Operating Manual for Lead Futures Contract Trading

  

2011 Edition

Shanghai Futures Exchange

http://tsite.shfe.com.cn

 

Operating Manual for Lead Futures Contract Trading (2011 Edition)

 

This operating manual is for reference only. For updates please call relevant departments of Shanghai Futures Exchange at 8621-68400000 or visit http://tsite.shfe.com.cn.

Contents

 

 

l  Variety Profile /01

Natural Quality and Application of Lead /01

Production of Refined Lead in China /4

Consumption of Refined Lead in China /6

Import & Export of Refined Lead in China /8

Major Factors Influencing Lead Price /9

 

 

 

SHFE Lead Contract and Related Regulations

 

l  Lead Contract and Appendix /08

l  Key Points of Detailed Trading Rules /14

l  Key Points of Detailed Settlement Rules /14

l  Key Points of Detailed Delivery Rules /15

l  Key Points of Risk Management System /18

l  Key Points of the Rules on Hedging Trade /22

 

 

Appendix 1: Detailed Rules on Lead Ingot Surface Quality Inspection (for Futures Delivery) (Tentative) /24

Appendix 2: Rules on Lead Hedging Trade (Tentative) /27

Appendix 3: Registered Trademark, Packaging Requirements and Premium/Discount Standard of Lead Futures /32

Appendix 4: Certified Delivery Warehouse of Lead Futures and Its Fees Standard /33

 

 

 

Variety Profile

 

Natural Quality and Application of Lead

 

Natural Quality of Lead

Lead is a kind of frequently used non-ferrous metal, with its annual production and sale ranking 4^th among all the metals of the kind (after aluminium, copper and zinc). Lead has a chemical symbol “Pb” (“Plumbum” in Latin), atomic number 82, the highest among all stable chemical elements. With a density of 11.34g/cm³, melting point 327.5℃ and boiling point 1,740℃, it has strong anti-radiation-penetration performance. Lead is silver gray glassy heavy metal easy to oxidize and produce a layer of lead oxide or lead subcarbonate which removes the glass of the lead surface and prevent further oxidization. Lead in low in electric conductivity and high in resistance to chemical corrosion. It is soft with weak ductility and strong malleability.

 

Main Usage of Lead

The consumption of lead focuses on lead acid cell, cable sheath, lead foil and extrusion products, lead alloy, pigments and other compounds and ammunition. Lead acid cell is the biggest lead consumption field. The lead consumption for lead acid cell in U.S.A, Japan and China accounted for 86%, 86% and 81.4% respectively in 2009. The consumption of lead in other fields is low as per the requirements of environmental protection.

Lead can be fully recycled without any loss of physical and chemical performance. Currently 90% of the lead that can go into the recycling chain is recycled.

 

世界铅消费结构图：Structure Chart of Lead Consumption Worldwide

 

电池：Cell

电缆护套：Cable sheath

铅管铅板：Lead pipe and tinplate

铅弹：Plumb

铅合金：Lead alloy

化工：Chemical industry

其他：Others

 

数据来源：安泰科              An Taike

Distribution of World’s Lead Resources

The lead in earth crust often has intergrowth with zinc and copper to form lead zinc ore or lead zinc copper deposit that contains not only lead, zinc and copper but gold, silver, bismuth, cadmium, indium, germanium, tin, etc. Therefore, it is necessary to obtain concentrate that contains 40-70% lead through mineral dressing before the blanch is smelted.

The abundant lead resources in the world and its high regeneration rate combined meet the demands of future global economic growth. Related data show the bright exploitation prospect of the world’s lead resources. According to the statistics of USGS, the lead reserve and reserve base of the world increased by 23.4% and 18.9% respectively from 1999 to 2009, and increased to 79,000,000 tons and 170,000,000 tons in 2007 and remain at this level now. With the world’s lead concentrate output at 3,800,000 tons in 2009, the static guarantee period of the world’s current lead reserve and reserve base is 20.8 years and 44.7 years respectively.

The lead resources of the world are concentrated in Australia, North America, China, Mid-Asia, etc. The lead reserve of the top five resource countries accounted for 68% of the total reserve of the world in 2009.

 

2009年主要国家铅储量：Lead Reserve of Major Resource Countries in 2009

 

澳大利亚：Australia

中国：China

美国：U.S.A

秘鲁：Peru

墨西哥：Mexico

其他国家：Other countries

 

资料来源：USGS         Data source: USGS

 

Production of Refined Lead in China

 

Currently, the industrialized lead smelting processes in the world include the oxygen flash smelting and electric reduction process (Kivcet), QSL lead smelting, oxygen top blown immersion smelting (ISA and Ausmelt lead smelting), Kaldor converter smelting, lead smelting in blast furnace and QSL (SKS).

The past 60 years witnessed radical changes in the lead and zinc industry of China. The technological level of lead and zinc smelting has been improving constantly and the production capacity and output in rapid growth. There are many production lines for QSL (SKS) in China.

The lead smelting capacity of China has been growing rapidly since 2000. The average yearly growth rate of lead smelting capacity reached 16.4% from 2000 to 2009. The output of refined lead has been on rise since 2000 and its growth has accelerated since 2003. The average yearly growth rate of refined lead output reached 11.2% from 2003 to 2009, lower than the growth of production capacity.

China took the place of U.S.A as the biggest refined lead producer in the world in 2003 and has maintained absolute advantage since. The lead output in western countries is on decline due to the environmental pollution during its production.

