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30 April, 2018
On April 13, 2018, the China Securities Regulatory Commission (“CSRC”) announced that all preparation work for the opening of the iron ore futures market to foreign traders has been completed and it will be formally implemented on May 4, 2018. Following the launch of crude oil futures on the Shanghai International Energy Exchange (“INE”) on March 26, 2018, iron ore futures will be the second commodity futures contract that foreign traders are allowed to trade. Below are the key features of foreign participation in iron ore futures, as compared to crude oil futures.
I. Approaches for Foreign Participation
The Dalian Commodity Exchange (“DCE”) classifies the foreign traders into two categories: foreign brokers and foreign clients, unlike INE, it does not set up the category of “overseas special participants”. There are four approaches for foreign traders’ participation in crude oil futures, while there are only two approaches for foreign traders’ participation in iron ore futures, namely, (i) by entrusting a domestic futures company member of DCE to trade (“Approach I”); or (ii) by entrusting a foreign broker, and the foreign broker will re-authorize a futures company member of DCE to trade (“Approach II”). Just as with crude oil futures, those foreign brokers who intend to participate in iron ore futures trading need to be registered with the exchange before conducting relevant businesses.
II. Eligibility of Traders
Similar to crude oil futures, the foreign traders who participate in iron ore futures trading also shall fulfill relevant eligibility requirements. Such eligibility requirements mainly include knowledge of futures trading, trading experience, minimum funding requirements, compliance and integrity, etc., and a broker that opens an account for its client shall be responsible for reviewing the eligibility of the client. All trading experience shall be real – simulated trading experience is not accepted. As for the trading experience, the DCE only requires a client to have one executed domestic futures trading order or one executed order at an overseas futures trading venue which is supervised and regulated by the futures regulatory institution of a country or region that has entered into a Memorandum of Understanding of Regulatory Cooperation with the CSRC within the last three years, while in contrast the INE requires at least ten executed orders. In terms of the minimum funding requirements, the daily balance available in the margin account of a client (no matter an institutional participant or individual participant) of iron ore futures for the last five business days before applying for the trading code shall be no less than RMB 100,000 or its equivalent in a foreign currency, while for an institutional client of crude oil futures, the minimum amount of the available balance is RMB 1,000,000, and a minimum amount of RMB 500,000 is set for individual clients.
III. Margin, Risk Control Businesses
Same as crude oil futures, when trading iron ore futures, US dollars may be accepted as collateral for margin payments, but the settlement currency shall be Renminbi. In terms of the clearing and risk control businesses like large position report, such matters will be handled by a futures company member entrusted by a foreign client under Approach I; while under Approach II, a foreign broker shall re-authorize a futures company member to handle the matters upon the entrustment of a foreign client. In addition, foreign brokers shall assist futures company members to conduct relevant risk control work.
IV. Trading Rules
Currently, foreign participants of iron ore futures are subject to the same rules as domestic participants, which are the existing rules of the DCE. In order to prepare for introducing foreign traders, the DCE has amended the relevant rules, and the amended rules were promulgated on March 27, 2018.
V. Our Observations
We will continue to pay close attention to the relevant policies and regulations regarding crude oil futures and iron ore futures, as well as the opening up of domestic futures market to foreign investors. With China’s market opening step by step, we believe that more commodity futures will be accessible to foreign investors in the future.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
