%,the imports showed an year-on-year decrease of 4.1%and the exports represented a substantial year-on-year increase of 14.7%.

1.        FuelOil Production and Consumptionin China

In 2010, fuel oil output amounted for 61.7% of apparent consumption of fuel oil, up 6.5% on a year-on-year basis, and the proportion of the imports to the apparent consumption fallen to 67.1%.As indicated by Industry analysts, the shrink of apparent consumption of fuel oil was mainly affected by factors like high crude oil price, additional levy of fuel oil consumption tax, etc. Since the beginning of this year, other fuel oil demands in Chinese fuel oil market than marine demand are obviously replaced by other fuels such as LNG and coal. .

Domestic apparent consumption of fuel oil in 2010 (0.000 tons)

Data source: China Petroleum and Chemical Industry Federation

2. China’ Fuel Oil Import

Among domestic consumption areas of imported fuel oil in 2010, Shandong Province ranked No.1 with 11,737,000 tons imported fuel oil and 51.0% market share, Guangdong Province ranked No. 2 with 4,319,000 tons imported oil and 18.8% market share,and Zhejiang Province ranked No. 3 with 11.8% market share.

On the whole, China’s total imported fuel oil volume in 2010 was reduced by 4.1% to 23,014,000 tons, in which total imported 5-7# fuel oil was reduced by 5.1% to19, 760,600 tons.Venezuela, Malaysia, Russian, Korea and Singapore occupied the top five import sources of 5-7# fuel oil successively in 2010, whose volumes are 4,213,600 tons, 3,566,400 tons, 3,558,200 tons, 2,346,900 tons and 2,054,400 tonsrespectively.

Distribution of Import Sources of 5-7# Fuel Oils for China in 2010

Venezuela 23%

Indonesia 5%

Japan 6%

Malaysia 19%

Russian Federation 19%

Singapore 11%

Netherlands 1%

Kazakhstan 3%

UAE 0%

South Korea 12%

Thailand 1%

Data source: General Administration of Customs

3.China’s Fuel Oil Consumption Structure

From 2005 to 2010, China’s fuel oil consumption structure changed due to high oil prices and levying of fuel oil consumption tax. From a nationwide perspective, China’sfuel oil consumption structure in 2010 was characterized by mainly served as raw materials for refining and chemical, supplemented by demand fromtransportation and marine oil.With respect to standard product quality indicators, fuel oil contracts listed on the Exchange in 2004 are designed for industrial users such as power plants and boilers. However, the power sector currently onlyaccounted for 2% of total consumption; instead, the demand from marine oil market rose steadily in recent years, with the consumption up to 14,290,000 tons in 2010. Consequently, the Exchange revised the quality standard for standard productunderlying fuel oil contract in order to better adapt itself to the evolving and changing landscape of fuel oil market.

                                                        Data source: C1 Energy, General Administration of Customs

4.China’s Marine Oil Market

In 2010, the consumption of domestic marine fuel oils was about 14,290,000 tons, a year-on-year increase of 15.1%.Sales of the bonded marine oil market continued to lead the domestically traded marine oil market with the gap on course to becoming large.On the general trend of economic recovery, total cargothroughput of Chinese ports is predicted to remain stable growth, and marine fuel oil demand will also have a large room for growth.

Consumption of domestic marine fuel oil in 2010 (0,000tons)

Data source: C1 Energy, General Administration of Customs

In 2010, consumption of marine fuel oil market in the Yangtze River Delta area accounted for about 39% of that across the whole China, a flat level compared with that in 2009; that in the Pearl River area accounted for about 36%of that across the whole China, a year-on-year decline of 2%; that in Bohai Rime area rose by 2% to 25%. Due to the increase in overall consumption of marine fuel oil, the actual consumptions in all regions rose, but the differences lie in their respectivemarket shares only.

In the bonded fuel oil market, China Marine Bunker (Petro China) Co., Ltd (CHIMBUSCO), China Shipping & Sinopec Suppliers Co., Ltd., China Changjiang Bunker (Sinopec) Co., Ltd., Sinopec Zhoushan Branch, and BRIGHTOIL established their respective distribution points in Shanghai and Ningbo in 2010, from where a fierce competition was unveiling.Together with economy recovery and rebound in international shipping market in 2010, the consumption of the bonded fuel oil in Yangtze River Delta area rose significantly, accounting for 41% of that across the whole China, up 1% compared with that in 2009.

In internally traded marine fuel oil market, due to increasingly tight fuel oil supply, higher market purchase costs, weaker competitiveness than that of Bohai Rimand diversion of the market demand from the south to the north, the market share in Yangtze River Delta area decreased by 1% to 37%; and due to sustained drop of demand from the downstream shipping market for internally traded marine fuel oil in the Pearl River Delta area, the market share decreased by 3% to 39%; the decrease in market share of the above two areas plus relatively rich resources resulted in a 4% increase in market share of BohaiRim areain the whole internally traded marine fuel oil market.

Distribution of the bonded marine fuel oil consumption in China

26%

33%

41%

Pearl River Delta              Yangtze River Delta                      Bohai Rim

Data source: C1 Energy

Distribution of the internally traded marine fuel oil consumption in China

24%

39%

37%

Pearl River Delta              Yangtze River Delta                      Bohai Rim

Data source: C1 Energy

Cost Calculation of Imported Fuel Oil

1.        The cost of imported fuel oil is calculated generally using the following formula

[(MOPS price + discount) x exchange rate x (1 + duty rate) + consumption tax] x (1 + VAT rate) + other costs

MOPS price:Calculated on the basis of B/L date or NOR and in the form of full month, 2+1+2, 2+0+3,etc.

Exchange rate: Calculated according to the foreign exchange quotation of the day

VAT rate: 17%, provisional duty: 3% (Lowered to 1% from July 1)

Consumption tax rate: Applicable tax rate for fuel oil at RMB0.8 Yuan/liter, which is converted into RMB812 Yuan/ton

Other costs: These costs are varied and may include the following costs as appropriate: import agency fees, port charges/dockage charges, storage fees, commodity inspection fees, drayage fees, sanitary inspection fees, insurance premium, interests, urban construction fees, educational surcharge, flood prevention fees, etc.

2.        Examples of cost calculation of imported fuel oil

B/L date: January 12, 2010

MOPS price: USD502.94

Discount: USD1.17

Exchange rate: 6.8

Import agency fees: RMB35 Yuan/ton

Port charges: RMB26 Yuan/ton

Storage fees: RMB30 Yuan/ton

Commodity inspection fee: RMB2.4 Yuan/ton

Total cost is: [(502.94+1.17) x 6.8 x (1+0.03)+812]x (1+0.17)+93.4=RMB5174.46 Yuan

Note: In spot trades, costs such as import agency fees, port charges, storage fees and commodity inspection feesvary depending on specific conditions like ports and oil depots.

Characteristics of Price Fluctuation on Spot Fuel Oil Market

Shanghai fuel oil futures priceshave maintained a strong correlation with the trends of Huangpu fuel oil spot prices, Singapore fuel oil spot prices and WTI crude oil futures prices since its listing on August 25, 2004. But in recent two years, the correlation between domestic and overseas fuel oil futures prices dropped slightly due to the decrease in demands for fuel oils from domestic power industry, lower capacity utilization level of local refineries in South China and the decline in fuel oil imports due to price inversion of imported fuel oils. Empirical statistics and research indicated that the correlation coefficient between Shanghai fuel oil futures prices and Huangpu fuel oil spot prices/Singapore fuel oil prices/WTI crude oil futures prices from August 25, 2004 to August 25, 2010 were 98.12%/94.46%/83.16% respectively. While the fuel oil futures prices were highly correlated with the fringe markets, they also showed an independent price trend, i.e., a smaller price movement relative to NYMEX crude oil prices and Singapore fuel oil prices and a strong correlation with domestic spot market at the same time.  On one hand, it reflected different viewpoints of domestic clients on international oil prices; on the other hand, due to the restriction by domestic spot market, it also mirrored the “Chinese pricing” that was formed objectively to reflect the supply and demand in China’s fuel oil market.

