- Crude Oil Futures Q&A 2020 Edition
- Crude Oil Futures Q&A 2020 Edition
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- Low Sulfur Fuel Oil Futures 50 Q&A
- Bonded Copper Futures 40Q&A
- Bonded Copper Futures 40Q&A
- TSR 20 FUTURES 50 Q&A
- TSR 20 FUTURES 50 Q&A
- What's the significance of building a crude oil futures market in China?
- China's crude oil futures market aims to provide an effective tool against price risks for enterprises to better protect themselves against market risks in their daily operations. Although Europe and America already have mature crude oil futures markets, their prices cannot accurately reflect the demand-supply relationship in Asia-Pacific. The launch of China's crude oil futures will help to establish a pricing system as a benchmark reflecting the demand-supply relationship of the petroleum markets in China and the Asia-Pacific region more accurately, and also optimize the allocation of oil resources to better serve the real economy. Building a crude oil futures market is one of the significant steps China will take to open up and globalize its futures markets.
- What's the general idea behind the design of crude oil futures?
- Shanghai International Energy Exchange (“the Exchange”) is under a basic framework of "International Platform, Net Price Trading, Bonded Delivery and RMB Denomination". "International Platform" means trading internationally, delivering internationally and clearing internationally, with an aim to facilitate free, efficient and convenient participation by both domestic and overseas traders including transnational petroleum companies, crude oil traders, investment banks based on the global physical crude oil market so as to promote the formation of a benchmark reflecting more accurately the demand-supply relationship of petroleum markets in China and Asia-Pacific region. "Net Price Trading" means pricing based on net value exclusive of customs duty and VAT, different from the tax-inclusive pricing method currently adopted in domestic futures trading. Such arrangement will enable the domestic price to compare directly with the tax-exclusive prices on international markets, and avoid the impact of taxation policy on trading prices. "Bonded Delivery" means physical delivery based on bonded oil depots. We adopt bonded delivery mainly because bonded spot trade adopts a tax-exclusive pricing, has fewer restrictions on the participants, and may act as a link between domestic and overseas crude oil markets, which is conducive for international crude oil physical and futures traders to participate in trading and delivery. "RMB Denomination" means using RMB in trading and delivery, and foreign exchanges such as USD are accepted as margin collaterals.
- How will domestic and overseas traders participate in the crude oil futures trading?
- The trading mode of crude oil futures for domestic traders and domestic future firms is the same as that at the Shanghai Futures Exchange. As the first product on the Chinese futures market that allows international participation, there are four methods for overseas traders to participate in the trading of crude oil futures: first, directly participate in trading at the Exchange as an Overseas Special Non-Brokerage Participant (“OSNBP”); second, participate in the trading as a Client of an Overseas Special Brokerage Participant (“OSBP”); third, participate in the trading as a Client of a domestic Futures Firm Member (“FF Member”); fourth, participate in the trading through an Overseas Intermediary, which shall authorize the Client’s orders to a domestic FF Member or an OSBP. The clearing and settlement of the above OSNBPs and OSBPs with the Exchange shall be through domestic FF Members. In addition, there is no restriction for any Overseas Intermediary to introduce overseas traders to an FF Member for participating in the trading as a Client of the FF Member.
- Why do you choose Medium Sour Crude Oil as the underlying of delivery?
- The reasons for selecting Medium Sour Crude Oil are as follows: first, medium sour crude oil is relatively abundant with output accounting for 44% of the global; second, demand-supply relationship of medium sour crude oil is not exactly the same as that of light sweet crude oil, and currently, there is no authoritative benchmark for medium sour crude oil on the international market; third, medium sour crude oil is the main type of crude oil imported by China and its neighboring countries. According to statistics released by the General Administration of Customs, China imported 381 million tons of crude oil in 2016, including 183 million tons from the Middle East, which accounts for as much as 49% of the total import. Forming a benchmark of medium sour crude oil will facilitate the development of international crude oil trade.
- What supportive policies for the launch of crude oil futures have been released by relevant government authorities?
In preparation for the launch of crude oil futures, we have received a lot of supports from relevant government authorities under the State Council, including the Ministry of Finance, the State Administration of Taxation, the China Securities Regulatory Commission, the People's Bank of China, the State Administration of Foreign Exchange and the General Customs Administration. The major supportive policies issued by the above authorities are as follows:
In April 2015, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on the Value-Added Tax Policies for the Bonded Delivery of Crude Oil and Iron Ore Futures Contracts, specifying the interim exemption of VAT for the bonded delivery of crude oil futures;
In June 2015, the China Securities Regulatory Commission issued the Interim Measures for the Administration of Overseas Traders’ and Overseas Brokers’ Engagement in the Trading of Specified Domestic Futures Products , specifying the requirements for overseas traders and brokers in account opening, clearing and settlement, margin collection and deposit, etc.;
In July 2015, the People's Bank of China issued the Announcement on Matters Concerning the Administration of Cross-Border Settlement of Domestic Crude Oil Futures Trading, specifying the pricing and settlement currency for crude oil futures, opening of RMB account and the scope of receipts and payments thereof, method for calculating interest, special account management, and the requirements for anti-money laundering and anti-terrorist financing, etc.; In July 2015, the State Administration of Foreign Exchange issued the Circular of the State Administration of Foreign Exchange on Foreign Exchange Administration for Overseas Traders and Brokers Engaging in Futures Trading under Specific Domestic Categories , specifying the opening of relevant foreign exchange accounts and the scope of receipts and payments thereof, foreign exchange, method for calculating interest, special account management and report of the international receipts and payments, etc.;
In August 2015, the General Administration of Customs issued the Announcement Regarding the Bonded Delivery of Crude Oil Futures Contracts in support of the bonded delivery of crude oil futures.
