Futures Trading in China
Chinese futures exchanges are required by law to enforce futures margin requirements, T+0 no-liability settlement requirement, price limits, position limits, large account position reporting requirement, simultaneous or rolling delivery, and risk reserve requirement.
Meanwhile, Chinese futures companies are required to have clients sign both risk disclosure and client agreement and deposit futures margin before starting to trade, and they are permitted to receive only market and limit orders via writing, phone, internet, and dedicated pc terminal. Chinese futures companies are also responsible for completing delivery procedures on behalf of clients.
Risk Management Requirements
- Futures Margin - In accordance with the Administrative Regulations on Futures Trading, Chinese futures exchanges set a minimum margin requirement for each futures contract listed, but the margin requirement is raised under the following conditions - 1) the delivery date is approaching, 2) the position is getting larger, 3) price limits are being breached, 4) cumulative daily price changes reach a certain level.
- T+0 No-Liability Settlement - In accordance with the Administrative Regulations on Futures Trading, Chinese futures exchanges are required to report settlement results to clearing members by the end of the trading trade, i.e. T+0, and members (= futures brokerage companies) are also required to report settlement results to clients on the same day. If either members or clients fail to meet margin requirements, exchanges or members are respectively authorized to forcibly close members or clients' positions during the morning session of the following trading day, with profit/loss and other costs to be covered by members or clients.
- Price Limits - Price limits are calculated from the settlement price of the previous trading day.
- Position limits - Chinese futures exchanges set position limits for each futures contract listed, but hedge accounts are not subject to position limits. Price limits can be revised only once a year, with the approval of exchange board of directors, and take effect after reporting to the China Securities Regulatory Commission.
- Large Account Position Reporting - Members and large accounts that have reached 80 percent of the speculative position limit of a certain futures contract need to report to futures exchanges before 3 p.m. the following trade day 1) sources of funds, 2) five largest accounts with the same member, 3) and other required information.
- Simultaneous or Rolling Delivery Methods - All futures contracts in China, except CFFEX CSI 300 Index futures contract, which is to be cash-settled, are subject to delivery at settlement according to the simultaneous or rolling delivery method. Currently, the Shanghai Futures Exchange employs the simultaneous delivery method for all of its contracts, and the Zhengzhou Commodity Exchange uses it for all contracts except for its wheat futures contracts, which are settled according to the rolling delivery method. In contrast, the Dalian Commodity Exchange employs the rolling delivery method for all of its contracts.
- Risk Reserve - Chinese exchanges are required to collect a risk reserve contribution equivalent to 20 percent of the trading fee, although they can stop collection with the approval of the CSRC when the total amount of the risk reserve fund reaches 10 times its registered capital.
- Information Disclosure - Chinese exchanges are required to price quotes and other market information instantly, daily, weekly, monthly, and annually.
- Opening Accounts - Before clients start trading future, Chinese futures brokerage companies are required to have clients sign a futures trading risk disclosure letter and futures brokerage agreement, and deposit futures trading margins.
- Placing Orders - Chinese futures brokerage companies can accept three types of orders – market, limit, and cancel – for domestic futures contracts. Among the four exchanges, however, only the ZCE accepts all three types, and the DCE and SHFE do not accept market orders, while the CFFEX does not accept cancel orders.
- Delivery Procedures - Chinese futures brokerage companies are required to represent clients in delivery processes and deal with exchanges on their behalf, and in case clients fail to fulfill their duities, mmebers are held liable for damages.
- Margins. Zhengzhou Commodity Exchange.
- [http://www.dce.com.cn/portal/servlet/look/Measures+Of+Dalian+Commodity+Exchange+For+Risk+Management.pdf?filename=TWVhc3VyZXMgT2YgRGFsaWFuIENvbW1vZGl0eSBFeGNoYW5nZSBGb3IgUmlzayBNYW5hZ2VtZW50LjExNTc0MzY1NzczMTEucGRm Measures Of Dalian Commodity Exchange For Risk Management]. Dalian Commodity Exchange.