Comparison of spot prices and futures prices of fuel oils

Huangpu Spot (RMB Yuan/ton)/Shanghai Fuel Oil Futures (RMB Yuan/ton)/NY crude oil (USD/barrel)

Singapore fuel oil market profile 

Singapore is one of the oil trading centers in the world. Singapore fuel oil market plays an important role in the world, consisting of traditional spot market, PLATTSopen market and Paper Market.

1.        Traditional spot market

Traditional spot market refers to the market for fuel oil spottrading in general sense, with a market size of about 30-40 million tons annually.

2.        PLATTS open market

PLATTSopen market refers to the market where public spot trading is conducted via PLATTS open outcry system (PAGE 190) from 4:00pm to 4:30pm. Instead of being used for physical delivery of fuel oil, its primary goal is to form the market prices of the day and play the role of price discovery.

3.        Paper Market

Roughly established around 1995, Singapore Paper Market, in its nature, is a derivative market, which is also an OTC market rather than an exchange traded market. Main products traded on Paper Market include naphtha, gasoline, diesel oil, jet fuel and fuel oil. Currently, the size of Singapore Paper Market for fuel oil is nearly more than 3 times the spot market, including about 80% of speculative trading and about 20% of hedging trade.

Participants in Paper Market mainly include investment banks, commercial banks, large multinational oil companies, oil traders and end users.

Primary goal of Paper Market is to provide a safe haven, with standard contracts as its trading objects. The longest contract period can be extended up to three years, and the lot size of each contract is 5,000 tons. After the contract expires,a cash settlement will be conducted instead of a physical delivery, with the settlement price at the weighted average prices of the nearest month in Plattsopen market, and commission at 7 cents/ton (i.e. USD350/lot) collected by the broker. Because it is an OTC market, usually the transactions in Paper Market belong to a credit trading, in which the performance guarantee completely relies on the reputation of both parties to the transaction, thus requiring all companies participating in Paper Market shall be the international well known and reputable companies.At present, most fuel oil traders in China’s southern regionappoint overseas agents to conduct paper trading in Singapore fuel oil in order to implement international purchases in a steady manner. .

Application of Oil Futures to Hedging and Arbitrage

How to hedge oil futures

Hedgingrefers to the futures trading activities designed to avertspot price risks. That is to say, one sells or buys equivalent amount of futures in the futures market while buying or selling the physical commodities. After a period of time, the profit/loss on spot trading arising from pricechanges may be offset or covered up by the loss/profit on futures trading, thus establishing a hedging mechanism between the spot and the futuresto minimize the price risks.

1.        Short hedge by oil producers and refiners

In order to ensure the reasonable economic profits from commodities that have been produced and prepared for the market or that are still in the process of production for future sales in the market and prevent losses arising from price decline in commoditieswhen they are sold officially,the oil producers supplying crude oils to the market and the refineries supplying the finished oils, as the suppliers of social goods, may utilize the short hedging of corresponding commodity futures to reduce price risks, namely, the means of hedging by which one sellsan equivalent amount of futures in the name of the seller in the futures market and buys futures position for hedging until the spot is to be sold.

Specific operations are shown in the following example:

In July, an oil field learned that crude oil price is at USD54/barrel and it was satisfied with this price. So the oil field stepped up their production. However, it was worriedthat oversupply in the spot market may cause a decline in crude oil price that will result in a decrease in its gains. In order to avoid the risks brought about by price decline in the futures, the oil field decided to conduct short hedging of WTI crude oil future (futures contract on light sweet crude oil) on NYMEX. The trading and the profit/lossare shown in the following table:

In spite of adverse change in spot prices for the oil field, the price was decreased by USD4/barrel through this hedging trade, which resulted in a revenue loss of USD40,000; however, the trading in the futures market generated a profit of USD40,000 so as to eliminate the effects of adverse change in price.

2.        Long hedge by oil product processing companies like refiners and petrochemical enterprises, as well as finished oil consuming companies such as airlines

For petrochemical enterprises and refineries taking crude oil as raw materials, as well as finished oil consuming enterprises like airlines, they are worried that crude oil or finishedoil price will rise. In order to prevent them from suffering losses on rise in oil price when they need to buy raw material, they may use long hedging to reduce the price risks, namely, the means of hedging through which one buys an equivalent quantity of futures contractin the name of the buyer in the futures market and sells the futures positions for hedging until they need to buy the spot oil.

Specific operations are shown in the following example:

On June 1, a refinery and local distributor concluded a forward contract and agreed to supply a batch of products in September. It proposed a fixed price to the distributor based on WTI crude oil futures price of USD56/barrel at that time.Indeed, currently the refinery doesn’t have any goods,nor the goods supply guarantee or pricing of crude oil for refining. In order to lock in profits by fixing the costs, the refinery decided to carry out WTI crude oil futures trading. The trading is shown in the following table:

Although, by using this hedging trade, the refinery suffered a loss of USD40, 000 in the spot marketdue to the adverse change in spot prices, it made a profit of USD40, 000 from the trading in the futures market so as to eliminate the effects of adverse change in price.

3.        Hedging by oil product operators like oil traders and storage and transportation providers

The traders as well as storage and transportation providers can not only buy spot goods from client A and sell spot goods to client B.In the event of difference in the concluded buying and selling quantities, inconsistency in timing, there will be risk involved. How to conduct long hedging or short hedging shall be subject to the net exposure to monthly spots.

How to conduct arbitrage of oil futures

Arbitrage refers to traders gain profits from the price changesin two contracts by buying and selling two different futures contractssimultaneously. Arbitrage is generally classified into calendar spread arbitrage, cross market arbitrage and intercommodity spread arbitrage.

1.        Calendar spread arbitrage

Calendar spread arbitrage refers to the use of abnormal changes in the normal price spread between the same commodity in different delivery months to conduct hedging and make profits, which can be divided into bull spread and bear spread.

For example, when spreading the WTI crude oil futures contracts using bull spread, one may buy WTI crude oil futures contracts of nearby delivery month and sell WTI crude oil futures contracts of forward delivery month simultaneously to expect the increase in nearby contract prices exceeds that inforward contract prices; while the operation of the bear spreads is just the opposite, namely, the selling of nearby delivery month contracts and buying of forward delivery month contracts to expect the decline in forward contract prices is lower than that in nearby contract prices.

Bull spread

It can be seen from this example that in normal market, the success of arbitrage is subject to whether the spread narrowed. For oil futures, the spread between two contracts in two delivery months next to each other is determined by the carrying charges per month for general oil warrant. For contracts in two adjacent months in the same oil production year, if the spread between the nearer-month contract and the more-distant moth contract is greater than the carrying charges, it is estimated that the spread will regress to the carrying charges in the future.As a result, onecan also make profits by buying the nearby month contract while selling the forward month contract.The wider the spread is, the lower the risk is and the bigger the room for profit is.

But in the inverted market, the widening of spread is favorable for the arbitrager. In addition, the contango of the nearby contract relative to the forward contracts has no limits while that of the forward contract relative to the nearby contract is restricted by the carrying charges, so this bull spread has a large potential for profits but a limited potential for risks.

Bear spread

Unlike the above example, the success of the arbitrage is subject to whether the spread widened. If the spread between the forward month contract and the nearby month contract is less than the carrying charges, it is estimated that the spread will regress to the carrying charges in the future.As a result, one can also make profits by selling the nearby moth contract while buying the forward month contract.The narrower the spread is, the lower the risk is and the bigger the room for profit is.

