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Encourage arbitrage to enhance market efficiency
Dalian Commodity Exchange (DCE) lately released a notice that the DCE Arbitrage Management Measures (hereinafter referred to as the “Measures”) will be implemented since the settlement on July 12. After the issue of this notice, futures companies and investors have paid close attention to it. Therefore, relevant person in charge of DCE answered to reporters’ questions of market concern yesterday.
Q: Why does DCE formulate and implement the Measures?
A: Arbitrage, with low trading risk and stable return, is one of the main trading modes in the investment market. DCE has launched the calendar spread arbitrage order and the cross-variety arbitrage order in 2007 and 2008 respectively, and the trading volume and the position-holding volume of arbitrage have increased year by year. However, the transaction cost of arbitrage still remains high, and the market has repeatedly asked for the decrease of arbitrage cost. To further perfect the diversified trade ecosystem of futures market, improve the investor structure, reduce the market operating cost, enhance the market efficiency, and satisfy the demand of the mass market investors, DCE has formulated the Measures after research and offered favorable arbitrage trading margin by rule.
Q: What is the common practice in the international market?
A: In the mature foreign markets, arbitrage is one of the major futures trading modes like hedging and speculation. As arbitrage position-holding has less risk than single speculation position-holding, the international market usually offered some favorable measures to arbitrage, and the most typical ones are favorable margin and position-holding exemption.
Q: How does DCE manage customer’s arbitrage position-holding limit? Will DCE consider practice arbitrage position-holding exemption during the implementation of the Measures?
A: Arbitrage of a single contract is manifested as speculation position-holding, and the arbitrage position-holding is the combination of the speculation position-holding of different contracts. DCE’s management on arbitrage position-holding focuses on the approval of customers’ increase of arbitrage amount during the period of arbitrage position-holding. Besides, DCE has referred to the practice of the mature markets in the United States and established the position-holding exemption measures that suit the arbitrage in China’s futures market. First, DCE will exempt arbitrage position-holding in general months. As the two sides risks of arbitrage position-holding can be hedged, certain position-holding exemption will provide more space for the arbitrage trading, which is also in line with the common practice of arbitrage management in the international market. Second, DCE will exempt arbitrage position-holding in months near the delivery month. Considering the market’s arbitrage demand when the futures prices differ with the spot prices, DCE will approve the increase of arbitrage limit when the operation of contract is abnormal. With the implementation of the Measures, DCE will provide qualified position-holding with position-holding exemption in accordance with the specific market operating situation and relevant laws and regulations.
Q: How does DCE set up the charging standards and modes of arbitrage margin? How can the setting of favorable margin amount both ensure the efficiency of market operation and avoid risks effectively?
A: DCE will implement favorable margin to spread calendar position-holding and cross-variety position-holding under the premise of strictly controlling risks. At the primary stage, DCE will charge arbitrage margin as the maxim one of the two contract position-holding margin in an arbitrage portfolio, which will not only significantly reduce market cost, but also make up for the margin demand of the remaining single position-holding after one close position of the arbitrage position-holding on the one hand, and greatly cover the possible gain or loss of arbitrage position-holding during the market fluctuation on the other hand.
The Measures stipulates that during the trading, the customer’s arbitrage position-holding transacted under the arbitrage trading order will enjoy favorable margin. When placing an arbitrage trading order, DCE will only charge arbitrage position-holding margin; and in settling, DCE will first pair customers’ single position-holding according to their arbitrage margin priority, and then charge arbitrage position-holding margin; during the transaction, DCE will directly offer favorable margin to arbitrage position-holding transacted by arbitrage order; and in closing the position, DCE will first return the arbitrage position-holding margin, and then charge the margin for open position contract.
Q: What effects will the implementation of the Measures have on the market, and what’s the meaning of it? What other efforts will DCE make to promote the implementation of the Measures?
A: Arbitrage position-holding exemption and favorable margin are the common practices in the international market. The promotion of arbitrage can enrich market trading modes, reduce trading cost, and enhance capital’s use efficiency, thus creating more convenient conditions for institutional customers’ participating in the market and helping to improve the market customer structure. The practice of allowing the buying and selling of two different contracts at the same time will help to promote contract’s liquidity, form reasonable difference in prices, and improve contract structure, thus benefiting hedging customers’ engaging in hedging. The implementation of the Measures will greatly enhance investors’ enthusiasm in participating in arbitrage, thus giving full play to DCE’s market functions in improving market efficiency and serving the national economy.
Next, DCE will organize several “wget” training for its members according to the actual situation, which aims at fully interpreting the Measures and answering the questions of its members’ concern. Besides, it will conduct research and studies on its customers, so as to further understand the implementing situation of the Measures and the demand of the customers and to promote the successful implementation of the Measures.
