Futures in China
Measures of China Financial Futures Exchange on Risk Management 2014-06-25
Measures of China Financial Futures Exchange on Risk Management
Chapter I General Provisions
 
Article 1 These Measures are formulated in accordance with the Trading Rules of China Financial Futures Exchange for the purpose of strengthening risk management in futures trading, protecting the legitimate rights and interests of futures trading participants, and ensuring smooth trading of futures on China Financial Futures Exchange (hereinafter referred to as the Exchange).
 
Article 2 For the purpose of risk management, the Exchange implements such measures as trading margins, price limits, position limits, large position reporting, forced liquidation, forced position reduction, settlement guarantee funds and risk warning system.
 
Article 3 The Exchange, members and clients shall comply with these Measures.
 
Chapter II Margins
 
Article 4 The Exchange adopts margins. The margin is classified into settlement reserve and trading margin.
 
Article 5 During trading sessions under following circumstances, the Exchange may adjust the trading " ">(1) only buy orders or only sell orders quoted at the daily price up/down limit (hereinafter referred to as a one-sided market);
(2) during a long public holiday;
(3) there is a noticeable change in market risk as considered by the Exchange; or
(4) other circumstances as recognized by the Exchange.
One-sided market refers to circumstances where there are only buy orders or only sell orders quoted at the daily price up/down limit during the five minutes prior to the closing of the market, or where transactions are executed whenever there is a buy order or sell order but all orders are quoted at the daily price up/down limit.
 
Article 6 Where the Exchange adjusts the trading margin of a contract, on the day of adjustment, it shall clear all positions of the aforesaid contract based on the new margin level.
 
Article 7 The settlement reserve shall be governed by the Detailed Clearing Rules of China Financial Futures Exchange.
 
Chapter III Price Limits
 
Article 8 The Exchange adopts daily price up/down limits. The price limit shall be set by the Exchange and may be adjusted based on the market conditions.
 
Article 9 Where a one-sided market for a contract occurs for two consecutive trading days (Hereinafter, the first trading day is referred to as D1, the second trading day is referred to as D2, the trading day preceding D1 is referred to as D0), if D2 is the last trading day, the contract will be delivered directly; if D2 is not the last trading day, the Exchange may in its discretion adopt one or more of the following risk control measures depending on market conditions: raise trading margins, restrict the opening of new positions, restrict the withdrawal of funds, order a close-out of positions within a specified time limit, force liquidation, suspend trading, adjust the daily price up/down limits, force reduction of positions, or other risk control measures. 
 
Chapter IV Position Limits
 
Article 10 The Exchange adopts position limits. Position limits refers to the maximum number of positions held by a member or client as prescribed by the Exchange.
 
Article 11 If one client holds positions with different members, its total positions shall not exceed the position limit as prescribed for the client.
 
Article 12 The position limits for each trading product shall be governed by the relevant regulations of the Exchange and subject to adjustment by the Exchange based on market conditions.
The positions for hedging and arbitrage purposes shall be governed by the relevant regulations of the Exchange.
 
Article 13 A member or client whose positions exceed the position limit is prohibited from opening new positions in the same direction.
 
Chapter V Large Position Reporting
 
Article 14 The Exchange adopts large position reporting measures. The Exchange may publish a position reporting threshold based on market conditions.
Positions held by a proprietary member or client under different client codes for hedging, arbitrage and speculation purposes shall be aggregated. Positions held by the same client with different members shall be aggregated.
 
Article 15 When the positions held by a member or client in a particular contract reach the position reporting threshold as specified by the Exchange, or when required by the Exchange, the member or client shall report to the Exchange within the time limit specified by the Exchange.
If the client fails to do so, the member with whom the client maintains its account shall report this to the Exchange. In the case that the client maintains accounts with several members, the Exchange will designate a relevant member to submit the client’s documents. The Exchange may in its discretion require the member or client to provide another report or a supplementary report.
 
