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The reasonable risk control system is an important factor to ensure the smooth operation and functioning of the futures market. What is the basis for the designing of the risk control system for the polypropylene (PP) futures, the first new futures product in the Year of Horse? At the “Workshop for Analysts and Business Personnel of PP Futures” held in Shanghai yesterday, an official of the industrial products business division of Dalian Commodity Exchange (DCE) said in the interview that in accordance with the product characteristics, trade characteristics and the industrial structure for the PP futures and with reference to the experience in the risk control for the plastic and chemical futures products, DCE has rationally designed the risk control system for the PP futures, which can effectively prevent and control the market risks and ensure the stable operation of the market.
In response to the designing of the price limit system, the official said that as the spot market is the basis for the futures market and the futures prices and the spot prices of commodities have high dependence, DCE has fully considered the volatility of the PP spot prices in China when designing the price limit system for the PP futures contracts. At present, China's largest consumption of the PP spot goods is recorded in the East China region represented by Jiangsu, Zhejiang and Shanghai, which sees the briskest spot trade resulting in the more representative spot market prices. Therefore, DCE selected the daily transaction prices in the region of Yuyao, Zhejiang Province, as samples to analyze the volatility of the PP spot prices. According to the calculation, in the range of the samples, the largest upward and downward fluctuation ranges of the PP spot prices stood at 4.4% and -8% respectively, with 99.76% of the fluctuations within the absolute volatility of 4% and 99.06% of the fluctuations within the absolute volatility of 3%. Therefore, in accordance with the principles for setting the price limit and the level of margin, DCE has set the price limit of the PP futures at 4%. When the PP futures contracts see continuous price limits, DCE will increase the range of the price limit and the margin level. The settings will not only effectively release market risks, but also ensure the safe operation of the market.
When the PP futures record three consecutive price limits in the same direction, the measures for coke and other futures products will be followed as the risk control means: when three consecutive price limits occur, DCE will not necessarily implement the compulsory position reduction but make judgments and decisions according to the actual situations. If the third price limit occurs on the last trading day of the delivery month, the process of delivery will directly begin; if the third price limit appears on the trading day prior to the last one of the delivery month, the trade will continue on the last trading day of the delivery month with the price limit and the margin level of the previous day; if the third price limit is seen on earlier days, DCE will, according to the market conditions, take the measures such as increasing the trade margin unilaterally or bilaterally, in the same ratio or different ratios and for some or all members, or implement the compulsory position reduction. It is learnt that the measures retain the delivery channel to fully protect the interests of the investors.
The margin system is another important means for risk control on the futures market. In the ordinary months, DCE sets the minimum trade margin for the PP futures at 5% of the contract value while adjusting the level of the minimum trade margin according to the total open interests of the contracts. Currently, the standard of the minimum trading margins for all the products on DCE is 1.25 times the price limits, that is, if the price limit is 4%, the level of margin in ordinary months is set at 5%. It is learnt that generally the futures company members would charge the clients an extra of 3% - 5% for the margin ratio besides the margin collected by DCE, with the final margin ratio reaching about 10%, the level of which will fend against the daily price fluctuation of 4%. Therefore, DCE has set the standard of the minimum trade margin for the PP futures contracts at 5%.
In terms of the designing of the margin gradients, as the apparent consumption of the PP amounted to about 14.86 million tons in 2012, most close to that PVC, the PP position base has been set at 1 million contracts with reference to the position base of PVC. Meanwhile, in accordance with the designing plan for position margin for DCE’s current industrial products, the PP position margins have been set in two gradient changes. When the total bilateral open interests are less than or equal to 1 million contracts, the trade margin will be charged at 5% of the contract value, with 7% to be charged for those of more than 1 million contracts. In addition, during the near-delivery periods the contract margin for the delivery month is adjusted on the basis of two gradients, that is, as of the tenth trading day of the month before the delivery month the margin will be charged at 10% of the contract value, and as of the first trading day of the delivery month the margin will be charged at 20% of the contract value.
The DCE official explained that in management of positions, different position limit ratios and position limits for the PP futures have been set for the futures company members, non-futures-company members and clients in different periods. For futures companies, when the total unilateral open interests are more than 200,000 contracts, the position limit ratio is set at 25%; when the total unilateral open interests are less than or equal to 200,000 contracts, no limit is set for the position ratio. The phased position limits are adopted for non-futures-company members and clients, with the limit universally at 2,500 contracts as of the delivery month and the limit universally at 5,000 contracts as of the tenth trading day of the month before the delivery month; in ordinary months, the position limit will be adjusted according to the levels of the total open interests, and when the total unilateral open interests are more than 200,000 contracts, the ratio of position limit for both non-futures-company members and clients is 10%; when the total unilateral open interests are less than or equal to 200,000 contracts, the position limit for both non-futures-company members and clients is 20,000 contracts. According to the official, the designing of the PP futures features the reference to the designs for the existing products as well as the consideration of the production, consumption and the business sizes of the traders on the spot industry chain. In different stages of the contract operation, the gradient position limits are adopted for non-futures-company members and clients, which not only meets the industrial clients’ demand for hedging but strictly controls the contract positions in the near-delivery months so as to effectively prevent the risks in market operation.
In addition, the relevant provisions in the “Measures of Dalian Commodity Exchange for Risk Management” will be implemented for the control of other risks for the PP futures product.