But in the inverted market, the narrowing of spread is favorable for the arbitrager. In addition, the widening of spreads in normal market is restricted by the carrying charges while in the inverted market, the contango of the nearby contract relative to the forward contracts may be very high, so this bear spread has a limited potential for profitsbut an unlimited potential for losses.

2.        Cross market arbitrage

Cross market arbitrage is a kind of arbitrage among different exchanges.

For example, when the spread between WTI crude oil futures on NYMEX and Brent crude oil futures on IPE is lower than a reasonable level, a trader may sell Brent crude oil contracts while buying WTI crude oil contracts, and then makes profits by hedging and closing out positions in both contracts when the price relationship between two markets returns to normal; and vice versa.

Example: OnJuly 1, the NYMEX December light sweet crude oil futures contract (WTI crude oil futures)  is quoted at USD53/barreland the IPE December Brent crude oil futures contracts is quoted at USD48/barrel, hence the spread of USD5/barrel. The arbitrager believes there is a room for arbitrage and the spread will become narrow. So he bought 10 lots of Brent crude oil futures contract and sold 10 lots of WTI crude oil futures contract to expect that he can make profits by closing out the positions in both contracts simultaneously at a favorable timing in the future to make profits.

Clearly, one may buy contracts at lower price and sell contractsat higher priceif the spread is expected to narrow; otherwise, one may buy contracts athigher priceand sell contracts at lower price.

In cross market arbitrage, attention shall be paid to several factors as follows: (1) Transportation cost. Transportation cost isthe main factor for determination of the spread between the sametype of commodity traded on different exchanges. Generally, the futures price on the exchange closer to the place of origin is lower while that on the exchange far away from the place of origin is higher; (2) The difference in the delivery grades. Although the same type of product is traded in the cross market arbitrage, different exchanges have different rules on the quality grades of the product traded, which may also result in different prices; (3) Trading unit and FX rate fluctuation: in cross market arbitrage, one may have problem with different trading units and quotation systems, which may affect the results of arbitrage to some degree. In case of arbitrageamongmarkets of different countries, the arbitrager may take on FX fluctuation risk. (4) Margin and commission costs: when conducting cross market arbitrage, ainvestor is required to pay the margin and commission in both markets, with the margin occupation cost and commission included in the cost of such investor.Only at the time when the arbitrage spread between two markets exceeds the above cost will the investorconduct the cross market arbitrage.

3.         Intercommodity spread arbitrage

Intercommodity spread arbitrage refers to the use of spread between futures contracts on two different butcorrelated commodities to conduct arbitrage, i.e., buying the futures contract on one commodity in one delivery month and simultaneously selling the other futures contract on correlated commodity in the same delivery month, so as to make profits by hedging and closing out positions in both two contracts concurrently when time is favorable. Intercommodity spread arbitrage shall meet the following requirements: first, both of these two commodities shall be correlated and replaceable; second, the transactions are restricted by the same factor; Third, normally the buying and selling of futures contracts shall be done in the same delivery month.

Arbitrage among correlated commodities e

For example, there are certain reasonable spreads among such correlated commodities as fuel oil, heating oil and natural gas. When the spreads deviate from their reasonable values, there will be a room for arbitrage. That is to say, one may buy contract at lower price and sell contract at higher price if the spread is expected to narrow.

Arbitrage between raw materials and finished products

Arbitrage in this form can be conducted between crude oil and finished oil. Normally, there exists a certain spread between the crude oil as raw materials and the finished oil as refined products. When this spread deviates from normal range, the arbitrage between crude oil and finished oil is viable. That is to say, one may buy contract at lower price and sell contract at higher price if the spread is expected to narrow.

Guideline for Fuel Oil Futures Trading

Market-entering and trading diagram

1.    Flow chart for the client to enter the market for trading

2.Go through procedures for opening of account

2.    Flow chart for fuel oil futures trading and settlement

3.    Main rules on risk controlof fuel oil futures trading

4.      Flowchart for physical delivery of fuel oil futures

5.    Flow chart for EFP for fuel oil futures

Note:

1. The duration of EFP begins on the first business day of the month prior to the delivery month of the contract, and ends on the fourth-from-the-last business day (including this day). .

2. EFP is applicable to historical open positions in fuel oil futures, but not to newly opened positions on the date of application.

6. Flow chart for fuel oil hedging

(Taking November contract as an example)

Standard contract

1.       Contract text

2.       Appendices to the Contract

Contract size
The size of standard fuel oil contract 50 tons and the minimum warranted delivery size must be the integralmultiple(s) of 50 tons.

Quality Specifications
Fuel oil of 180CST or higher standard refers to hydrocarbon mixtures extracted from petroleum, which shall not contain any inorganic acid and waste lubricating oil, nor any additives or chemical wastes that endanger ship safety, have adverse effect on machine operating performance, do harm to human body or cause air pollution, but without excluding the addition of small quantity of additives for improving certain efficiency of fuel oil.

Quality Standard for SHFE Fuel Oil

Certified Delivery Depots
Which will be designated and announced by the Exchange in due course.

Note: new contract specification and relevant implementing rules will begin with FU1022 contract.

Futures trading rules

I. The Rules on Risk Management

1. Margin System

Tradingmargin refers to the fundsthat member depositedin Exchange’s accountto ensure the contract performance, which is occupied by the contract. Minimum trade margin for fuel oil futures contracts is 8% of the contract value.

The Exchange establishes different margin rates according to the size of open interest (OI)in one futures contract and the stage at which one futures contract is listed and operated. The details are as follows.

Margin requirements differentiated according to the size of OI in fuel oil futures contract:

Ps: X represents the total bilateral OIs (in lots) in contract of one month.

During the trading, the margin requirementsremain unchanged temporarily even though the OI in one fuel oil contract reaches total OIs for one level. If, at daily settlement, OI in one fuel oil contract reachestotal OIs for one level, the Exchange will collect the trading margin corresponding to total OIs for this level for total OIs in this contract.Any deficiency in the margin is shall be topped up before the market opening on the next trading day.

Margin rate (%)

Total OIs (0,000 lots)

Margin requirements differentiated according to the stage at which the fuel oil futures contract is listed and operated.

When fuel oil futures contract reaches to the extent that adjustment to trading margin shall be made, the Exchange should settle all the historical open positions in the contract using new margin rate when making settlement on one trading day before the execution of the new rate. Any deficiency in the margin should be made up before the market opening on the next trading day.

After entering the delivery month, the seller may use standard warrant as the contract performance guarantee of OI in the delivery month futures contract whose quantity is the same as that shown on the warrant, and the trading margin corresponding to such OI is no longer collected.

Margin requirements differentiated according to the stage at which the fuel oil futures contract is listed and operated.(Take November contract as an example)

2. Price Limit System

Price limit refer to the allowable maximum intraday price fluctuation of the futures contract with which quote exceeding the price limit is considered invalid and d and cannot be concluded.

Price limit for fuel oil futures contract is set at ±5% of the settlement prices of the previous trading day. When the situation of one-side market occurs to one futures contract on one trading day (the trading day is referred to as D₁whilethe next trading days as D₂, D₃, D₄and D₅),the corresponding adjustment to the price limit and margin rate for this futures contract will be made as below:

On D₄, the Exchange may decide to apply either one of the following two measures to fuel oil futures contract based on market conditions:

Measure 1: On D₄, the Exchange decides and announces that on D₅, it will take one or several of the following measures: raise trading margin on one side or two sides, by the same rate or different rates, for part of members or all the members; suspend new position opening by part of members or all the members; adjust the price limit; limit the funds withdrawal; close out positions within a given time; and close out positions forcibly. The adjusted price limit shall not exceed 20%. After the Exchange announces the adjustment to the margin level,any deficiency in the margin should be made up before the market opening on D_5. If D₅‘s price limit for this contract is not triggered, D6‘s price limit and margin rate for this contract will be restored to the regular level; if the price change in this contract on D₅hits the price limit again inthe same direction as that on D₃, the Exchange may announce this situation as abnormalities and take risk control measures as per relevant rules. If the price change in this contract on D₅hits the price limitin a direction opposite to that on D₃, it will be regarded as a new round of one-side market, i.e., the D₅shall become D₁, and the margin rate and price limit for the following trading day shall be set pursuant to Article 13 of the Rules on Risk Control and Management.