Article 16 The member or client whose positions reach the reporting threshold specified by the Exchange shall submit the following documents:
(1) Large Position Reporting Form, which contains the member’s name and member number, the client’s name and code, contract symbol, positions, trading margin, available funds, etc.;
(2) statement on the sources of funds;
(3) information on the accounts with de-facto control relationship;
(4) documents on the opening of account as well as the settlement documents for the current day;
(5) delivery intention and delivery quantity;
(6) information related to the underlying cash assets held by it; and
(7) other documents as required by the Exchange.
 
Article 17 A member shall review the documents provided by the client and guarantee the truth and accuracy of such documents.
 
Article 18 The Exchange shall be entitled to verify the documents provided by members or clients.
 
Chapter VI Forced Liquidation
 
Article 19 The Exchange adopts forced liquidation measures. Forced liquidation refers to a compulsory measure whereby the Exchange liquidates the positions held by a member or client in accordance with relevant regulations.
 
Article 20 The Exchange shall apply forced liquidation of the positions held by a member or client if any of the following circumstances occurs:
(1) the balance of the clearing member’s settlement reserve is less than zero and the clearing member fails to cover the deficit before the morning session closes;
(2) the positions held by the client or by the member undertaking proprietary business exceed the position limit and the client or the member fails to close out the positions before the close of morning session;
(3) forced liquidation is imposed by the Exchange due to violations or breaches;
(4) forced liquidation is required as an emergency measure of the Exchange; or
(5)other circumstances specified by the Exchange in which forced liquidation is necessary.
 
Article 21 The positions involved in forced liquidation shall be liquidated first by the member before the close of the morning session unless otherwise prescribed by the Exchange. If a member fails to complete the liquidation within the specified time limit, the Exchange shall apply forced liquidation.
1. Liquidation by the member
In the case of forced liquidation due to circumstances set forth in Subparagraph (1) or (2) of Article 20hereof, the principle of liquidation shall be determined by the member itself, provided that the result of liquidation conforms with the regulations of the Exchange.
2. Liquidation by the Exchange 
 
(1) In the case of forced liquidation due to circumstances set forth in Subparagraph (1) of Article 20hereof: the Exchange will arrange the positions to be liquidated in a descending sequence based on the total positions held in each contract after settlement on the previous trading day, then prioritize liquidation of contracts with larger positions, and make allocations among the clients of the said member in proportion to their trade margins for the said contract.
If forced liquidation is necessary for several clearing members, the Exchange will choose members for liquidation in a descending sequence based on the size of the additional margin.
(2) In the case of forced liquidation due to circumstances set forth in Subparagraph (2) of Article 20 hereof: where the Exchange applies forced liquidation of excessive positions, if the client holds positions with different members, the Exchange will choose members for liquidation in a descending sequence based on the number of positions held by each member.
(3) In the case of forced liquidation due to circumstances set forth in Subparagraphs (3), (4) and (5) of Article 20hereof, the Exchange will determine the positions for forced liquidation on a case by case basis.
If the circumstances set forth in Subparagraphs (1) and (2) of Article 20hereof both apply to the member, the Exchange will determine the positions to be liquidated first in accordance with the circumstances set forth in Subparagraph (2), and then in accordance with the circumstances set forth in Subparagraph (1).
 
Article 22 Procedures for forced liquidation
1. Notification
The Exchange will issue a Notification of Forced Liquidation (hereinafter referred to as the Notification) to relevant clearing members for forced liquidation. Unless separately delivered by the Exchange, the Notification will be sent along with the clearing data of the same day, and clearing members can obtain the Notification via the Exchange’s system.
2. Liquidation and confirmation
(1) after opening of the market, the relevant members shall liquidate their own positions until the requirements of the Exchange are met;
(2) if a clearing member fails to fully complete liquidation within the specified time limit, the Exchange will force liquidation of the remaining positions;
(3) theresult of the forced liquidation will be sent along with the transaction record of the same day, and the relevant information shall be available via the Exchange’s system.
 