 

中国精铅产量及其在世界总产量中的比重：Refined Lead Output of China and Its Percentage in the World’s Total Output

 

万吨：10,000 tons

中国：China

在世界产量中的比重：Percentage in the World’s Output

 

资料来源：ILZSG, CNIA, 安泰科            Data source: ILZSG, CNIA, An Taike

 

The production capacity and output of refined lead in China are concentrated in the provinces of Henan, Hunan, Yunnan, Anhui and Guangxi which occupy 65.8% of total production capacity of China. At the top of the capacity list, Henan is the only province with a capacity of over 1 million tons. Its capacity accounts for 25.9% of the total capacity of China. Among the five provinces above, Anhui focuses on secondary lead while other provinces focus on primordial lead. Henan is not abundant in lead and zinc resource and the raw materials are mainly purchased from other province sand overseas market. Hunan, Yunnan and Guangxi are relatively rich in resources.

There were seven provinces whose refined lead output exceeded 100,000 tons in 2009, with Henan, Hunan, Anhui, Yunnan and Guangxi as the top five. Anhui focuses on secondary lead whose output accounts for 85.5% of its total output.

 

Consumption of Refined Lead in China

 

The industrialization and urbanization in China pushes lead consumption. China took the place of U.S.A as the biggest lead consumer in the world in 2004.

The average yearly growth rate of the apparent lead consumption in China was 14.4% from 2000 to 2009. The consumption reached 3,680,000 tons in 2009. During this period the average yearly growth rate of the real lead consumption was 21%, and the consumption reached 3,330,000 tons in 2009. The rapid development of China’s automotive, communication, financial, electric power, transportation and electric bicycle industries contribute to the growth of the lead acid cell industry. As a result, China became the biggest producer and exporter of lead acid cell in the world.

 

中国铅消费及其在世界总消费中的比重：Lead Consumption of China and Its Percentage in the World’s Total Consumption

 

万吨：10,000 tons

铅消费：Lead Consumption

在世界总消费中的比重：Percentage in the World’s Total Consumption

 

资料来源：ILZSG, 安泰科         Data source: ILZSG, An Taike

 

The main usage of lead in China is for producing lead acid cell, and second to this is lead oxide. Other usages include lead material, lead alloy, lead salt and cable. The lead consumption for lead acid cell represented the biggest growth from 2005 to 2009. Its percentage in the total lead consumption rose from 71.3% in 2005 to 81.5% in 2009.

 

中国铅消费结构变化：Changes in the Lead Consumption Structure of China

蓄电池    Cell        化工       Chemical Industry         焊料       Solder     铅弹       Plumb

护套       Sheath     铅管和铅板    Lead Pipe and Tinplate          其他       Others

资料来源：安泰科              Data source: An Taike

 

Import and Export of Refined Lead in China

 

According to the statistics of China Customs, the total import and export volume of lead in China reached USD 2.19 billion (with a year-on-year rise of 5.2%), 85.7% higher than the USD 1.18 billion in 2005. The import enjoyed constant increase. The import volume in 2009 was 204.5% higher than that in 2005 which was mainly represented by the import of lead concentrate; the export volume reached the peak in 2006 and has been on sharp decline since 2008 mainly due to the dramatic decrease in the export of refined lead. The lead trade deficit hit USD 1.94 billion in 2009, ten times bigger than that in 2005.

China has long been implementing policies encouraging the import of minerals and restricting their export. The import and export volume of lead concentrate in China was small and the export exceeded the import before 1995. The export of lead concentrate was 10,000—30,000 tons from 1995 to 1999. The export volume of concentrate has been very small while the import has grown quickly due to the rapid expansion of lead smelting capacity in China since 2000. The percentage of imported concentrate in the total refined lead output rose considerably, from 10% in 1999 to 25% in 2009. The development of the recycling industry in China contributed to the rapid increase in the secondary lead output which enjoyed a stable rise in its percentage in total output.

中国铅精矿进口及其在精铅总产量中的比重：Import of Lead Concentrate in China and Its Percentage in the Total Refined Lead Output

万吨：10,000 tons

铅精矿进口-实物：Import of Lead Concentrate-Real Object

铅精矿出口-实物：Export of Lead Concentrate-Real Object

净进口量在精铅产量中的比例%：Percentage of Net Import in Refined Lead Output

资料来源：中国海关，安泰科           Data Source: China Customs, An Taike

（以上内容主要由安泰科提供）       (The above is mainly supplied by An Taike)

 

Major Factors Influencing Lead Price

 

 

Supply-Demand Relationship

 

According to principles of micro-economics, the price of a commodity declines when its supply exceeds demand and rises when the demand exceeds the supply. Meanwhile, the price influences supply and demand in turn, i.e., supply increases and demand decreases when the price rises, while demand increases and supply decreases when the price declines. Therefore, price and supply and demand influence each other.

Inventory is an important index of supply-demand relationship. The inventory of lead is divided into two types, i.e., reporting inventory and non-reporting inventory. Reporting inventory is also called “dominant inventory” which refers to the exchange inventory. Non-reporting inventory is also called “hidden inventory” which refers to the inventory that manufacturers, traders and consumers worldwide hold. It is difficult to make statistics of such inventory because it is not announced regularly. Consequently, usually the exchange inventory is used to measure inventory changes.

 

Domestic and International Economic Development

As lead is an important non-ferrous metal variety, its consumption is highly related to economic development. Lead consumption enjoys corresponding increase when the economy of a country or region grows rapidly. Similarly, economic recession results in decreased lead consumption in some industries and consequently the fluctuation of lead price. There are two very important indices in the analysis of macro-economy. One is economic growth rate or growth rate of GDP, and the other is the growth rate of industrial production.

 

Situation of Downstream Industries

The main usage of lead is lead acid cell which is primarily used for automobiles, communication power supply, electric bicycle, etc. Therefore, whether these concentrated downstream industries of lead prosper or not influences lead consumption directly. An analysis of the changes in these downstream industries helps grasp the trend of lead consumption.

