DCE Amends Rules For Risk Management

To effectively improve the level of market services, provide protection for the member units of futures companies to develop businesses and grow bigger and stronger under the premise of strictly controlling the risks and meet the demand of industrial clients and institutional clients for participating in and making use of the market, Dalian Commodity Exchange (DCE) issued a notice on September 10 to announce the amendments to the “Measures of DCE for Risk Management” (the “Risk Management Measures” for short) and other related rules with the amended rules to come into effect from the settlement on September 16, 2014. The implementation of the new rules will undoubtedly give great boost to the operation quality and functioning level of the futures market in Dalian, thus pushing the market development to a higher level.

The amendments involve the rules in the Risk Management Measures such as the position limit, forced liquidation, major client report, open interest and the time tier margin for the futures company members as well as the periods of validity for hedging in ordinary months and the adjustment to the period of validity for the arbitrage increases in ordinary months. In specific: cancelling the position limit and the relevant position report systems for the futures company clients and adjusting the rules related to the forced liquidation of excessive positions; adjusting the position tier margin management modes; the time to implement the tier margin is postponed from the tenth trading day to the 15th trading day in the month before the delivery month; the periods of validity for hedging and arbitrage increases in ordinary months are increased by about 10 trading days compared with the former rule and extended to the last trading day of the month before the delivery month with the position management of near-delivery-month changed to the position management of delivery month.

The adjustments to the rules have been made by DCE in the context of the constant development of the futures market especially the businesses of futures company members with the focus on relaxing the requirements for the position limits and the margin ratios for the members and further liberalizing and improving hedging and arbitrage management. With regard to the position limits for the members, in the past the position limit mode for the futures company members saw the limits implemented in proportion when the market size is sharply increased, but with the continuous and steady growth of the market size in recent years, the original position limit mode has hindered the scale expansion and business development of the futures company members, with the futures companies eagerly calling for the liberalization of the position limits. In terms of the tiered margins, with stringent requirements, the original standards have restricted the functioning of market to some extent with the market operation costs increased along with the prevention of risks. DCE liberalized position parameters and margin parameters associated with the position tiers of all products in 2013 and reduced the time tier margin from 5 tiers to 2 tiers. The implementation effect has shown good market reception and the significant role in making the front-month contracts more brisk, and the market expects the exchange to further relax relevant standards. Regarding the periods of validity for hedging and arbitrage increases in ordinary months, after DCE implemented a series of measures to improve the systems in recent years, the contracts of all products near the delivery month have been increasingly brisk with the demand of industrial and institutional clients for positions near the delivery month growing accordingly. In this context, the industrial and institutional clients expect DCE to further extend the periods of validity for hedging and arbitrage increases in ordinary months.

A DCE official said that the rules were adjusted to better adapt to the requirement of the business development and integrate the existing business rules. In recent years, with the continuous development of the futures companies, under the position limit system some powerful futures company members would have to advise clients to transfer the positions to other members due to insufficient position limits. The cancellation of the position limit and the related position report systems for the futures company members will encourage the member units to grow bigger and stronger and provide better services for the institutional investors. Meanwhile, with the constant improvement of the system of legal rules for the futures market and the establishment of the five-in-one supervisory system, the members’ capacity for risk management has been continuously improved and the rational market trading has been enhanced, with the role of the position tier margins system in controlling risks gradually weakened. With the adequate adjustments according to the market demand, DCE has no longer specified the standards for the adjustments to positions and margins, and will timely announce on the market when adjusting the margin standards due to the changes of positions on the market. The further extension of the tier implementation time by 5 trading days in the month before the delivery month will further reduce the trading costs in the month before the delivery month, attract the clients to participate in the trading of front-month contracts and give more play to the market functions.

The periods of validity for hedging and arbitrage increases in ordinary months are extended to the last trading day of the month before the delivery month with the position management of near-delivery-month changed to the position management of delivery month. The official said that although there are only about 10 trading days in the near-delivery month, the prices are highly sensitive and the effect of the industrial clients implementing hedging and the institutional clients carrying out the investment strategies will be significantly affected. In order to meet the demands of industrial clients, DCE has taken the similar moves in the practice of hedging approval by separately considering the limits from the tenth trading day of the month before the delivery month to the last trading day of the month before the delivery month. The approval has been based on the principle for the hedging approval in ordinary months, that is, a client can hold the ordinary-month hedging positions until the last trading day of the month before the delivery month at latest. The extension of the period of validity for hedging in ordinary months to the last trading day of the month before the delivery month has been indirectly achieved in the process, and the approval results and the market reception has shown that the risks are controllable with good market response.

Market participants believe that the adjustments of DCE to the risk management measures and other rules will give the members more development space, boost the continuous development and growth of the members, help the members maintain and manage the clients and further improve the level of market services; meanwhile, it has relaxed relevant requirements and standards and extended the periods of validity for hedging and arbitrage increases, thus further reducing the trading costs and making the market more active in hedging and arbitrage, and it will also make the front-month contracts brisker and improve the quality of market operation. As the adjustments to some rules are the extension of the guidelines of current rules and the further optimization on the former foundation after the practice for some time, the market can accept and understand the adjustments more smoothly.