Article 23 The price for the forced liquidation will be generated from market transactions.
 
Article 24 In the event that forced liquidation cannot be fully completed within the specified time limit due to daily price up/down limit or other market factors, the remaining positions will be liquidated on the following trading day based on the same principle as defined in Article 21until the requirements of the Exchange are met.
 
Article 25 In the event that forced liquidation cannot be fully completed on the same day due to daily price up/down limit or other market factors, the Exchange will take appropriate disciplinary actions against the clearing member in question based on the settlement result of that day.
 
Article 26 In the event that forced liquidation can only be completed at a later time due to daily price up/down limit or other market factors, any losses subsequently induced shall be borne by the party held directly responsible. In case that the liquidation is not completed, the position holder shall continue to assume responsibility for holding the positions or delivery of the positions.
 
Article 27 Any profits generated from forced liquidation implemented by a member shall go to the party held directly responsible. The profits and losses generated from forced liquidation by the Exchange, after being offset, shall be handled in accordance with relevant State regulations. Losses generated from forced liquidation shall be borne by the party held directly responsible.
If the party held directly responsible is a client, the losses generated from forced liquidation shall be first borne by the member with whom the client maintains its account, and then be claimed by the member from the client.
 
Chapter VII Forced Position Reduction
 
Article 28 The Exchange adopts forced position reduction measures. Forced position reduction refers to the process whereby the Exchange automatically matches and executes outstanding close-out orders quoted at the price up/down limit for the current day with the positions held by clients whose net positions of the contract are profitable at the daily price limit of the same day and in proportion to the positions held.
 
Article 29 Methods for forced position reduction
1. If a client (including a member that trades with its own account; within this chapter, the same shall apply below) holds both short and long positions of the same contract, the close-out orders for its net positions will be included in the calculation of the forced position reduction, while other close-out orders will be automatically offset against the positions it holds in the opposite direction.
2. Determination of the liquidation quantity
The liquidation quantity refers to all the positions for which close-out orders quoted at the price up/down limit have been entered into the Exchange’s system and remain outstanding by the closing of the market on D2, and at the same time the unit loss of clients’ net positions is greater than or equivalent to a certain percentage (10% for stock index futures and 2% for treasury bond futures) of the settlement price of D2.
Any client unwilling to liquidate its positions in the aforementioned manner may cancel its orders before the closing of the market.
3. Determination of the unit profit or loss of a client’s net positions of a particular contract
The unit profit or loss of a client’s net positions of a particular contract refers to the total profits or losses of the positions held by the client of the said contract divided by its net positions. The total profits or losses of the positions held by the client of the said contract refer to the profits or losses of all the positions it held of the said contract, calculated on the basis of the difference between the settlement price of D2 and the settlement price of D0 for all the transactions executed before D0 (inclusive), and also the difference between the settlement price of D2 and the actual execution price for all the transactions executed on D1 and D2.
4. Determination of the scope of liquidation for clients with a profitable unit net position
All the profitable positions held by a client with a profitable unit net position greater than zero as calculated based on the abovementioned method shall be included in the scope of liquidation.
5. Principle for allocating the liquidation quantity
(1) Liquidation quantity is allocated at three levels based on the profit level.
Liquidation quantity shall be first allocated to the first-level profitable positions (positions whose unit profit of net positions is greater than or equivalent to 10% of the settlement price of D2 for stock index futures, positions whose unit profit of net positions is greater than or equivalent to 2% of the settlement price of D2 for treasury bond futures), then to the second-level profitable positions (positions whose unit profit of net positions is smaller than 10% but greater than or equivalent to 6% of the settlement price of D2 for stock index futures, positions whose unit profit of net positions is smaller than 2% but greater than or equivalent to 1% of the settlement price of D2for treasury bond futures), and finally to the third-level profitable positions (positions whose unit profit of net positions is smaller than 6% of the settlement price of D2 but greater than zero for stock index futures, positions whose unit profit of net positions is smaller than 1% of the settlement price of D2 but greater than zero for treasury bond futures).
(2) The allocation for the aforementioned various levels shall be based on the ratio of the liquidation quantity (remainder of the liquidation quantity) to the profitable positions available for liquidation at various levels.
Where the quantity of the first-level profitable positions is greater than or equivalent to the liquidation quantity, the liquidation quantity shall be allocated to the first-level profitable positions, at the ratio of the liquidation quantity to the quantity of the first-level profitable positions.
Where the quantity of the first-level profitable positions is smaller than the liquidation quantity, the quantity of the first-level profitable positions shall be allocated to the clients that have placed the close-out orders, at the ratio of the amount of the first-level profitable positions to the liquidation quantity. The remainder of the liquidation quantity shall be allocated first to the second-level profitable positions and then to the third-level profitable positions in the aforementioned manner. If there is still a remainder, no more allocations shall be performed.
6. Execution of forced position reduction
Forced position reduction shall be performed after the closing of the market on D2, and the result of the forced position reduction shall be taken as the trading result of the member on D2.
7. Price for forced position reduction
Forced position reduction shall be performed at the price up/down limit of the contract for D2.
Losses induced from forced position reduction performed in accordance with the provisions of this Article shall be borne by the member and its clients.
 