Measure 2: at the daily settlement on D₄, the Exchange shall automatically match the unfulfilled order for liquidation placed at D3’s market closeat D3’s price limit, with the positions held by client (or Non Futures-firm Members) who gained profits from his net positions in this contract, based on the proportion of open position.  If one client holds positions inboth directions, such positions shall be offset by his own opposite one first and then the liquidation shall be conducted following the above methods:

3.        Risk management in case of high price fluctuation

Measures to be taken: raising the margin rate, restricting the funds withdrawal, suspending the opening of new positions, adjusting the price limit, closing out position within the required time, forced liquidation and so on. The adjusted price limit shall not exceed 20%.

In the event the accumulated increase or decline (N)in one fuel oil futures contractfor three consecutive trading days reaches12%(i.e. D₁,D₂ and D₃); or the accumulated increase or decline (N)for four consecutive trading days reaches 14%(i.e. D₁,D₂,D₃ and D₄); or the accumulated increase or decline (N)for five consecutive trading days (i.e. D₁,D₂,D₃ ,D₄and D₅) reaches 16%, the Exchange may take one or several of the following measures base on market conditions: raise trading margin on one side or two sides, by the same rate or different rates, for part of members or all the members; suspend new position opening by part of members or all the members; adjust the price limit; limit the funds withdrawal; close out positions within a given time; and close out positions forcibly. The adjusted price limit shall not exceed 20%.

N is calculated as below:

t = 3,4, 5

P₀: the settlement price of the business day before D₁

P _t: the settlement price of D _t, t =3, 4, 5

P₃ : the settlement price of D₃

P₄: the settlement price of D₄

P₅: the settlement price of D₅

4.        PositionLimit System

(1) Position limit refers to themaximum one-side speculative positions in one futures contract that can be held by a member or a client.

The requirements on position limit ratioand open-interest limit for fuel oil futures contract at different stages (in lot)

Note: The open interest in one futures contract mentioned above is calculated bilaterally, while theopen interestlimit of Futures-firm Member, NonFutures-firm Member and client is one-sided. Theopen interest limit of Futures-firm Member is the base.

(2) The Exchange applies categorized management to hedging positions and speculative positions. The hedging positions are not subject to the limits for the speculative positions

5.        Large Trader Reporting System

When a member or client’s speculative positions in one futures contract reach or surpass 80% (including this percentage) of the speculative positions limit as prescribed by the Exchange, such member or client shall report the information on its funds and positions to the Exchange in which client shall make such report through Futures-firm Member. The Exchange may set and adjust the disclosure threshold for such open interest based on market risks.

6.        Forced Liquidation System

In one of the following situations, the Exchange shall impose forced liquidation upon the positions held by memberor client:

(1)The balance of member’s settlement reserve is negative and the deficiency is not made up within the prescribed time limit;

(2) The open interest exceeds the position limit;

(3) Forced liquidationis imposed by the Exchange as a punishment on rules-violation;

(4) According to the Exchange’s emergencymeasures, forced liquidation of positions is a must;

(5) Other situations where forced liquidation is considereda necessity.

Forced liquidation of fuel oil futures contract that falls within the scope as defined in the above (2): If the client’s (or NonFutures-firm Member’s ) positions exceed the limit, his (or NonFutures-firm Member’s ) positions beyond the limit will be forcibly closed out. If Futures-firm Member’s positions reach or exceed the limit, he shall not open any new position in the same direction to trade.

II. The Rules on Hedging Management

Hedging refers to the buying (or selling)futures contracton the same commoditiesin the futures market thatare in the direction opposite to trade with a same quantity in the spot market. Therefore, regardless of the extent to which the price fluctuation will reachin the spot market, it will always end up with a loss in one market but a gain in the other market with the amount of losses nearly equal to the profits, so as to avert the risks involved.

Hedging position is subject to approval system. Hedging trade is classified into long hedging and short hedging.

According to the Rules on Fuel Oil Hedging Business (Trial), hedging position for Fuel Oil futures contracts is classified into hedging position in normal months (defined by this Rule as the period from the listing of futures contact to the last trading day of the third month before the delivery month), and hedging position close to the delivery month (defined by this Rule as the second month before the delivery month and the first month before the delivery month). The member or client will not be allowed to apply for hedging position close to the delivery month until having applied and obtained hedging position in normal months.

1.        Materials to be submitted by clients applying for hedging position in normal months

Member or client applying for hedging position in normal months is required to fill out the Application (Review and Approval)) Form for SHFE Fuel Oil Hedging Position in Normal Months, and submit the following supporting documents to the Exchange:

(1) Copy of enterprise's duplicate business license;

(2) Physical products operation performance of current year and the previous year;

(3) The hedging plan of the enterprise (including analysis on risk sources, setting of hedging goal, defining the quantity of delivery or liquidation);

(4) Additional supporting documents required by the Exchange

2.  Materials to be submitted by clients applying for hedging positions close to delivery month

Member or client applying for hedging positions close to delivery months shall fill out the Application (Review and Approval) Form for SHFEFuel Oil Hedging Position Close to Delivery Month, and submit the following supporting documents to the Exchange:

In addition to the above supporting documents, the Exchange may also ask member or client to provide other supporting document it considers necessary.

3.Time for hedging application

Hedging application shall be submitted before the last trading day of the second month prior to the delivery month of the hedging contract. Otherwise, the Exchange will not accept the application for hedging position for contract with this delivery month. The hedger may apply for hedging positions for contract with multiple delivery months at once. The Exchange will conduct the review and approval procedures within five trading days upon receipt of the application for hedging positions.

4.        Time for opening the hedging positions

Member or client who has been granted hedging position shall establishpositions as per the approved trading position (or positions) before the 15^th day of the first month prior to the delivery month of hedging contract. Failure to establishpositons with the given time limit will be considered the automatic waiver of such hedging position. The hedging position shall not be used repeatedly since the first trading day of the month before the delivery month.

III. Settlement Procedures and Relevant Rules

Settlement refers to the business procedures for calculation and transfer of member’s margin, profits and losses, transaction fees, delivery payment and other funds subject to the trading results and relevant rules of the Exchange. 

1.        Daily settlement

The Exchange opens a special settlement account at each futures margin depository bank to deposit member’s margins and other related funds. Member is required to open special funds accounts in the futures margin deposit banks to deposit margins and related funds.  The Exchange institutes the split-account management over margins deposited in the Exchange’s special funds accounts by members.

The Exchange adopts the marked-to-market system, i.e., after the end of daily trade, the Exchange settles the profits and losses, margins, transaction fees and taxes for all contracts at daily settlement price, transfers net balance of the receivables and payables on lump-sum basis, and increases or reduces the member’s settlement reserve accordingly.

Call margin: after themarket is closed every day, if the balance of settlement reserve after the settlement is lower than the minimum requirements, member is required to deposit additional funds to meet the minimum requirementsbefore 8:30am on the next business day. Otherwise, if the balance of settlement reserve is positive but lower than the minimum requirements, member is prohibited from opening any new position. If the balance of settlement reserve is negative, the Exchange may impose the forced liquidation as per relevant rules.   

2.        Marketable securities

Approved by the Exchange, member may use the marketable securities as themargin. But funds like losses, fees and taxes shall be cleared off as monetary capital. Clients shall appoint Futures-firm Member to deposit the marketable securities.

