By He Chuan
On December 16, Zhang Xiaojun, spokesman of China Securities Regulatory Commission, said that CSRC has recently approved the Zhengzhou Commodity Exchange to carry out sugar options trading and the Dalian Commodity Exchange to carry out soybean meal options trading. The relevant preparatory work is expected to be done in about 3 months, thus the specific listed time will be announced separately.
Enriching risk management tools of agro-related enterprises
The term "option" refers to the right of the buyer to buy or sell a certain commodity or financial instrument in certain quantity in accordance with the predetermined price within the agreed time limit. Option is a mature basic risk management tool in international derivatives market and constitutes a complete risk management tool system in commodity market together with futures, forwards and swaps.
The No. 1 Document 2016 issued by the central government has clearly indicated, it is necessary to "create agricultural futures varieties and carry out agricultural options pilot". The sugar and soybean meal options which are prepared to be listed in ZCE and DCE respectively recently are also agricultural options.
"In recent years, the spot prices of sugar and soybean meal have been fluctuating frequently, so the relevant agricultural enterprises urgently need more abundant risk management tools. The agricultural options trading pilot carried out by CSRC selecting the two futures varieties of sugar and soybean meal will better meet the needs of agricultural enterprises on refined and diversified risk management tools. In addition, compared with futures, the transaction modes of options are more flexible and diversified and require more on the underlying futures market. While since listing of the sugar and soybean meal futures contract, the market operation has been smooth and orderly with industry customers widely participating in and the futures function working well, thus they have had the market basis for launching the options," said Hu Yuyue, director of Securities and Futures Institute of Beijing Technology and Business University.
Director assistant of Nanhua Futures Research Institute Cao Yanghui said, after listing of sugar and soybean meal options, a price network relationship can be established between spot, futures and options. The intrinsic link and mutual influence between the three market prices can improve the efficiency of the price discovery of sugar and soybean meal futures market and better play the role of futures prices in the allocation of agricultural resources.
What are the advantages of options compared with futures? Cao Yanghui cited an example, when a sugar-related company uses the sugar futures to hedge risk and adverse changes in market prices occur, the company need to provide additional margin, if its funds are insufficient, the hedging transactions will be forced to stop. But if the company uses the sugar options to hedge risk, when the buyer pays the option money to buy options, the risks are limited. There is no risk of additional funds, thus it is more suitable for the sugar companies with relatively weak financial strength.
Net assets of RMB 50 million yuan for market maker threshold
ZCE and DCE have repeatedly carried out simulated sugar and soybean meal options trading to verify the feasibility and operability of all aspects including rules system and technical system. On the day that CSRC announced the approval to carry out sugar and soybean meal options, ZCE, DCE immediately issued the draft of a series of rules for the implementation including options contracts of related species and options trading management approaches.
Judging from the options contract in the draft, sugar and soybean meal options have both the same points and differences. In terms of the same points, the types of both contracts are the call option and put option with the trading unit of 1 lot (10 tons) of sugar or soybean meal futures contract; the minimum change in the price is RMB 0.5 yuan/ton; the exercise way is American option. In terms of differences, the price limit range of sugar options is the same as that of sugar futures contract, namely ±4 percent; while the price limit range of soybean meal options is the same as that of soybean meal futures contract, namely ±5 percent.
In addition, this time, the sugar and soybean meal options will take market maker system. According to the draft, ZCE and DCE will implement market maker qualification management. Institutions applying for the qualification of market maker are required to meet the conditions including that the net assets should not be less than RMB 50 million yuan, specialized agencies and personnel should be equipped to conduct market making business, market making personnel should be familiar with the relevant laws and regulations of the futures and options and business rules of the exchange, there should be no major illegal records with the last 3 years. In addition, the draft also stipulated the market making business, market maker rights and obligations as well as the regulation of exchange to the market maker.
"Options trading in foreign mature market mostly take market maker system. The market maker mainly has the following functions: the first is to find the value, that is the market maker prompts the option price to approach the actual value as close as possible by professional valuation; the second is to enhance the liquidity and make the market becoming active; the third is to stabilize the market, that is the market maker can stabilize the options price fluctuations and enhance the market stability through two-way quotes and trading," said Hu Yuyue.
RMB 50 million yuan for investor threshold
Compared with the threshold of RMB 500 thousand yuan for individual investors' SSE 50ETF option, this time ZCE and DCE have both lowered the investor threshold for sugar and soybean meal options trading, but still much higher than the threshold of A stock market investors.
According to the draft on the investor appropriate regulation of the two futures exchanges, when the general institution and individual customers open the option trading privileges, the funds available balance of the deposit account after the settlement of the previous day before the day opening option trading privileges should be no less than RMB 100 thousand yuan. At the same time, the investors also need to meet a series of conditions including possessing the simulation options trading experience, exercise experience, and having gone through relative knowledge test. In addition, the exchange can adjust the appropriateness criteria according to market conditions.
"As the domestic futures market is characterized obviously by the investment structure of retail investor dominating, therefore, a certain threshold should be set on the basis of ensuring the interests of small- and medium-sized investors," said Cao Yanghui.
Hu Yuyue believes that although there are risks in commodity futures and options market, but the risk is limited, and compared with stock index options, the risk is more controllable. At present, the balance of funds available in deposit account of the customers being set at RMB 100 thousand yuan initially by the exchange indicates the consideration of the exchange on the market nurture.
Besides, two futures exchanges have also said to strictly control the risk. An official from the exchange department of DCE said, the design of soybean meal options contract system has combined with the reality of China's futures market, and fully considered the risk control and liquidity. Among them, the risk control is the basis of the normal operation of the option market. To this end, DCE has developed a set of risk management system including margin, price limits, position limit, stopped out and compulsory position reduction, to ensure the stable operation of the options market.