 

Import and Export Policy

Import and export policy, especially tariff policy is an important means to balance the domestic supply and demand through the control of the import and export volume of a commodity by adjusting its import and export cost. As the domestic demand increases quickly and the resource bottleneck becomes increasingly prominent, our country does not encourage the import of smelting products with high energy consumption. From 2006 on, our country reduced and cancelled export refund for many products and even raised export tax and cancelled preferential policies for furnished raw material processing. Increased export cost restrained export effectively. On January 1, 2004, the export refund rate of refined lead was lowered to 13% from 15%; from September 15, 2006 on, the export refund of refined lead was cancelled and that of lead material was lowered to 8%; Starting from July 1, 2007, the export refund rate of lead material and leadwork was lowered to 5%; from July 15, 2010 on, the export refund lead material and leadwork was cancelled.

The changes in the trading policies of China are prominently represented in the export of refined lead. Before the cancellation of the export refund of refined lead by the trading policy in 2006, a large amount of lead was exported, which made the export volume of that year a historical high. The export volume declined drastically in 2007. With the support of domestic and international price parity, the import of refined lead increased considerably and exceeded export in 2009. China became a net import country of refined lead for the first time.

 

 

Trading Direction of Fund

 

In spite of its long history, the fund industry did not have vigorous development until the 1990’s. Meanwhile, funds’ involvement in commodity futures exchange increased substantially. As is shown in the commodity market evolution of the recent decade, funds are an important driver of the many big market advances.

Funds differ greatly both in size and in operation. Generally funds fall into two categories. One is macro-fund such as hedge fund. They are big in size (nearly USD 1 million) and focus on strategic long-term investment. The other is short-term fund under the management of Commodity Trading Advisors (CTA). It is small in size (usually around USD 100,000,000). Focusing on short-term operation through technical analysis, it is also called technical fund.

Due to funds’ deeper insight into macro-economy fundamentals, learning about the action of funds is key to grasping market tendency. The commodity market movements in recent years show that funds are a huge driving force of market soar.

 

Production Cost of Lead

Production cost is the basis of the measurement of commodity price. Different mines and smelting enterprises have different estimation of production cost. The most common economic analysis method is to adopt “cash flow breakeven cost” which decreases as the value of by-product increases. There is big output of the by-product silver during the smelting of lead. Therefore, the changes in silver price also influence the production cost of lead.

 

SHFE Standard Lead Contract and Related Regulations

 

Lead Contract and Appendix

 

Contract

 

 

Appendix of Contract

 

(1) Contract size and Minimum Warranted Delivery Size

The contract size of lead contract is 25 tons/lot and the minimum warranted delivery size is 25 tons.

 

(2) Quality Specifications

a. The lead ingot for the physical delivery of this contract must conform to National Standard GB/T 469-2005 Pb 99.994 specification and have a content of lead no less than 99.994%.

b. Appearance and weight. The lead for delivery should be ingot. The weight of each ingot of domestic lead is 48kg±3kg, 42kg±2kg, 40kg±2kg, 24kg±1kg.

c. The overfilled and underfilled weight for each warrant should not exceed ±2% and the pound difference should not exceed ±0.1%.

d. The lead for each warrant must be composed of lead ingot produced by the same enterprise with the same designation, registered trademark, quality grade, shape of piece and packaging number (similar bundle weight).

e. The lead ingot for each warrant must be the registered brand approved by the Exchange and have corresponding quality certificate.

f. The warrant must be checked for acceptance by the certified delivery warehouse of the Exchange before being issued.

 

(3) Manufacturers and Registered Brands Certified by the Exchange

The lead ingot for physical delivery must be brand registered with the Exchange. The specific registered brands and premium and discount standards are otherwise prescribed and announced by the Exchange.

 

4. Certified Delivery Warehouse

The certified delivery warehouse is designated and otherwise announced by the Exchange. The premium and discount standards of remote delivery warehouse are prescribed and announced by the Exchange.

 

Key Points of Detailed Trading Rules

 

1. The automatic computer matching system of the Exchange sequences trading orders in the principle of price priority and time priority. Trading price is a price coming from the automatic matching when the buy price is higher than or equal to the sell price. The concluded price after matching is the middle one of buy price, sell price and the last contracted price.

2. Trading order is divided into three types: limit order, cancel order and orders prescribed by the Exchange. For limit order the maximum order to be placed every time is 500 lots. The minimum order to be placed for trading order is 1 lot. The quote for the trading order can only be within the limit of price fluctuation.

3. The Exchange adopts trading code recording system. Trading code refers to the special code for futures trading between members and clients, which is divided into Non trading code for Futures-firm Member and that for client.

4. The Exchange provides members, client and the public with futures trading information on a real-time, daily, weekly, monthly and yearly basis. Such trading information includes open, close, high, low, latest price, change(up & down), high buy price, low sell price, applied buy quantity, applied sell quantity, settlement price, turnover and position. No member, information operating organization, public media or individual is allowed to announce false or misleading information.

 

Key Points of Detailed Settlement Rules

Settlement refers to the business activities for the calculation and transfer of members’ trading margin, gain or loss, transaction fee, delivery payment and other related amounts based on to trading results and the Exchange’s relevant regulations.

 

1. The Exchange opens a special settlement account at each depository and custodian bank to deposit members’ margin and related amount. Members should open special capital accounts at depository and custodian banks to deposit margin and related amount. The capital flow of futures business between the Exchange and members is handled through the special settlement account of the Exchange and the special capital accounts of members.

 

2. By adopting the Account Splitting Management over margins that members deposit in their special settlement accounts, the Exchange sets up subsidiary accounts for each member and registers and calculates their funds deposit and withdrawal, P&L, trading margin and transaction fee in order of day and time. By implementing the Account Splitting Management over margin that clients deposit in their special capital accounts, Futures-firm Members set up subsidiary accounts for each client and register and calculate their funds deposit and withdrawal, P&L, trading margin and transaction fee in order of day and time.

