On Chinese Exchanges clients are not allowed to hit their own orders and therefore create a “wash trade” this is viewed as a very serious offence. As mistakes can happen, a maximum 5-trade limit is applied, more than that and the client will be heavily penalised. Several software providers have solutions to contain this problem, in which all the traders for an account must be placed in the same trading group, the software will pre-screen orders within that group to prevent a wash trade, in effect, the second order will be rejected before reaching the exchange.

Similarly, inbound orders to the Chinese exchanges must be tagged with a message that declares if the proposed trade is an opening trade or closing trade. A manual user can usually sort this problem as he goes along. However, with the use of a spreader quickly moving from long to short to long again, there must be some logic that looks at the accounts’ current position and determines the correct tag. In effect, a trader may open a 10 lot long position with an “open” tag on the order message, while in selling that 10 lot position the order message will carry a tag saying “close”. If a mistake is made and the sell order has an “open” tag, then at the exchange level the client will not be square, he will be both 10 long “open” and 10 short “open” and the Initial Margin required by the exchange will be 10 lots. A client not managing this issue is likely to quickly run out of funds. Unlike “wash trades” which are a regulatory problem, the open-close issue is an exchange and clearing problem. Different trading software vendors have varying solutions to this issue.

There is no cancellation-to-order ratio in Chinese exchanges, instead, for example, a 500-daily cancellation limit for each account applies. Cross-border arb traders can work within the 500 cancellations limit if they do not make markets on the Chinese exchange leg. Therefore, cross-border arbitrage players tend to only hit a bid or offer on Chinese exchanges driven by what they have received in the international markets.

To prevent spoofing, typically a Chinese exchange may have a large amount declaration limit. If for example orders above 300 lots are cancelled more than 50 times this will be recognised as abnormal trading and will be penalised.

In some Chinese Exchange contracts, there are no “roll” contracts from month to month, as rolls are executed as two outright orders. This is an opportunity to use our spread trading software. However, two issues arise, attention should be paid to the 500-daily cancellation limit above and traders must pay very careful attention not to hit an offsetting directional resting order and inadvertently creating a “wash trade” by mistake as previously discussed.

Typically, Chinese exchanges have progressive position limits on clients. For example, the INE SC contract has the below limits:

  • Front month: 500 lots
  • Second month from delivery: 1,500 lots
  • Third month from delivery: 3,000 lots

BANDS Financial as an Overseas Intermediary may also have a limit of 25% of the total market open interest.

Typically, the Chinese exchanges have a progressive mechanism for consecutive Limit Up and Limit Down events. This affects both the price tolerance and the initial margin charged:

  • D1 Trading limit = settlement price + or -4%, Initial Margin = 5%
  • D2 Trading limit = settlement price + or -7%, Initial Margin = 9%
  • D3 Trading limit = settlement price + or -9%, Initial Margin = 11%

As alternatives to RMB, warehouse receipts or USD can be used as collateral, subject to:

  • US dollar can be used at the Exchange level as an initial margin discounted at a 5% haircut.
  • Standard warehouse receipts valued as margin deposits, using the daily settlement prices of the latest delivery month contract to calculate the market value, no more than 80% of market value can be used as a margin deposit.

All Chinese exchanges operate a pre-trade margin basis meaning that client cash either RMB or USD must be in the client designated account before an order will be accepted by the Exchange.

Accounts are designated either as normal or hedging accounts. Similar to other Chinese exchanges, hedging accounts have lower initial margins and fees. Arbitrage trades against an international exchange do not qualify for hedging status. Hedging status can only be permitted by the Exchange.

The initial margin for Chinese futures contracts is calculated based on gross positions, but using the ‘One-Side, Larger Amount’ mechanism.

At the contract start, the initial margin is, for example, 5% of the value of the contract. Typically, on the first trading day one month before the delivery month (i.e. the second trading month), the initial margin rises to 10%. Two trading days before the last trading day, the initial margin will rise to 20%. Consequently, the most active trading month is the 3rd trading month.

However, the “One Side, Larger Amount” principle does produce effects that would seem unusual to western participants.

For example, if a client’s initial margin for a long position in the third month is calculated as 20,000 RMB, then he will be charged 20,000 RMB. If he opens a second position, also a long position, in the fourth month, and the initial margin is calculated as 23,000 RMB, then his total initial margin will be 43,000 RMB (20k+23k).

If, on the other hand, the position in the fourth month is short, western investors would expect the initial margin requirement to fall to 3,000 RMB (23k-20k) as the positions are offset. However, on Chinese exchanges, the initial margin would be 23,000 RMB, this being the higher of the two “offsetting” positions (i.e. the maximum of 20k or 23k).

The Ministry of Finance has announced a tax exemption for overseas traders on income derived from trading RMB-denominated Chinese futures contracts. The tax exemption will cover both institutional and individual investors.

Curiously, the MOF said it will waive income tax for three years for overseas individual investors but did not specify a time period for the exemption of institutional investors, therefore, we assume there is no time limit to the exemption for institutional investors.

The start of a new trading day is at the beginning of the night session, while the trading day ends at the close of the day session the following day. So, Monday night's trading session is trading for Tuesday, just as Tuesday’s day session is trading for Tuesday.

However, the settlement price is not the last price at the close of the day session. It is the volume-weighted average price of the total turnover across the night and day sessions.

Typically, Chinese exchanges have progressive position limits on clients. Further details can be found on the exchange websites.

The English versions of the exchange rules & regulations can be found below: