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Dalian Commodity Exchange (DCE) officially releases relevant business rules for the Basis Trading Platform (the “Platform” for short) on September 23, including the “Measures for Management of Basis Trading Business of Dalian Commodity Exchange (Trial)”, the “Measures for Dealer Management of Basis Trading Business of Dalian Commodity Exchange (Trial)”, and the “Measures for Dispute Resolution and Violation Handling of Basis Trading Business of Dalian Commodity Exchange (Trial)”. This Platform is another major business innovation of DCE, and a DCE official has been interviewed on the major business methods and the risk control system of the Platform.
The Platform is oriented on the forward commodity trading based on “futures price + basis” pricing, and the basis trading contracts signed at the Platform are therefore the commodity purchase and sales ones with the futures contract price plus basis as the settlement price. And the contracts can be settled by transfer, repurchase and physical delivery.
With regard to access qualification, the Platform adopts the dealer certification system. Business entities like industrial enterprises and futures company risk management subsidiaries should submit to the Platform their applications and relevant documents like the financial auditing report and the corporate credit report, and only when they are examined and approved, can they become dealers. The maximum number of dealers has been set for each product (series) to make sure that dealers taking part in basis trading are of great comprehensive strength.
In terms of trading products, iron ore and synthetic resin series (including PE, PP and PVC) are available on the Platform for quoting and trading, and dealers can apply for different products (series) according to their demand. For example, when one enterprise applies for being a dealer for synthetic resin series, it can engage in the basis trading of the products of this series at the Platform after being approved, but it needs to submit the application for being a dealer for iron ore products if attempting to conduct iron ore basis trading at the Platform.
In addition, the Platform will classify dealers into B, A and AA types according to their different capacities, rights and responsibilities. In particular, the B-type dealers should be of good credit and client resources and can only trade as the buyer; the A-type dealers should be of greater spot goods capacity and can trade as the seller or the buyer; and the AA-type dealers should be of great basis quoting and trading capacity, assume the responsibility as a market maker, and can trade as the seller or the buyer.
Two major trading methods, listed trading and agreed trading, are available at the Platform. The former refers to the trading responded by another dealer after a dealer makes public quotation for the contract at the Platform; and the latter refers to the trading responded by the designated dealer after a dealer makes directional quotation for the contract at the Platform. The major difference of these two methods is whether the basis quotation is open to the whole market.
There are two settlement methods: self-settlement and entrusted settlement by Platform. In self-settlement, the dealers can stipulate settlement-related articles in the contract by themselves, but the contract cannot be transferred or repurchased at the Platform. In entrusted settlement by Platform, bilateral settlement and trade-by-trade payment should be made according to the business rules of the Platform, and the contract is allowed to be transferred or repurchased at the Platform
The official says that as the over-the-counter market is of relatively high risks, DCE has made comprehensive design demonstration on the risk control system of the Platform, and the integral risk control measures before, during and after trading will be adopted to reduce the violation probability at most. Before trading, DCE has set up the access qualification for dealers and charge the risk security payment. During the trading, the buyer and the seller will be charged the performance security payment, and the dispute resolution system has been set up. For any dispute between dealers over the basis trading business at the Platform, it will first be coordinated by the Dispute Resolution and Violation Handling Committee under the Dealers Committee, and when the coordination fails, the two sides then apply for arbitration or file a lawsuit as agreed. After trading, DCE has made strict punishment measures. All these have lowered a dealer’ intention of breaking the contract and increased the penalty cost, thus playing an important role in avoiding and controlling credit risks.
The above systems and measures have ensured the liquidity and credit risk control of the Platform at the same time. “We hope to provide relevant industries with a fair and transparent platform to meet entity enterprises’ individualized demand on basis trading and increase the width and depth of serving the real economy by the futures market.” says the official.