 

3. The Exchange adopts margin system. There are two types of margin, i.e., settlement margin and trading margin. Without being occupied by contract, settlement margin refers to the funds members prepare for trading settlement in the Exchange’s special settlement account in advance. Being already occupied by the contact, trading margin refers to the funds members deposit in the Exchange’s special settlement account to ensure contract fulfilment.

 

4. The Exchange adopts market-to-market system under which after the closing of daily trade, the Exchange settles the gain and loss, trading margin, transaction fees, tax and so on using the settlement price of the day, transfers accounts receivable and payable in net amount at once, and increases or decreases member’s settlement margin correspondingly.

 

5. Members must make up the deficiency before the market opens on the next trading day if the settlement margin is lower than minimum balance after the settlement when the market is closed on a day. In case of failure to make it up, if the balance of settlement margin is lower than the minimum balance but higher than zero, such member is prohibited from opening a new position; if the balance of settlement margin is lower than zero, the Exchange will impose “forced liquidation” according to the applicable risk control and management rules.

 

Key Points of Detailed Delivery Rules

 

1. The lead ingot for lead futures delivery must be stored in indoor warehouse.

According to the National Standard GB/T469—2005 specification, lead ingot should be stored in well-ventilated and dry warehouse without corrosive substances. The upstream manufacturers and downstream consuming enterprises all store the lead indoors. In order to promote environmental protection in the circulation process and meet the storage requirements of the national standard, it is clearly prescribed that the lead ingot for futures delivery should be stored in indoor warehouse.

 

2. Quality discount regulation for lead ingot with white rust on surface

The warrant is made with a quality discount of RMB 120 for lead ingot with white rust on surface. For details see Appendix 1 Detailed Rules on Lead Ingot Surface Quality Inspection (for Futures Delivery) (Tentative).

 

3. Regulation for the position of natural person in delivery month

Since the closing of the nearest trading day but two prior to the last trading day of a lead futures contract, a natural person client shall hold nil outstanding position.

 

4. Certificates required for the deliverable commodity

Domestic product: Product Quality Proof issued by the registered producer.

Imported product: Certificate of Product Quality, Certificate of Place of Origin, Certificate of Commercial Inspection, Customs Import Duty Completion Proof and Customs Pre-collection VAT Proof. These certificates are not valid unless they are acknowledged by the Exchange.

 

5. Delivery settlement workflow

The Exchange adopts five-day delivery system. The delivery workflow is as follows:

Delivery Day One

A buyer calls for delivery. A buyer submits to the Exchange an intention for commodities which includes product, trademarks, quantity and name of the certified delivery warehouse.

A seller submits a standard warrant. A seller transfers to the Exchange a valid standard warrant of which the storage fees have been cleared.

 

Delivery Day Two

The Exchange allocates standard warrants. The Exchange collects those submitted warrants to set up a pool, out of which it allocates to the buyers. The allocation is conducted in principle of time of intent submission superiority, rounding of quantity, matching in the vicinity and resource availability.

 

Delivery Day Three

A buyer pays for the delivery and collects warrants. A buyer shall pay for the delivery to the Exchange and obtain the standard warrants by 14:00.

 

A seller collects the payment. The Exchange shall extend the payment to the seller by 16:00.

 

Delivery Day Four and Five

A seller submits VAT invoice.

 

6. The circulation procedures for physical delivery of standard warrant at the Exchange:

(1) Seller’s investor endorses the warrant and submits it to seller’s member;

(2) Seller’s member endorses the warrant and submits it to the Exchange;

(3) The Exchange puts stamp on the warrant and submits it to buyer’s member;

(4) Buyer’s member endorses the warrant and submits it to buyer’s investor;

(5) Buyer’s non-member and buyer’s investor endorse the warrant and go through relevant procedures at the warehouse;

(6) The warehouse or its representative puts stamp on the warrant and then buyer’s non-member and buyer’s investor can take or transfer the delivery,

 

Within the delivery period, in the event procedures are completed with submission of the standard warrant, VAT invoice, and remission of payment by 14:00 on the current day, the Exchange shall clear off the margins covering the delivery positions on the day. Should they be complete after the time, the Exchange shall clear off the margins on the following trading day.

 

7. Exchange futures for physical

An exchange futures for physical (EFP) is the process that members (clients), who hold the same month contracts with opposite directions, apply to the Exchange after forming an agreement, and under the approval of the Exchange, mutually offset the positions on the price that is prescribed by the Exchange and exchange the warrants that bear the same amounts, same products and the same direction with the underlying futures contracts on the price that is agreed by the two sides.

The warrant exchanged can be either standard warrant or non-standard warrant. Non-standard warrant refers to the warrant issued by relevant warehouse under the following circumstances: commodities of non-registered-trademark are stored in certified delivery warehouse; commodities of registered trademark are stored in non-certified delivery warehouse; commodities of non-registered-trademark are stored in non-certified delivery warehouse.

Time Limit of EFP: An EFP shall last from the first trading day after the last trading day of the previous month of the contract month to the second trading day (inclusive) prior to the last trading day of the contract month.

Handling of futures position applied for EFP: The positions of the buyer and seller, applied to be exchanged for physicals, will be closed out by the exchange on the settlement price of the delivery month contract on the previous trading day of the application date by 15:00 of it.

Trading margins (delivery margins) in the EFP: The margins shall be counted by the settlement price of the delivery month contract on the previous trading day of the application date.

(For details see Chapter 7 Exchange Futures for Physical of SHFE Detailed Delivery Rules)

 

 

 

Key Points of Risk Management System

Margin System

The Exchange sets different margin requirements according to the stage at which futures contract is listed and operated and different open interests in futures contract.

 

Margin requirements differentiate according to the size of open interest (OI) in lead futures contract

As from the 1st trading day of the 3rd month before the delivery month, when the total open interest (X) reaches the following:	Margin rate
X≦40,000	8%
40,000＜X≦60,000	10%
X＞60,000	12%

Note: X denotes the total bilateral OIs (in lots) for the contract of one month.