Article 30 If the risks associated with the contract persist after the enforcement of the abovementioned measures, the Exchange will declare an extraordinary situation, and will take contingency measures pursuant to relevant regulations.
 
Chapter VIII Settlement Guarantee Fund
 
Article 31 The Exchange holds a settlement guarantee fund. The settlement guarantee fund refers to the common guarantee fund contributed by clearing members pursuant to the regulations of the Exchange for the purpose of addressing the default risks of the clearing members.
 
Article 32 The settlement guarantee fund includes a basic guarantee fund and a variable guarantee fund. The basic guarantee fund refers to the minimum amount of guarantee fund that a clearing member must pay for participating in the clearing and delivery at the Exchange. The variable guarantee fund refers to the part of guarantee fund that exceeds the basic guarantee fund and changes in line with the business volume of the clearing member. Contributions to the settlement guarantee fund shall be made in cash.
(1) Basic guarantee fund requirements for different types of clearing members are: RMB 10 million for a trading clearing member, RMB 20 million for a full-clearing member, and RMB 30 million for a special clearing member. A clearing member shall deposit the basic guarantee fund in the Exchange’s special account for the settlement guarantee fund before the close of the morning session on the fifth trading day after its signing of the Clearing Member Agreement of China Financial Futures Exchange.
(2) On the first trading day of each quarter, the Exchange will determine the base amount of the settlement guarantee fund for the whole market as the basis for calculating the amount of each member’s share in the settlement guarantee fund.
Based on the base amount of the settlement guarantee fund, the Exchange will calculate each member’s share for the current quarter in proportion to their respective business volumes. A clearing member’s share in the settlement guarantee fund for the current quarter = the base amount of settlement guarantee fund × (20% × average daily trading volume of the member in the previous quarter / average daily trading volume of the market in the previous quarter + 80% × average daily trading margin of the member in the previous quarter/ average daily trading margin in the market in the previous quarter).
The clearing member’s share in the settlement guarantee fund and its basic guarantee fund, whichever is greater, shall be taken as the amount that the member must pay to the settlement guarantee fund for the current quarter. After the close of the morning session on the fifth trading day in the current quarter, the Exchange will transfer any surplus in the balance of the settlement guarantee fund to the clearing member’s special account for the settlement guarantee fund and deduct any deficit in the settlement guarantee fund from the clearing member’s special account for the settlement guarantee fund.
In case of a deficit in the settlement guarantee fund, the clearing member shall deposit the additional amount in its special account for the settlement guarantee fund no later than the close of the morning session on the fifth trading day of the current quarter.
(3) The Exchange may adjust the timeframe for collecting the settlement guarantee fund as well as the total amount of the settlement guarantee fund based on market conditions and may in its discretion raise the level of the settlement guarantee fund for particular clearing members.
 