Futures-firm Memberwho uses client’s marketable securities as the margin, shall provide the Letter of Authorization by Client for Special Purpose signed by the client. However, in the event client’s standard warrant is used as the margin, such client may assign authorization to the member in standard warrant management system and submit such authorization to the Exchange.

The settlement department of the Exchange is in charge of the business of accepting marketable securities as the margin. The daily closing time for the business is when the trading is closed. In case of any special situation, the Exchange may extend the daily closing time for the business.

(1)     Category of marketable securities

Standard warrant: standard paper warrant is not allowed to be used as the margin. It was only after the member or client has undergone formalities for sending the standard paper warrant back to the depot and resuming its electronic form can they use such warrant as the margin. 

Other marketable securities certified by the Exchange.

(2) Formalities regarding the use of marketable securities as the margin

n   Application

Member is required to submit application to the Exchange when undergoing formalities regarding the use of marketable securities as the margin. Member who uses client’s marketable securities the margin, shall provide the Letter of Authorization by Client for Special Purpose signed by the client. However, in the event client’s standard warrant is used as margins, such client may assign authorization to the member in standard warrant management system and submit such authorization to the Exchange.

n   Verification of deposit

After the application was approved by the Exchange, member who usesthe standard warrant the margin shall submit the standard warrant in electronic form to the Exchange via the Standard warrant Management System, so as to go through formalities regarding deposit. (See the Rules on Standard Warrant Management for specific operational method).

The verification of deposit of other marketable securities shall comply with the Exchange’s relevant rules.

(3) Method for calculating the value of marketable securities

In the event of using standard warrant as the margin, its market value is calculated using the daily settlement priceof futures contract on this product in the nearest delivery monthas reference price. The amount that can be used as the margin shall not exceed 80% of the market value of the standard warrant. The amount after discount refers to the amount that can be used as the margin after the market value of marketable securities is discounted.

The reference price for other marketable securities used as the margin is approved by the Exchange.

The Exchange will reset reference price for marketable securities in the above-prescribedway when making daily settlement and will adjust the amount after discount accordingly.

IV. Delivery procedures and relevant rules

1.        Settlement price upon delivery

Settlement price upon delivery of fuel oil futures is the reference price for delivery and settlement of the fuel oil futures, which is the time-weighted average price of such contract in the last ten trading days.

Pi is the settlement price of the day in corresponding trading day i; 

For the 9th day before the last trading day, i=1; for the 8th trading day before the last trading day, i=2; …for the last trading day, i=10.

During the settlement upon delivery, both the buyer and the seller will carry out the settlement according the settlement price upon delivery of the contract.

2.        Contract size

The size of standard fuel oil contract is 50 tons and the minimum warranted delivery sizeis the integral multiple (s) of 50 tons.

3.        Documents and certificates necessary for delivery of commodities

n   Domestic fuel oil: the original copy of inspection certificate issued by the quality assayerdesignated by the Exchange must be provided.

n   Imported fuel oil: the Customs Declaration for Imports, the original copy of the Customs Release Sheet (the Exchange will return the original after having it copied.), the Statutory Commodity Inspection Certificate and the original copy of Inspection Certificate issued by the quality assayer designated by the Exchange, must be provided.

4.        Delivery fees

Both the buyer and seller who conduct physical delivery shall pay the delivery fees to the Exchange at RMB 1 Yuan/ton respectively.

If the legitimate holder of standard warrant takes delivery by oil tank truck, it shall pay the operation fees to the depot at RMB 50 Yuan/ton.

5.        Delivery method

n   Physical delivery of the matured fuel oil futures contractwill be conducted according to standard delivery procedures.

n   Physical delivery of the outstanding fuel oil futures contract can be conducted by means of Exchange for physical (hereinafter referred to as EFP). Both parties to such delivery shall submit the application and pair them up successfully in advance in the event of delivery by EFP (including warrant and ship-to-ship delivery).

6.        Inspection methods and assayers

The load-in and load-out of oil products is subject to the inspection by the Exchangedesignated assayer. ASTM D4057 is applied to sampling. See the standard fuel oil futures contract for testing method.

n   For load-in of oil products, the seller chooses assayers among those designated by the Exchange while for load-out of oil products, the buyer chooses assayers among those designated by the Exchange..

n   In the event delivery depot has disputes over the assayer chosen by the buyer or the seller, it may consult with the buyer or the seller to re-designate an assayer. If consultation fails, delivery depot may file application to the Exchange for it to designate the assayers. Both thebuyer and seller, as well as the depotshall assist the designated assayers in inspection works.

n   The inspection fees will be borne by the buyer and sellerrespectively.

7.        Load-in declaration

Before making shipment to the certified delivery depot, the consignor shall go through formalities for load-in declaration (delivery pre-declaration), submit to the Exchange the fuel oil load-indeclarationand the application for production of standard warrant. The contents of load-in declaration include varieties, grade, quantity, shipper, name of delivery depot to be added into the list of the certified delivery depotand so on. Client shall appoint the Futures-firm Member to go through procedures for load-in declaration (delivery pre- declaration).

n   Review and approval of load-in declaration

When the storagecapacity is allowable, the Exchange, after taking into account the willingness of consignor, will decide whether to approve the load-in declaration within 3 trading days. The consignor shall make shipmento the certified deliverydepot as determined in the approved load-in declaration within the valid period as prescribed by the Exchange. The fuel oil that enters the depot without approval of the Exchange or beyond the valid period cannot be used for delivery.

n   Deposits for load-in declaration

The materialssubmitted by the consignorfor load-in declaration shall be authentic. The consignor shall pay the deposits for declaration at RMB30 Yuan/ton. The deposits for declaration will be transferred from member’s settlement reserve accountby the Exchange.

If the consignor fulfills the declaration as per the approved load-in declaration within valid period, the Exchange will settle and refund the deposits for declaration into member’s settlement reserveaccount after the consignor has obtained the standard warrant; if the declaration is partially fulfilled, the corresponding deposits will be refunded as per according to the actual arrival quantity. If the consignor fails to fulfill the declaration, the deposits for load-in declaration will not be refunded and be used by the Exchange as the payment to deliverydepot.

8.        Load-in Inspection

Before the load-in of oil products, the consignor is required to appoint the assayer designated by the Exchange to conduct the inspection. The inspection is divided into quality inspection and quantity inspection.

Quality Inspection over load-in oil products

Before the load-in of oil products, the assayer shall collect samples from the oil in the cabin (sample A) and the existing oil in the depot (sample B) respectively and then seal the samples. Sample A is divided into sample A1 and sample A1, in which sample A1 refers to loaded-in fuel oil sample from single compartment or single container (Multiple), and sample A2 refers to mixed sample of certain proportion to sample A1. After the load-in of oil products, the assayer shall collect the sample again from the mixed oil in the depot (sample C), test it and then issue the inspection report. If the sample C is up to grade after testing, it means the quality of oil products delivered by the consignor is up to grade and the inspection report on Sample C serves as the quality inspection report on oil products delivered by the consignor.

If sample C is not up to grade after testing, the assayer shall assay sample A and sample B. And the results show the following four scenarios:

(1) If sample A is up to grade but sample B is not, it means the quality of oil products delivered by the consignor is up to grade. Therefore, delivery depot shall be held responsible for non-conforming oil products after mixing in the depot, as well as for inspection fees for sample A and sample B;

(2) If sample B is up to grade but sample A is not, it meansthe quality of oil products delivered by the consignor is not up to grade. Therefore, the consignor shall be held responsible for non-conforming oil products after mixing in the depot, as well as for inspection fees for sample A and sample B;

(3) If both sample A and sample B are up to grade, it means the quality of oil products delivered by the consignor is up to grade. Therefore, delivery depot shall be held responsible for non-conforming oil products after mixing in the depot, as well as for inspection fees for sample A and sample B;

 (4) If neither of sample A and the sample B is not up to grade, it means the quality of oil products delivered by the consignor is up to grade, neither is the existing oil in the depot. Therefore, the consignor and the oil depot shall be jointly held responsible for non-conforming oil products after mixing in the depot, with the inspection fees for sample A on the part of the consignor and that for sample B on the part of delivery depot.