 

As from the 1^st trading day of the 3^rd month before the delivery month, when the total open interest (X) exceeds 40,000 and 60,000 lots, the margin rate of lead futures contract rises from the base 8% to 10% and 12% respectively.

 

Margin requirements differentiate according to the stage at which lead futures contract is listed and operated

Trading Period	Margin rate
From the day when the contract is listed	8%
From the 10th trading day of the 2nd month before the delivery month	10%
From the 1st trading day of the 1st month before the delivery month	12%
From the 10th trading day of the 1st month before the delivery month	15%
From the 1st trading day of the delivery month	20%
From two trading days before the last trading day	30%

 

There are six margin rate levels for the different operational stages of lead futures contract, with 30% as the highest. The margin rate is raised to 10%, 12%, 15%, 20% and 30% respectively from the 10^th trading day of the 2^nd month before the delivery month, the 1^st trading day of the 1^st month before the delivery month, the 10^th trading day of the 1^st month before the delivery month, the 1^st trading day of the delivery month and two trading days before the last trading day.

 

During the trading, the margin requirements will not be adjusted temporarily when the open interest in one futures contract reaches the total open interest for one level. If, at daily settlement, OI in one futures contract reaches the total OIs for one level, the Exchange collects the trading margin corresponding to the total OIs for this level for the total OIs in this contract. Any deficiency in the margin should be made up by the market opening on the next trading day.

 

Position Limit System

Position limit refers to the maximum amount of speculative position for one contract on one side that can be held by members or clients as regulated by the Exchange. The open interest for hedging trade is subject to applicable regulations of the Exchange instead of this article.

Position limit is implemented for futures-firm member from the listing of the contract till the delivery month. During this period, the futures-firm member’s position limit rate is 20% when the OI of one lead futures contract is not less than 40,000 lots. This period is divided into three phases in which different position limit amounts are adopted for the speculative position of non-futures-firm members and clients. From the listing of the contract till the last trading day of the 2^nd month before delivery month, the position limit amount for them is 500 lots; from the last month before delivery month, the amount is 200 lots; in the delivery month, the amount is 60 lots.

 

The position limit rate and OI limit of lead contract in different stages (Unit: lot)

 

From the listing of the contract till the delivery month			From the listing of the contract till the last trading day of the 2nd month before delivery month		The last month before delivery month		Delivery month
Lead	OI of one futures contract	Position limit rate	Position limit amount		Position limit amount		Position limit amount
		Futures-firm member	Non-futures -firm member	Client	Non-futures -firm member	Client	Non-futures -firm member	Client
	≧40,000	20%	500	500	200	200	60	60

Note: The OI of one futures contract is bilateral, and the position limit for futures-firm member, non-futures-firm member and client is one-sided; the position limit amount for futures-firm member is the base.

 

Price Limit System

The Exchange adopts price limit system in which the daily maximum price fluctuation of each listed futures contract is established by the Exchange. In the trading of futures contract, the Exchange may adjust the price limits based on market risk in the event of the following:

 

(1) Consecutive Price Limit hits in the same direction;

(2) There is long national holiday;

(3) Increased potential market risk which the Exchanges deems as significant;

(4) Other cases in which the SHFE deems it necessary.

 

When the cumulative increase or decline in one lead contract reaches 10% for three consecutive days, or 12% for four consecutive days, or 14% for five consecutive days, the Exchange may take one or more measures in the following based on market conditions: raise trading margin on one side or two sides, by the same percentage or different ones, for part of members or all the members; limit the funds withdrawal by part of members or all the members; suspend new position opening by part of members or all the members; adjust price limit; close out positions within a given time and close out positions forcibly. But the adjusted price limit should not exceed 20%.

When consecutive price limit hits in the same direction (upward and downward) occur without continuous unilateral quote, increase the price limit of lead duly and raise its margin rate correspondingly. When unilateral quotation in the same direction occurs in a lead contract, the price limit for trading day one and two is 7% and 9% respectively, and the margin rate for the closing settlement for trading day one, two and three is 10%, 12% and 12% respectively.

 

Large Trader Reporting System

The Exchange adopts large trader reporting system under which when the speculative position of one contract on one product held by members or clients reaches 80% of the speculative position limit as prescribed by the Exchange, or when it is required by the Exchange, they should report the information on their funds and positions to the Exchange. Clients must report via agent members. The Exchange may establish and adjust the position disclosure threshold based on the potential market exposures.

 

Forced Liquidation System

In the event of any of the following on the part of members or clients, the SHFE may impose forced liquidation upon them:

(1) The balance of member’s settlement margin is lower than zero and the failure to make up such insufficiency within the prescribed time limit;

(2) OI exceeds position limit;

(3) Failure to adjust the OI to the integral multiple as required within the prescribed timeline;

(4) Penalized by the Exchange for rules-violation such as the imposition of forced liquidation;

(5) Forced liquidation shall be imposed by virtue of the Exchange’s emergency measures;

(6) Other cases in which forced liquidation is required.

 

Risk Warning System

The Exchange adopts risk warning system under which in case where the Exchange considers it necessary, it may warn and mitigate risk by taking one or multiple measures, respectively or concurrently: request of report, conversation reminder, written warning, denouncement and issuance of risk warning announcement.

 

Key Points of the Rules on Hedging Trading

1. Hedging position for lead contracts is classified into hedging position in normal months and hedging position close to delivery month.

       To better serve industrial economy and national economy, based on the differences in the operational periods of contracts and materials for position approval, hedging position for lead contracts is classified into hedging position in normal months and hedging position close to delivery month. According to the rules on lead hedging, “normal month” refers to the period from the listing of a futures contact to the last trading day of the second month before the delivery month, and “close to delivery month” refers to the last month before the delivery month and the delivery month. Members or their clients shall not apply for hedging position close to delivery month until they have obtained hedging position in normal months.

