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Reasonable risk control systems are an important guarantee for stable operation and effective functioning of the futures market. An official of the agricultural products business division of Dalian Commodity Exchange (DCE) said recently in an interview that according to the product characteristics of the “two boards” and the operation rules of the futures market, DCE has set a rigorous risk prevention system, which is effective and will ensure the smooth operation of the “two boards” futures.
According to the official, on the basis of the current trading rules and risk management measures, DCE has implemented a set of sound risk control measures including the price limit system, the margin system, the system of limiting speculative positions, the large position reporting system, the system of forced liquidation, handling of irregularities, the risk warning system and other systems, in a bid to ensure the stable and healthy operation of the futures market, prevent malicious manipulation, avoid and defuse risks, and maintain the virtuous cycle of the entire market and the market confidence.
The official said that in setting the margins for the futures of fiberboard and blockboard, the rules for DCE’s existing products have been followed with other designs made according to the characteristics of the “two boards”. First, in ordinary months, the minimum trading margin is set at 5% of the contract value, or 1.25 times the price limit. In the early period of listing, under the principle of “Steady Listing, Gradually Functioning”, the trading margin is tentatively set at 7% and after the stable operation of the products, the level of 5% will be resumed. Second, the level of the minimum trading margin will be adjusted according to the open interests. Usually the benchmark open interest is set on the basis of the ratio of the apparent consumption to the tonnage for the benchmark open interest. In 2012, China’s output of the medium density fiberboard (MDF) available for delivery was about 1.09 billion pieces, and that of 15mm and 18mm blockboard was about 360 million pieces. Calculated on the basis of 500 pieces / contract, the benchmark open interests for the fiberboard and blockboard futures are set at 500,000 contracts and 160,000 contracts respectively. The changes of the trading margins are set at two levels. When the open interests are less than or equal to 500,000 and 160,000 contracts respectively, the trading margin is set at 5%; when the open interests are more than 500,000 and 160,000 contracts respectively, the trading margin is set at 7%, which will meet the requirements for risk control. Third, the contract margin for the month preceding the delivery month and the delivery month is also set at two levels: in the period from the 10th trading day of the month preceding the delivery month to the first trading day of the delivery month, the ratio of the contract trading margin is 10% of the contract value; in the delivery month, the trading margin of the contracts is 20% of the value of the contracts.
With regard to the system of the price limits, the official said that DCE selected the price indices released by Guangdong Yuzhu Timber Market, a representative domestic spot market, as the samples for statistics and analysis. In terms of the ranges of the samples, the fiberboard and blockboard with the absolute value of daily fluctuations of less than 3% account for 86.6 percent and 87.9 percent respectively. Therefore, the price limit set at 4% can cover the vast majority of the daily fluctuations. When the price limit of the futures contracts of the “two boards” occurs continuously, DCE will raise the range of the price limit and the level of the margins. The cases of the price limit in the same direction occurring three times in a row will be dealt with according to the current measures for risk control. (The case of the third price limit occurring on the last trading day of the delivery month will directly lead to the process of delivery; if the third price limit occurs on the trading day preceding the last trading day of the delivery month, the trading on the last trading day of the delivery month will continue by following the price limit range and the margin level of the previous day. Except the above-mentioned cases, DCE will decide and announce according to the market conditions on the third trading day with the price limit in the same direction to take any one of the following two measures. The first measure is that on the last trading day with the consecutive price limit in the same direction, the trading margin can be increased unilaterally or bilaterally, in the same ratio or different ratios, for some members or all the members, some or all the members opening a new position can be suspended, the range of the price limit can be adjusted, the margin withdrawal can be restricted, the position can be closed within a time limit, the forced position closing can be implemented, and one or several above-mentioned moves will be adopted to defuse the market risks; the second measure is that the forced position reduction will be implemented after the closing of the third trading day with the price limit in the same direction.)
The system of position limit is implemented for the futures of the “two boards”. Considering the apparent consumptions of fiberboard and blockboard, the position limits for the futures companies are set at 160,000 and 60,000 contracts respectively, and the ratio of the position limit for the futures companies is set at 25%.
With regard to the position limit for the non-futures-company members and the clients, the official said that in setting the position limits for the non-futures-company members and the clients, both the spot market characteristics of the “two boards” and the compliance with the designing rules of the existing products should be taken into account. Both the two boards are characterized by various varieties and specifications, low industrial concentration, moderate outputs of individual producers, and a large number of traders, etc. Therefore, the guideline for designing the position limits of the futures of the “two boards” is stricter position limits for the delivery month with a view to preventing the delivery risks; in the ordinary months the position limits will be relaxed reasonably so as to address the industrial clients’ demand for avoiding risks.
According to apparent consumptions, the volumes of fiberboard and blockboard available for delivery are approximately 230 million and 126 million pieces respectively, and the position limits for the delivery month have been designed on the basis of the figures. In specific, the position limit for the fiberboard in the delivery month is 100 contracts. According to the consumption sizes, in South China for example, the annual consumption of the fiberboard used for furniture was 8 million cubic meters with a monthly consumption of 670,000 cubic meters or about 14 million pieces. According to the statistics of the Forest Industry Association of Guangdong Province, there were 449 furniture manufacturing enterprises above the designated size, and the monthly limit of 50,000 boards can fully meet the demands. The position limit of the blockboard in the delivery month is 20 contracts. In terms of the consumption sizes, on the basis of the consumption of blockboard in East China accounting for 53% of the total, there are about 3,000 furniture and decoration enterprises, and the monthly limit of 10,000 pieces can meet the demands.
Market participants said that in designing the futures of the “two boards” such factors have been taken into account as the effective connection with DCE’s risk control system of the existing listed products on the basis of the market operation rules, the characteristics of the “two boards” products and the close integration with the actual conditions of the spot market, which will effectually prevent and control the market risks as well as be understood by the market. It is believed that the futures market of the “two boards” will achieve safe and stable operation in the future.