In the above four scenarios, if either sample A1 or sample A2 is not up to grade after testing, sample A will be regarded as non-conformity. The inspection report on sample A serves as the quality inspection report on oil products delivered by the consignor.

Inspection on quantity of the load-in oil product is subject to the measurement by the staff gauge for tank capacity. 

9.Standard Procedures for Delivery

Standard procedures for delivery refer to the deliverymethod through which both the buyer and seller performs the physical delivery of matured contracts in the form of standard warrant (in the unified form prepared by the Exchange) as per the required procedures.

Pursuant to article 4 of the Implementing Rules on Delivery of Fuel Oil Futures (Trial), member shall go through procedures regarding the physical delivery on behalf of its client and in the name of member at the Exchange. Clients who are unable to present or accept VAT invoice are not permitted to conduct physical delivery.

After the closing of one fuel oil futures contract on the 3^rdtrading day of the last trading day, the open interest (OI) in such fuel oil futures contracts held by natural person client shall be 0 lot. Since the 2^ndtrading day before the last trading day, the OI held by natural person client in this month will be forcibly liquidated by the Exchange directly.

The delivery of matured contracts shall be conducted and finished within the 1^st to 5^thfirst five business days of the delivery month, which are known as the 1^st, 2^nd, 3^rd, 4^th and 5^thdelivery day respectively. The 5^thdelivery day is regarded as the last delivery day.

n   The 1^stdelivery day

 (1) The buyer shall submit to the Exchange a Letter of Intent on Commodities in Demand (in the unified form prepared by the Exchange) within the 1^stdelivery day.

(2) The seller shall submit to the Exchange the valid standard warrants with storage fees paid via standard warrant management system within the 1^stdelivery day. The storage fees are at the expense of the seller until the end of the 5^thdelivery day (including this day). The storage fees after the 5^th delivery day will at the expense ofthe buyer. (The fees items and standard of the certified delivery depotwill be approvedand announced by the Exchange in due course.)

n   The 2^nddelivery day

The Exchange assigns the standard warrants. On the basis of the available resources, the Exchange conduct the matching of standard warrants in principles of time priority, rounded up to the integral number, near-place matching and overall planning.

n   The 3^rddelivery day

(1) The buyer makes the payment and obtains the warrant. The buyer shall go to the Exchange to make the payment for goods and obtain the standard warrant before 14:00 on the3rd delivery day.

(2) The seller receives the payment. The Exchange shall pay the seller before 16:00 on the 3^rddelivery day. The Exchange may delay such payment to the seller under special circumstances.

n   The 4^thand 5^thdelivery day

The seller submits the VAT invoice and the Exchange settles and refunds the corresponding margins.

10. Procedures for transfer of warrants

For physical delivery of standard warrants at the Exchange, the procedures are as follows:

(1)Clients with short positions transfer the standard warrants to Futures-firm Member with short positions for physical delivery after the endorsement;

(2) Members with short positions submit the standard warrants to the Exchange;.

(3)The Exchange assigns the standard warrants among members with long positions;

(4) Futures-firm Memberwith long positions assigns the standard warrants to clients with long positions.

If within the delivery period, delivery procedures concerning standard warrant, payment for goods and VAT invoice are completed before 14:00 of the day, the Exchange will settle and refund the corresponding margins for that day. If the delivery procedure is completed after 14:00 of the day, the Exchange will settle and refund the margins on the next trading day.

11.      Take the delivery

n   When the legal holder of standard warrant takes the delivery, delivery depot is allowed to make the shipmentonlyafter confirming that the standard warrant is error-free after verification. The consignor may take the delivery on its own at the depot, or appoint the delivery depot to make the shipment.

n   Deliverydepot shall circulate and heat the oil products in the oil tanks at the time of load-out, and the temperature of load-out oil products shall not be lower than 40⁰C

n   Quality inspection

When the legal holder of standard warrant takes the delivery, such holdershall appoint the assayer designated by the Exchange to conduct on-site inspection on quality and quantity of oil products for delivery. The inspection on quantity of load-out oil products is subject to the measurement by staff gauge of tank storage capacity. If the load-out quantity is less than 3,000 tons, the assayer may choose flow meter or other measurement tools. The quality inspection is subject to the sampling within the oil tank. The samples are divided into sample A and sample B, with the former used for test and the latter sealed.

Failure of the holder of standard warrant to appoint an assayer designated by the Exchange to conduct the inspection will be deemed that suchholderconfirms that shipment made by the certified delivery depot is error-free while delivery depot will no longer accept the application for disputes over the oil products for delivery.

n   Acceptance of disputes over quality

If the consignee has disputes over the quality of products for delivery, he shall submit to the delivery depot a written application together with the quality appraisal conclusion issued by the assayer designated by the Exchange within 10 business days afterthe completion of physical delivery. Failure to submit the application within the specified time limit will be deemed that the consigneehas no disputes over the products for delivery while delivery depot will no longer accept the application for disputes over the oil products for delivery. 

12. Criteria for ullage, overfill and underfill

Total ullage of load-in and load-outat a time shall not exceed 2‰, with the loss shared by the consignors applying for load-in or load-out on a 50:50 basis.

Overfill and underfill: the oil productunderlying each standard warrant weighs 50 tons. At the time of load-in or taking the delivery, the actual overfill and underfill of oil products shall not exceed ±3%.

Settlement of the overfill and underfill

The consignor shall settle the overfilled and underfilled (after deducting 1‰ of ullage)load-in oil products directly with the delivery depot within 3 business days after the completion of load-inat the settlement price of the nearest month fuel oil futures contract on the business day before the completion of load-in.

The consignor shall settle the overfilled and underfilled (after deducting 1‰ of ullage)load-out oil products directly with the delivery depot within 3 business days after the completion of load-out at the settlement price of the nearest month fuel oil futures contract on the business day before the completion of load-out.

13. Exchange for Physical (EFP)

(1) Definition

EFP refers tothe exchange activity in which members (clients)who hold contracts of the same month but in opposite direction, reach an agreement and submit to the Exchange the application for closing out their respective positions on their behalf at the price as specified by the Exchange upon the approval by the Exchange, as well as for exchanging of warrants and bills of lading or the ship-to-ship delivery (involving products with the same quantity, direction, type or approximate type as that of the product underlying futures contract) at an agreed price.

Physical delivery of the outstanding fuel oil futures contract can be realized by means of EFP.

EFP is applicable to historical open positions in fuel oil future, but not to newly opened positions on the date of application.

(2) Period of application

Thedurationof EFP begins on the first business day of themonth before the delivery month of the contract, and ends on the fourth-from-the-last business day (including this day). Within the above period, both parties reaching an EFP agreement shall go through procedures regarding EFP at the Exchange. The Exchange will publish the intent of EFP for each contract once.

The seller shall submit the special VAT invoice within seven days after going through formalities regarding EFP, but no later than the third-from-the-last trading day (including this day) of the month before the delivery month of the contract.

(3) Two ways to search the EFP counterparties

---To search the counterparties by their own

---To search the counterparties based on the intent of EFPas published by the Exchange

The Exchange will publish the intent of EFP for each contract once.

Before 16:00pm on the 20th day (to be postponed if it falls on holidays) of the month prior to the delivery month of the contract, memberwith intention to conduct physical delivery of the current month contract may summit the intent of EFP (in the unified form prepared by the Exchange) to the Exchange via the Exchange’s member service system. The contents of application include the name of member, name of client, EFP delivery method (warrant delivery or delivery by ship-to-ship), delivery quantity, delivery venue, delivery date, contact method and so on.