 

       2. Procedures for applying for hedging position in normal months

       The materials for applying for hedging position in normal months include the following: (1) one copy of an enterprise's duplicate business license; (2) operational performance in the year and the previous year; (3) the hedging plan of enterprises (including analysis of risk source, determined goal of hedging, definite quantity of delivery or liquidation); (4) additional documents required by the Exchange.

 

       3. Procedures for applying for hedging position close to delivery month

In addition to spots operational performance, members or clients need to submit the following materials for applying for hedging position close to delivery month: (1) certificates proving the stock of physical products corresponding to the hedging application (warrant, purchase or sales contract or invoice) for short hedging; (2) proof materials such as processing order and purchase or sales contract corresponding to the hedging position for long hedging; (3) description of the implementation of the above-mentioned proof materials.

 

4. Time limit for applying for lead contract hedging position and hedging trade

The application for lead contract hedging position should be submitted by the 20^th day of the month before the hedging contract delivery month. In case of exceeding the time limit, the Exchange will not accept any hedging application for contract with such delivery month. Hedgers can apply for the hedging position for contracts with multiple delivery months at once.

The approved hedging members or clients shall set up positions with approved direction and limit before market closes on the last trading day of the month before the delivery month. Otherwise, it is deemed as waiver of the hedging limit.

The hedging position is not allowed to be used repeatedly from the 1^st trading day of the month before the delivery month.

 

5. Management of hedging trade

Members or clients with approved hedging positions must report to the Exchange in a timely manner any major changes related to the enterprises’ operations during the period. The Exchange has the right to adjust members’ or clients’ hedging positions according to market conditions and hedging enterprises’ business operation.

If the approved hedging limit (or other limit standards) is exceeded, members or clients should voluntarily adjust its hedging positions before close of the first session on the next trading day. If position is not adjusted after the deadline, or the adjusted position still doesn’t conform to relevant rules, the Exchange has the right to forcibly close out the position.

At times of heightened market risk, in order to diffuse market risk, the Exchange, when reducing positions according to relevant rules, will reduce speculative position before reducing hedging position.

 

See Appendix 2 SHFE Rules on Lead Hedging Trade (tentative) for detailed regulations on lead contract hedging.

 

 

Appendix 1

 

Detailed Rules on Lead Ingot Surface Quality Inspection (for Futures Delivery) (Tentative)

 

Chapter 1 General Principles

 

Article 1 The rules are made by the lead quality inspection organizations jointly that are appointed by SHFE according to its applicable regulations to ensure the smooth business operation of lead ingot surface quality inspection of SHFE (for futures delivery).

 

Article 2 The lead ingot surface quality inspection business of SHFE (for futures delivery)are subject to the rules.

 

Article 3 The surface quality inspection mentioned in the rules refers only to the inspection of the corrosion of lead ingot strapping (including the rust on the lead ingot surface) and the surface batch white rust.

 

Article 4 The rules apply only to the re-inspection that the clients authorizes quality inspection organization to do in the event that they have objection to the load-in inspection result by the appointed delivery warehouse of the corrosion of lead ingot strapping (including the rust on the lead ingot surface) and the surface batch white rust.

 

Article 5 The quality inspection organization implements one surface quality inspection of the declared goods only.

 

Chapter 2 Inspection Process

 

Article 6 Acceptance of Inspection Declaration by Inspection Organization

1. The legal person (applicant) applying for the lead ingot surface quality inspection for futures delivery must provide the load-in sheet issued by the appointed delivery warehouse on which the load-in time, manufacturer, trademark and production date and so on must be stated.

 

2. The applicant must fill in the commissioned lead ingot surface quality inspection confirmation (for futures delivery) and put stamp on it and then submit the application for commissioned lead ingot surface quality inspection (for futures delivery) to the quality inspection organization in written form.

 

3. The applicant must be the consignor or its authorized agent. The agent, when applying for inspection, must provide the stamped letter of authorization issued by the applicant.

 

4. The quality inspection organization shall report the Exchange for record in time when receiving the client’s application for re-inspection.

 

Article 7 Implementation of Inspection

1. The quality inspection organization determines the inspection day (within two days) when receiving the application for inspection and informs the applicant. The inspector goes to the place where the goods are stored to check the commissioned inspection confirmation and load-in sheet. In the event of any disagreement between the application form and the actual condition of the goods such as quantity, weight, name, manufacturer, trademark and production date, the inspector has the right to stop the inspection, and the applicant shall bear corresponding responsibility.

 

2. If the actual conditions of the goods agree with the application materials, the quantity of one warrant is adopted as one inspection batch.

 

Article 8 Inspection Content

The inspection of the corrosion of lead ingot strapping (including the rust on the lead ingot surface) and the surface batch white rust.

 

Article 9 Inspection Method

Visual observation.

 

Article 10 Basis for Determining Inspection Result

Basis for determining the corrosion of lead ingot strapping (including the rust on the lead ingot surface):

1. If there occurs surface ferric oxide corrosion on the steel strapping of lead ingot due to surface coating fall-off and long-time wearing and rain exposure, the corrosion of the strapping of this bundle of lead ingot (including the rust on the lead ingot surface) is determined.

2. Determining conclusion: there is corrosion on the strapping of this bundle of lead ingot (including the rust on the lead ingot surface)/there is no corrosion on the strapping (no rust on the lead ingot surface).

 

Basic for determining lead ingot surface batch white rust:

1. Surface ingot white rust:

If there occurs white striated marks on the lead ingot surface due to rain exposure during its outdoor storage, it is determined that this lead ingot had surface ingot white rust.

2. Surface bundle white rust:

If there are over 20% ingots with surface ingot white rust in a bundle, it is determined that this bundle of lead ingot has surface bundle white rust.