These policies have laid a solid foundation for the crude oil futures of the Exchange to be traded more conveniently and closely to international markets, and also provide an easy access for domestic and overseas traders to participate in the trading of the futures contract.
- How is the central counterparty position of the Exchange specified?
As the central counterparty, the Exchange will interpose itself between counterparties to contracts traded in futures transaction as the seller to every buyer and the buyer to every seller, adopt the net settlement method and ensure all settlement and delivery for centralized futures trading. Meanwhile, the Exchange also specifies in its General Exchange Rules that the legal attributes of property rights or derived from activities such as trading, clearing and delivery of executed orders, positions closed, cash received as margin, assets either transferred or pledged as margin collaterals, paired standard warrants, or those actions adopted by the Exchange against any default shall not be revoked or invalidated when a Member enters into a bankruptcy proceeding; if a Member enters into a bankruptcy proceeding, the Exchange will still conduct net settlement for such Member’s holding positions in accordance with the General Exchange Rules and the related implementing rules.
- What are the major changes between the INE’s final rules published and the draft rules for public consultation?
After soliciting comments for the INE’s draft rules, weighing opinions from market participants and communicating thoroughly with regulatory authorities, we made revisions on the standard contracts, the threshold for trader eligibility, and measures against delivery defaults, etc. In respect to the standard contract, we adjusted the contract size to 1000 barrels per lot, making it in line with international mainstream crude oil futures contracts. In respect to the trader eligibility threshold, we set a threshold of RMB five hundred thousand (¥500, 000) for individual Clients and a threshold of RMB one million (¥1,000,000) for institutional Clients. Meanwhile, traders are required to have relevant trading experience and certain risk tolerance. In respect to measures against delivery defaults, only penalties are adopted for the default.
- What are the fund thresholds for traders to engage in crude oil futures trading?
A trader shall apply for a trading code and conform to the available fund requirements set forth by the Exchange. According to the Futures Trading Participant Eligibility Management Rules of the Shanghai International Energy Exchange, if an institutional Client applies to the Exchange for a trading code, the balance in its margin account shall be no less than RMB one million (¥1,000,000) or its equivalent in foreign currency five (5) business days prior to applying for the trading code. For an individual Client, the balance in the margin account shall be no less than RMB five hundred thousand (¥500,000) or its equivalent in foreign currency five (5) business days prior to applying for the trading code. Meanwhile, both institutional and individual Clients are required to pass relevant knowledge tests and have relevant trading experiences. The margins needed to trade one lot of crude oil futures contract depend on various factors such as the contract size, crude oil futures price and margin requirements. Traders shall assess various market risks and make rational investments in light of their own risk tolerance. Judging by the current international crude oil price, the value per contract of China’s crude oil futures will be about RMB three hundred thousand (¥350,000) . If the Exchange collects a 5% margin and the Member collects a 7% margin, a trader eligible for account opening and that has successfully opened the account needs to pay a margin of RMB twenty four thousand (¥24,000) to trade one lot of crude oil futures contract. Besides, the Exchange has also set requirements for the minimum clearing deposit. The minimum clearing deposit is RMB two million (¥2,000,000.00) for a FF Member, and RMB five hundred thousand (¥500,000) for a Non-Futures Firm Member. Meanwhile, in order to increase the Members' resistance to risks, if a Member is authorized by entities such as overseas brokers to conduct the clearing, its minimum clearing deposit shall increase in light of the number of authorizing entities. If a futures firm that is a Member of the Exchange participates in crude oil futures trading on behalf of domestic investors , its minimum clearing deposit shall be RMB two million (¥2,000,000.00). If such firm also conducts clearing for an Overseas Special Participant, its minimum clearing deposit shall be RMB four million (¥4,000,000.00).
- As the first internationalized futures product in China, how will you strengthen the risk management?
With respect to risk control, we will strictly adhere to the measures that have been proven effective in domestic futures markets, such as margin requirements, trading code system, position limit and large trader position report. Meanwhile, in light of the risks from overseas traders and features of crude oil futures trading, we will actively conduct overseas trader eligibility reviews, require traders to open accounts in real names and to declare accounts with actual control relationship, intensify the management of dedicated fund accounts and the enclosed operation of margins, work to establish various forms of joint supervisory mechanisms with overseas futures regulatory authorities, and explore practically feasible measures for joint cross-border supervision and investigation.
- What preparations has the Exchange made for the launch of crude oil futures? What remains to be done in the future?
The Exchange was established with the approval of the China Securities Regulatory Commission as a limited liability company fully owned by the Shanghai Futures Exchange, and registered in the China (Shanghai) Pilot Free Trade Zone in November, 2013. Since its establishment, under the principle of “internationalized, market-oriented, ruled by law, and professionalized”, the Exchange has endeavored to build a global trading network and an impartial, fair, open, efficient and safe trading platform for domestic and overseas market participants so as to attract wide participation of petroleum companies, financial institutions and other investors around the world.
Under the general framework of "International Platform, Net Price Trading, Bonded Delivery and RMB Denomination", the Exchange has formulated an overall plan for crude oil futures, which has sorted out and optimized all the aspects of the crude oil futures, including contract design, selection of deliverable grades, risk control in trading, clearing and delivery, and the admission of overseas investors. And finally the Exchange formulated a set of rules in conformity with market demand. In the next stage, the Exchange will make all necessary preparations for the launch of crude oil futures in accordance with the business rules, including accepting applications for Memberships or qualifications of Overseas Special Participants, accepting applications from banks, delivery storage facilities, and inspection agencies, and carrying out a market-wide simulated trading. After completing all preparations, the Exchange will strive to launch the crude oil futures within this year.