Before 12:00 on business day immediately following the 20^th day of the month before the delivery month of the contract, the Exchange will publish all members’ intent of EFP via the member service system. Therefore, both the buyer and seller can find their counterparties on their own based on the intent of EFP published by the Exchange.

(4) Several methods for conducting the EFP

After reaching the agreement, members (clients) of both the buyer and seller holding the contractsof the same delivery month shall go through formalities regarding the application for EFP at the Exchange before 14:00 of certain trading day (the date of application ) within the EFP period, and fill out the unified application form for EFP prepared by the Exchange.

Refer to the Operational Guideline for Ship-to-Ship Delivery of SHFE Fuel Oil for the operational procedures for delivery by ship-to-ship.

If non-standard warrantis used for delivery, the copies of related purchase and salesagreement and bill of lading are required.

The Exchange will close out the original futures positions in corresponding delivery month held by both the buyer and seller applying for EFP before 15:00 on the application day at the settlement price of the delivery monthcontract on thetrading day prior to the date of application.

If standard warrantsare used in EFP, the exchange of documents including payment for goods and warrants shall be conducted via the Exchange, and the margins for EFP are calculated based on the settlement price of the delivery month contract on the trading day prior to the date of application. Such exchange will be completed in the Exchange before 14:00 on the trading day following the date of application.

If non-standard warrants (including delivery by ship-to-ship) are used in EFP, the transfer of payment for goods and documents can be completed, based on agreements by boththe buyer and seller, via the Exchange, or directly between the buyer and seller. Any disputes arising from the delivery process will be resolved by both the buyer and seller on their own,and the Exchange will no longer assume the guarantee responsibility for the performance of contract.

Appendix1: SHFE Designated Quality Assayers for Fuel Oil Futures

1.        China Certification & Inspection Group Inspection Co., Ltd.

2.        SGS-CSTC Standards Technical Services Co., Lt

3.        The Industrial Products & Raw Materials Testing Technology Center of Shanghai Entry-Exit Inspection & Quarantine Bureau

Appendix 2: Business Contact for SHFE Certified Fuel Oil Delivery Depots

Note: There is no transportation premium or discount between these certified delivery depots.

Appendix 3:     The Fees Standard For SHFE Certified Fuel Oil Futures Delivery Depots

1. Storage fees: RMB1.4 Yuan per ton per day (heating fees included). The storage fees before the last delivery day (this day included) will be borne by the seller, and those after the last delivery day will be borne by the buyer. After the fees are collected, the certified delivery depot will indicate the expiry date for payment of storagefees on the standard warrant. The consignor shall go through formalities regarding payment at the designated delivery depot by the end of each month, for which the upfront payment is viable.

2. Printing fees: The owner of the warrant will be charged the printing fees at RMB100 Yuan/piece by the certified delivery depot when applying to the depot for printing the paper warrants.

3. The depot will charge the consignor other fees for load-in of oil products such as the port charge, loading and unloading fees, port construction charge, etc.based on the applicable fees standard.

Appendix 4: The Operational Guideline for Ship-to-Ship Delivery of SHFE Fuel Oil Futures

Article 1:     Ship-to-ship delivery refers the delivery method by which both the buyer and seller perform their duty to conduct the delivery of oil products by direct ship-to-ship transfer, which shall comply with relevant rules and regulations as prescribed by the state or local governments. Forship-to-ship delivery, both the buyer and seller shall fill out the unified EFP application formprepared by the Exchange, go through the EFP procedures, and sign the related agreements.

Article 2:     During the ship-to-ship delivery, the conjunct of the flanges of the barges severs as the boundary between the risks and liabilities of the buyer and those of the seller. Both the buyer and seller shall cooperate with each other to ensure the successful ship-to-ship delivery of fuel oil.

Article 3:     The seller has the right to choose the anchorage ground for ship-to-ship delivery. The seller shall inform the buyer of the ship arrival date at least 7 days before its arrival at the port, as well as of the dynamic information on the ship 4 days before its arrival at the port.

Article 4:     The responsibilities of the seller are to complete the procedures for customs declaration, port declaration and inspection application with respect to oil products; to inform the buyer of the dynamic information on the ship such as the ship name, arrival time, anchorage ground and anchorageberth; to provide the buyer with related supporting documents; and to pay the fees for customs declaration, port declaration and inspection application.

Article 5:     The responsibilities of the buyer are toprepare the required barge, inform the seller of the barge name in writing before the operation of ship-to-ship delivery, and cooperate with the seller to complete the ship-to-ship deliveryas soon as possible.

Article 6:     The seller shall choose the assayer for ship-to-ship deliveryat his expense. The inspection includes quality inspection and quantity inspection. After completion of the ship-to-ship delivery, the assayer shall issue the Quality Inspection Certificate and Quantity Inspection certificate (Barge Measurement Certificate) to the seller. The buyer retains the copy of the above certificates.

Article 7:     Quality inspection over ship-to-ship deliveryis subjethect to the sampling from the bigger ship, and the quantity inspection subject to the measurement of the barge.

Article 8:     After completion of the ship-to-ship delivery, the captain of the barge shall sign on the fuel oil receipt. The quantity listed on the fuel oil receipt shall be the same as that on the quantity inspection certificate. The goods paymentbetween the buyer and the seller is settled on the basis of the quantity stated on the Quantity Inspection Certificate.

Appendix 5: Detailed Rules on Inspection over Fuel Oil (Futures) (Revised on March 30, 2011)

Chapter I  General Rules

Article 1     These Detailed Inspection Rules are jointly formulated by the fuel oil assayers designated by Shanghai Futures Exchange.

  Article 2     These Detailed Rules are formulated in accordance to relevant rules and regulations of shanghai Futures Exchange to ensure the businesses related to inspection over thedelivery of fuel oil futuresof Shanghai Futures Exchange (hereinafter referred to as the Exchange) is properly conducted, and to normalize the physical delivery inspection activities.

  Article 3     Businesses related to inspection over the delivery of fuel oil futures of Shanghai Futures Exchange are conducted according to these Detailed Rules.

Chapter II         Inspection Procedures

Part I         Load-in Inspection

I. The assayer accepts the application for inspection upon entrustment.

The client of the inspection over the physical delivery of fuel oil futures (hereinafter referred to as the “Client”) must appoint the assayer designated by the Exchange in writing within 24 hours before the load-in of goods. At the time of making such appointment, the Clientshall provide relevant documents as below according to the origin of goods:

1.        For load-in delivery of the imported goods unloaded directly from the big ship, the Clientshall provide such relevant documents as certificate of quality, certificate of quantity, bill of lading, etc.  

2.        For load-in delivery of the imported goods transferred by ship-to-ship from the anchorage ground, after the goods is transferred to the barge, the Client shall require relevant assayer to seal the compartment with effective sealing for the purpose of check before unloading, and provide the designated assayer with the big ship’s certificate of quality or quality certificate of the commodity assayer of the place of import, barge measurement record for commodity inspection, lead sealing record, etc.

3.        For load-in delivery of domestic goods, the Client shall appoint the designated assayer to conduct quality pre-inspection over the goods in accordance with relevant standards and methods as specified by the Exchange before the goods is unloaded from the ship and loaded into the depot. For items subject to pre-inspection, refer to part III, chapter II of these Detailed Rules.

4.        For loaded-in delivery of goods that are not transported by ship, refer to clause 3 of this Article.

The designated assayer will keep a close contact with the Clientand the designated delivery depot, so as to timely learn the dynamic information on goods delivery arrangement, and to make arrangement for inspection.