3. Surface batch white rust:

If there are over 20% bundles with surface ingot white rust in a lot, it is determined that this lot of lead ingot has surface batch white rust.

4. Determining conclusion: this lot of lead ingot has surface batch white rust/has no surface white rust.

 

Article 11 Issuance of Quality Inspection Certificate

1. The quality inspection organization issues preliminary inspection result when completing the lead ingot surface quality inspection (for futures delivery) as the basis for making warrant. It issues written surface quality inspection certificate (including one original and several copies) within three workdays after the inspection.

 

2. The format of lead ingot surface quality inspection (for futures delivery) (see the appendix).

 

Chapter 3 Supplementary Articles

 

Article 12 The rules are implemented after being kept in record with SHFE.

 

Article 13 The lead quality inspection organizations appointed by SHFE have the joint right to interpret the rules.

 

Article 14 Matters not specified in the rules are subject to applicable business rules of SHFE.

 

Article 15 The rules go into effect for trial implementation upon the announcement date.

 

 

Appendix 2

 

SHFE Rules on Lead Hedging Trade (Tentative)

 

Chapter 1 General Principles

 

Article 1 Subject to the related rules prescribed in the Trading Rules of Shanghai Future Exchange, the rules herein are formulated to bring the futures market's function of hedging into full play and promote the proper development of the market.

 

Article 2 Hedging position for lead contracts is classified into hedging position in normal months (defined by the Rules as the period from the listing of a futures contact to the last trading day of the second month before the delivery month), and hedging position close to delivery month (defined by the Rules as the last month before the delivery month and the delivery month).

Members or their clients shall not apply for hedging position close to delivery month until they have obtained hedging position in normal months.

 

Article 3 Members or their clients, who conduct lead hedging trade in the Shanghai Futures Exchange, henceforth the Exchange, are bound to the rules herein.

 

Chapter 2 Application for and Approval of Hedging Position in Normal Months

 

Article 4 Hedging position in normal months for lead contracts is subject to the approval system. Hedging position in normal months is classified into long hedging and short hedging.

 

Article 5 Clients shall apply to their futures-firm members for hedging trade in normal months. The futures-firm members shall evaluate the application first and then go through the application procedures in the Exchange. Non-futures-firm members shall apply to the Exchange directly and go through the procedures.

 

Article 6 Clients and Non-futures-firm members applying for hedging trade in normal months shall have the qualification of operating related products.

 

Article 7 Members or their clients applying for hedging trade in normal months shall fill in the Application (Evaluation) Form of Hedging Position in Normal Months of Shanghai Futures Exchange, and submit the following evidence documents to the Exchange:

(1) One copy of an enterprise's duplicate business license;

(2) Operational performance in the year and the previous year;

(3) The hedging plan of enterprises (including analysis of risk source, determined goal of hedging, definite quantity of delivery or liquidation);

(4) Additional documents required by the Exchange

 

Article 8 In response to applications for hedging position in normal months, the Exchange will verify the qualification of hedging applicant, examine whether the products, position, quantity and date of hedging match such things as its business scale, operational performance in the past, fund resources and so on, before determining hedging position in normal months. The hedging limit in normal month shall be within the applied volume in the proof materials.

Accumulative hedging positions close to delivery month within a year shall not exceed the annual production capacity of the year, production plan of the year or product sales of the previous year.

 

Chapter 3 Application for and Approval of Hedging Position close to Delivery Month

 

 Article 9 Hedging position close to delivery month is subject to approval systems. Hedging position close to delivery month is classified into long hedging and short hedging.

 

Article 12 Clients shall apply to their futures-firm members for hedging trade close to delivery month. The futures-firm members shall evaluate the application first and then go through the application procedures in the Exchange. Non-futures-firm members shall apply to the Exchange directly and go through the procedures.

 

Article 13 Members or their clients applying for hedging trade close to delivery month shall fill in the Application (Evaluation) Form of Hedging Position Close to Delivery Month of Shanghai Futures Exchange, and submit the following evidence documents to the Exchange: 

 

Nature of Enterprise	Manufacturer	Manufacturing plans of the previous year, warrants of hedging position or other certificates proving the stock of physical products corresponding to the hedging application (purchase or sales contract or invoice)
	Processor	Manufacturing plans of the previous year; processing order corresponding to the hedging position, warrants of hedging position or other certificates proving the stock of physical products corresponding to the hedging application (purchase or sales contract or invoice)  for short hedging, proof materials of purchase or sales plan/contract corresponding to the hedging position for long hedging
	Trading firms and others	Warrants of hedging position or other certificates proving the stock of physical products corresponding to the hedging application (purchase or sales contract or invoice)  for short hedging, proof materials of purchase or sales plan/contract corresponding to the hedging position for long hedging

 

In addition to the above-mentioned proof documents, the Exchange can also ask members or clients to provide other certificates if necessary.

 

Article 12 In response to applications for hedging position close to delivery month, the Exchange will determine its hedging position close to delivery month based on the member or client’s position, quantity, operational condition of physical products, corresponding position of futures contracts, stockpile of deliverable products at the Exchange and whether the spot and futures prices of the product go in the different direction. The hedging limit close to delivery month shall be within the applied volume in the proof materials.

Accumulative hedging positions close to delivery month within a year shall not exceed the annual production capacity of the year, production plan of the year or product sales of the previous year.

 

Article 13 If a member or client has not obtained approval for hedging position close to delivery month, its hedging position in normal month, when entering the first month before delivery month or the delivery month, will be the amount prescribed in the lead position limit system, and such amount is converted into hedging position close to delivery month.

 

Article 14 For members or clients with approved hedging position close to delivery month, after entering the delivery month, sellers of hedging position can use standard position as warranty to guarantee delivery of products in correspondence to the same quantity of futures position in delivery month.