Article 33 Where the settlement reserve of a clearing member is smaller than zero and the deficit is not met within the specified time limit, if the clearing member holds no positions and the settlement reserve remains under zero after forced liquidation by the Exchange, the Exchange is entitled to utilize the settlement guarantee fund of the defaulting member to cover the deficit. If there is still a shortfall, the Exchange will utilize the settlement guarantee fund of other clearing members on a pro rata basis.
The utilization of the settlement guarantee fund of any other clearing member shall be based on the ratio of the balance of such member’s settlement guarantee fund to the total unused amount of settlement guarantee fund.
 
Article 34 After the amount of contribution made to the settlement guarantee fund by the clearing member has been utilized as specified in Article 33hereof, additional settlement guarantee fund shall be deposited in the clearing member’s special account for the settlement guarantee fund before the close of the morning session on the fifth trading day so as to bring the settlement guarantee fund up to the original level. After the close of the morning session on the fifth trading day, the Exchange will make deductions and transfers from the clearing member’s special account for the settlement guarantee fund through the bank.
 
Article 35 Any clearing member failing to contribute to the settlement guarantee fund within the specified time limit will be dealt with in accordance with the Measures of China Financial Futures Exchange on Dealing with Violations and Breaches.
 
Article 36 After utilizing the settlement guarantee fund, the Exchange has the right of recourse against the defaulting member.
 
Chapter IX Risk Warning System
 
Article 37 The Exchange adopts a risk warning system. When the Exchange deems necessary, it may take one or more of such measures as requesting members and clients to report on their situations, hold a cautionary conversation, issue a written warning or a risk warning announcement, in order to warn about and mitigate against risks.
 
Article 38 Upon the occurrence of any of the following circumstances, the Exchange may in its discretion summon the senior management of the member or client to hold a conversation to alert them to risks, or require the member or client to report on the situation:
(1) abnormal movement in the futures prices;
(2) abnormal trading conducted by a member or client;
(3) anomalies in the positions held by a member or client;
(4) anomalies in the funds of a member;
(5) a member or client is suspected of violations or breaches;
(6) the Exchange receives complaint against a member or client;
(7) a member is involved in a judicial investigation; or
(8) other circumstances as recognized by the Exchange.
 
Article 39 With respect to holding a cautionary conversation, the Exchange shall notify the member in writing of the time, location and relevant requirements one day in advance and the staff of the Exchange shall keep the information relating to the conversation confidential.
The client must attend the cautionary conversation in person and be accompanied by a representative designated by the member. If the person summoned for the conversation cannot attend the conversation due to a specific cause, he shall inform the Exchange in advance and, upon approval of the Exchange, he may appoint another person in writing to attend the conversation on his behalf. The person summoned for the conversation shall state the facts without concealment.
 
Article 40 Where, through situation reporting and cautionary conversations, a member or client is found to be suspected of violations of rules and regulations or its trading positions are found to carry significant risks, the Exchange may in its discretion issue a Risk Warning Letter to the member or client.
 
Article 41 Upon the occurrence of any of the following circumstances, the Exchange may in its discretion issue a risk warning announcement, warning all the members and clients of risks:
(1) abnormal movement in futures prices;
(2) there is a significant disparity between futures price and cash price;
(3) a member or client is suspected of violations or breaches;
(4) trading by a member or client involves significant risks; or
(5) other circumstances as recognized by the exchange.
 
Chapter X Supplementary Provisions
 
Article 42 For the purpose of these Measures, the term “positions” refer to the positions corresponding to each client code.
 
Article 43 Any violations of these Measures shall be dealt with by the Exchange in accordance with these Measures and the Measures of China Financial Futures Exchange on Dealing with Violations and Breaches.
 
Article 44 The power to interpret these Measures shall be vested in the Exchange.
 
Article 45 These Measures shall come into effect as of August 30, 2013.