II. On-site Inspection by the Assayer

1.        Before Load-in

1.1 Pre-inspection on quality

1.1.1 The assayer shall confirm with the Client on sampling time, place and method for pre-inspection over oil products to be delivered. For instance, if the Client selects to take samples in the shore tanks (before the shipment) at the loading port, the assayer shall lead-seal the inlet and outlet valves of the shore tank after sampling. After the pre-inspection quality is up to grade, the assayer shall supervise the shipment of corresponding shore tanks. If the Clientselects to take samples from the oil ship at the loading port or unloading port for pre-inspection, the goods cannot be unloaded from the ship and loaded into the depot until the tested sample from the ship is up to grade.

1.1.2 Sampling standard: ASTM D4057

1.1.3 Sample for pre-inspection are sent to the assayer for testing based on the items, standards and methods as described in Part III of this Chapter.

1.1.4 After passing the pre-inspection, the assayer will issue the pre-inspection quality report and fax the report to the delivery depot. The depot will arrange for unloading and loading of the oil into the depot/tanks upon receipt of the pre-inspection report. The report will be delivered to the Client after having been sent to the depot by fax.

1.2 Measurement

1.2.1 Know about the conditions of the shore tanks. The measurement shore tank must be calibrated by the qualified state measurement department and have the tank capacity table within the valid period; the pigging equipment in the tank area must conform to the requirements; thepumps, valves and pipelines must be clearly arranged; and the valves can be sealed.

1.2.2 Find out the conditions of oil entrapped in the pipeline before the dipping to make it remain unchanged before and after the oil transfer; for the tank area that is not of single tank and single pipeline, the corresponding pipeline valves shall be closed and sealed.

1.2.3 Work with the measurement personnel of the depot to measure the liquid depth or ullage and bottom depth, and then measure the liquid temperature and the atmospheric temperature of the tank area. If the oil is not pumped within 8 hours after the measurement, repetition measurement shall be conducted before staring the pump, and the results will be subject to the repetition measurement results.

1.2.4 Use the density indicated in quality report issued by the designated assayer when such shore tank entered the depot last time to calculate the storage volume in the shore tank before load-in.

1.3 Sampling

1.3.1 Sample category:

Sample A1: Load-in fuel oil sample from single compartment or single container (Multiple)

Sample A2-Mixed sample of certain proportion from sample A1 (One)

Sample B-Sample from the shore tank before load-in of goods (Two)

Sample C-Sample from the shore tank after load-in of goods (Two)

1.3.2 Sampling standard: ASTM D4057

1.3.3 Collection of sample A1

1.3.3.1 Sampling time: Before the goods is unloaded.

1.3.3.2 Sample quantity: Normally one set of balanced samplesevery compartment and single container, 2 (liters) x 2 (tanks), sealed; for delivery ship of below 2,000 tons (2,000 tons included), mixed samples from the whole ship may be taken given representative samples are guaranteed( 4 (liters) x 2 (tanks)).

1.3.3.3 Delivery and storage of samples: Two sets of sample are sealed and kept in the place designated by the assayer who, at the time when inspection is required, will open either one set for inspection of single compartment, or for inspection of comprehensive sample of the whole ship (which is mixed using samples from single compartment) based on the proportion of the compartment.

1.3.4 Collection of sample B

1.3.4.1 Sampling time: Before feeding of the goods into the tank

1.3.4.2 Sample quantity: Two balanced samples every oil tank, 4 (liters) x 2 (tanks), sealed.

1.3.4.3 Delivery and storage of samples: Two sets of sample are sealed and stored in the place designated by the assayer who, at the time when inspection is required, will open either one set for inspection.

2.Afterload-in

2.1 Measurement

2.1.1 Standing time after load-in shall not be less than 6 hours.

2.1.2 Check the valve sealing and the oilentrapped in the pipelines. 

2.1.3 Work with the measurement personnel of the depot and the Client to measure the liquid depth or ullage and bottom depth, and then measure the liquid temperature and the atmospheric temperature of the tank area.

2.1.4 Use the actually measured density to calculate the quantity of load-in goods.

2.2 Collection of sample C

2.2.1 Sampling standard: ASTM D4057

2.2.2 Sampling time: After the goods enter the tank, samples will be collected concurrently with the oil tank measurement.

2.2.3 Sample quantity: Two balanced samples every oil tank, 4 (liters) x 2 (tanks), sealed.

2.2.4 Delivery and storage of samples: Two sets of sample are sealed and stored in the place designated by the assayer who, at the time of inspection, will open either one set for inspection.

3.        Calculation and double check

III. Inspection by the Assayer

1. The designated assayer will perform the inspection according to the items, standards and methods as described in Part III of these Detailed Rules.

2. All labs conducting the inspection and subcontracting labs conducting the subcontracting inspection over the samples must have obtained the approval of CNAS (China National Accreditation Service for Conformity Assessment) or equivalent level and above.

3. Sample inspection process

3.1 If sample C is up to grade after inspection, the inspection ends with the inspection report being issued accordingly.

3.2 If sample A2 is up to grade after inspection but both sample C and sample B are not, the inspection will end;

3.3 If sample B is up to grade but both sample C and sample A2are not, the inspection will end;

3.4 If all sample C, sample B and sample A2 are not up to grade, the inspection will end;

3.5 If both sample B and sample A2 are up to grade, sample C is not up to grade, A1 is subject to a separate inspection on items that are not up to grade, and then the inspection will end. 

Part II: Load-out Inspection

I. The assayer accepts the appointment to conduct an inspection

The Client must appoint the assayer designated by Shanghai Futures Exchange within 24 hours before the load-out of goods. At the time of appointment, the Client shall provide the warrant quantity for delivery of goods, and the designated delivery depot shall provide relevant data such as the number of the storage tank. The assayer will keep a close contact with the Client and the designated delivery depot, so as to timely learn the dynamic information on goods delivery arrangement, and to make arrangement for the inspection.

II. On-site Inspection by the Assayer

1.Beforeload-out

1.1 Measurement

1.1.1 The measurement will be conducted according to 1.2.1~1.2.3 under Article 2 of part I in this chapter.

1.1.2 Use the density indicated in quality report issued by the designated assayer when this shore tank entered the depot last time to calculate the storage volume in the shore tank before load-out

1.1.3 For goods below 3,000 tons, the flow-meter can be selected for weight calculation. Prepare for the load-out and record the initial data.

1.2 Sampling

1.2.1 Sampling standard: ASTM D4057

1.2.2 Sampling time: Before the goods is taken out of the tank and after it is heated and circulated.

1.2.3 Sample quantity: Two balanced samples every oil tank, 4 (liters) x 2 (tanks), sealed.

1.2.4 Delivery and storage of samples: Two sets of sample are sealed and stored in the place designated by the assayer who, at the time of inspection, will open either one set for inspection.

2.Afterload-out

2.1 Measurement

2.1.1 Standing time after load-in shall not be less than 2 hours.

2.1.2 Check the valve sealing and oil entrapped in the pipeline.

2.1.3 Work with the measurement personnel of the depot and the Client to measure the liquid depth or ullage and bottom depth jointly, and then measure the liquid temperature and the atmospheric temperature of the tank area.

2.1.4 Use the same shipment density of this shore tank before the load-out to calculate the quantity.

2.1.5 Read the last data while using the flow-meter to calculate the weight.

3.Calculation and check

III. Inspection by the Assayer

1.       The designated assayer will perform the inspection according to the items, standards and methods as described in Part III of these Detailed Rules.

2.        All labs conducting the inspection and subcontracting labs conducting the subcontracting inspection over the samples must have obtained the approval of CNAS (China National Accreditation Service for Conformity Assessment) or equivalent level and above.

Part III: Requirements on Pre-inspection Quality

Quality Standard

Fuel oil of 180CST or higher standard refers to hydrocarbon mixtures extracted from petroleum, which shall not contain any inorganic acid and waste lubricating oil, nor any additives or chemical wastes that endanger ship safety or have adverse effect on machine operating performance, do harm to human body or cause air pollution, but without including the addition of small quantity of additivesfor improving certain efficiency of fuel oil.

Quality Items