 

Chapter 4  Hedging Trade

 

Article 15 The application for hedging position should be submitted by the 20^th day of the month before the hedging contract delivery month. In case of exceeding the time limit, the Exchange will not accept any hedging application for contract with such delivery month. Hedgers can apply for the hedging position for contracts with multiple delivery months at once.

 

Article 16 The approved hedging members or clients shall set up positions with approved direction and limit before market closes on the last trading day of the month before the delivery month. Otherwise, it is deemed as waiver of the hedging limit.

 

Article 17 The hedging position is not allowed to be used repeatedly from the 1^st trading day of the month before the delivery month.

 

Chapter 5 Supervision and Management of Hedging

 

Article 18 After receiving application for hedging position, the Exchange will start the approval process within five trading days, and will make decisions based on the following situations:

(1) Notify the applicant of approval if hedging requirements are met;

(2) Notify the applicant of rejection if hedging requirements are not met;

(3) Notify the applicant to submit additional evidence documents if documents are inadequate.

 

Article 19 The Exchange has the right to conduct inspection and supervision on members and clients’ production and operation situation, credit and performance in both futures market and cash market. Assistance and cooperation of members and related clients is required.

The Exchange has the right to require that hedging members or clients report their spot and futures trading.

 

Article 20 The Exchange will supervise and manage members or clients on how their approved hedging positions are being used. 

 

Article 21 Members or clients with approved hedging positions must report to the Exchange in a timely manner any major changes related to the enterprises’ operations during the period. The Exchange has the right to adjust members’ or clients’ hedging positions according to market conditions and hedging enterprises’ business operation.

 

Article 22 Members or clients should submit application to the Exchange in a timely manner, when they need to adjust their hedging positions.

 

Article 23 If the approved hedging limit (or other limit standards) is exceeded, members or clients should voluntarily adjust its hedging positions before close of the first session on the next trading day. If position is not adjusted after the deadline, or the adjusted position still doesn’t conform to relevant rules, the Exchange has the right to forcibly close out the position.

 

Article 24 If an approved hedging member or client, within its hedging limit, open and close out its positions frequently, or use the approved position to manipulate or attempt to manipulate market prices, the Exchange has the right to take measures including admonishment, written warning, adjustment or cancellation of its hedging position, position restrictions, position close-out order within a required time period and forcible position close-out.

 

Article 25 At times of heightened market risk, in order to diffuse market risk, the Exchange, when reducing positions according to relevant rules, will reduce speculative position before reducing hedging position.

 

Article 26 In the case of fraud or transgression in hedging application or trading, the Exchange has the right to reject the application, adjust or cancel related hedging positions, and the established hedging positions will be treated as speculation positions or closed forcibly. The involved members and their clients are subject to Guidelines for Punishment of Regulation In compliance of Shanghai Future Exchange.

 

Supplementary Provisions

 

Article 27  The Exchange retains the right of final explanation of the rules herein.

 

Article 28  The rules herein come into effect on March 24, 2011.

 

Notes: The rules are newly provided for lead contract.

 

Appendix 3

 

Registered Trademark, Packaging Requirements and Premium/Discount Standard of Lead Futures

 

No.	Country	Registered Enterprise	Production Place	Registration Date	Trademark	Premium/Discount	Dimension	Ingot Weight (kg)	Ingot/Bundle
1001	China	Henan Yuguang Gold & Lead Co., Ltd.	Jiyuan, Henan	March 2011	YUGUANG	Standard Price	620*120*80	48	20
1002	China	Yunnan Chihong Zinc & Germanium Co., Ltd.	Qujing, Yunnan	March 2011	CHIHONGXINZHU	Standard Price	620*120*80	48	25
1003	China	Zhuzhou Smelter Group Co., Ltd.	Zhuzhou, Hunan	March 2011	HUOJU	Standard Price	640*115*75	48	20
1004	China	Hunan Shuikoushan Nonferrous Metals Group Co., Ltd.	Hengyang, Hunan	March 2011	SKS	Standard Price	640*120*80	46	20
1005	China	Jiyuan Jinli Smelting Co., Ltd.	Jiyuan, Henan	March 2011	JIJIN	Standard Price	625*120*75	48	20
1006	China	Jiyuan Wanyang Smeltery (Group) Co. Ltd.	Jiyuan, Henan	March 2011	WANYANG	Standard Price	625*125*85	48	20
1007	China	Anyang Yubei gold and lead Co Ltd.	Anyang, Henan	March 2011	YUBEI	Standard Price	620*120*80	48	20
1008	China	Anyang Minshan Nonferrous Metal Co., Ltd.	Anyang, Henan	March 2011	MINSHAN	Standard Price	620*120*75	48	20
1009	China	Henan Zhicheng Gold & Lead Co., Ltd.	LINBAO, Henan	March 2011	YAWUSHAN	Standard Price	620*120*78	48	20
1010	China	Hanzhong Zinc Industry Co., Ltd.	Hanzhong, Shanxi	March 2011	BYXY	Standard Price	640*115*75	42	25
1011	China	Hunan Yuteng Nonferrous Metal Co., Ltd.	Chenzhou, Hunan	March 2011	JINYUTENG	Standard Price	640*120*75	46	20
1012	China	Anhui Copper Crown Non-ferrous Metal (Chizhou) Co., Ltd.	Chizhou, Anhui	March 2011	TONGGUAN	Standard Price	620*120*80	48	25
1013	China	Hechi Nanfang Nonferrous Smelting Co., Ltd.	Hechi, Guangxi	March 2011	ZNF	Standard Price	635*115*80	48	20
1014	China	Guangxi Chengyuan Mining & Smelting Co., Ltd.	Hechi, Guangxi	March 2011	CY	Standard Price	625*125*78	46	20

 

Appendix 4

Certified Delivery Warehouse of Lead Futures and Its Fees Standard

 

Certified Delivery Warehouse of Lead Futures