Crude Oil Futures Q&A 2020 Edition

Low Sulfur Fuel Oil Futures 50 Q&A

Bonded Copper Futures 40Q&A

TSR 20 FUTURES 50 Q&A

China's crude oil futures market aims to provide an effective tool against price risks for enterprises to better protect themselves against market risks in their daily operations. Although Europe and America already have mature crude oil futures markets, their prices cannot accurately reflect the demand-supply relationship in Asia-Pacific. The launch of China's crude oil futures will help to establish a pricing system as a benchmark reflecting the demand-supply relationship of the petroleum markets in China and the Asia-Pacific region more accurately, and also optimize the allocation of oil resources to better serve the real economy. Building a crude oil futures market is one of the significant steps China will take to open up and globalize its futures markets.

Shanghai International Energy Exchange (“the Exchange”) is under a basic framework of "International Platform, Net Price Trading, Bonded Delivery and RMB Denomination". "International Platform" means trading internationally, delivering internationally and clearing internationally, with an aim to facilitate free, efficient and convenient participation by both domestic and overseas traders including transnational petroleum companies, crude oil traders, investment banks based on the global physical crude oil market so as to promote the formation of a benchmark reflecting more accurately the demand-supply relationship of petroleum markets in China and Asia-Pacific region. "Net Price Trading" means pricing based on net value exclusive of customs duty and VAT, different from the tax-inclusive pricing method currently adopted in domestic futures trading. Such arrangement will enable the domestic price to compare directly with the tax-exclusive prices on international markets, and avoid the impact of taxation policy on trading prices. "Bonded Delivery" means physical delivery based on bonded oil depots. We adopt bonded delivery mainly because bonded spot trade adopts a tax-exclusive pricing, has fewer restrictions on the participants, and may act as a link between domestic and overseas crude oil markets, which is conducive for international crude oil physical and futures traders to participate in trading and delivery. "RMB Denomination" means using RMB in trading and delivery, and foreign exchanges such as USD are accepted as margin collaterals.

The trading mode of crude oil futures for domestic traders and domestic future firms is the same as that at the Shanghai Futures Exchange. As the first product on the Chinese futures market that allows international participation, there are four methods for overseas traders to participate in the trading of crude oil futures: first, directly participate in trading at the Exchange as an Overseas Special Non-Brokerage Participant (“OSNBP”); second, participate in the trading as a Client of an Overseas Special Brokerage Participant (“OSBP”); third, participate in the trading as a Client of a domestic Futures Firm Member (“FF Member”); fourth, participate in the trading through an Overseas Intermediary, which shall authorize the Client’s orders to a domestic FF Member or an OSBP. The clearing and settlement of the above OSNBPs and OSBPs with the Exchange shall be through domestic FF Members. In addition, there is no restriction for any Overseas Intermediary to introduce overseas traders to an FF Member for participating in the trading as a Client of the FF Member.

The reasons for selecting Medium Sour Crude Oil are as follows: first, medium sour crude oil is relatively abundant with output accounting for 44% of the global; second, demand-supply relationship of medium sour crude oil is not exactly the same as that of light sweet crude oil, and currently, there is no authoritative benchmark for medium sour crude oil on the international market; third, medium sour crude oil is the main type of crude oil imported by China and its neighboring countries. According to statistics released by the General Administration of Customs, China imported 381 million tons of crude oil in 2016, including 183 million tons from the Middle East, which accounts for as much as 49% of the total import. Forming a benchmark of medium sour crude oil will facilitate the development of international crude oil trade.

In preparation for the launch of crude oil futures, we have received a lot of supports from relevant government authorities under the State Council, including the Ministry of Finance, the State Administration of Taxation, the China Securities Regulatory Commission, the People's Bank of China, the State Administration of Foreign Exchange and the General Customs Administration. The major supportive policies issued by the above authorities are as follows:
In April 2015, the Ministry of Finance and the State Administration of Taxation jointly issued the Notice on the Value-Added Tax Policies for the Bonded Delivery of Crude Oil and Iron Ore Futures Contracts, specifying the interim exemption of VAT for the bonded delivery of crude oil futures;
In June 2015, the China Securities Regulatory Commission issued the Interim Measures for the Administration of Overseas Traders’ and Overseas Brokers’ Engagement in the Trading of Specified Domestic Futures Products , specifying the requirements for overseas traders and brokers in account opening, clearing and settlement, margin collection and deposit, etc.;
In July 2015, the People's Bank of China issued the Announcement on Matters Concerning the Administration of Cross-Border Settlement of Domestic Crude Oil Futures Trading, specifying the pricing and settlement currency for crude oil futures, opening of RMB account and the scope of receipts and payments thereof, method for calculating interest, special account management, and the requirements for anti-money laundering and anti-terrorist financing, etc.; In July 2015, the State Administration of Foreign Exchange issued the Circular of the State Administration of Foreign Exchange on Foreign Exchange Administration for Overseas Traders and Brokers Engaging in Futures Trading under Specific Domestic Categories , specifying the opening of relevant foreign exchange accounts and the scope of receipts and payments thereof, foreign exchange, method for calculating interest, special account management and report of the international receipts and payments, etc.;
In August 2015, the General Administration of Customs issued the Announcement Regarding the Bonded Delivery of Crude Oil Futures Contracts in support of the bonded delivery of crude oil futures.
These policies have laid a solid foundation for the crude oil futures of the Exchange to be traded more conveniently and closely to international markets, and also provide an easy access for domestic and overseas traders to participate in the trading of the futures contract.

As the central counterparty, the Exchange will interpose itself between counterparties to contracts traded in futures transaction as the seller to every buyer and the buyer to every seller, adopt the net settlement method and ensure all settlement and delivery for centralized futures trading. Meanwhile, the Exchange also specifies in its General Exchange Rules that the legal attributes of property rights or derived from activities such as trading, clearing and delivery of executed orders, positions closed, cash received as margin, assets either transferred or pledged as margin collaterals, paired standard warrants, or those actions adopted by the Exchange against any default shall not be revoked or invalidated when a Member enters into a bankruptcy proceeding; if a Member enters into a bankruptcy proceeding, the Exchange will still conduct net settlement for such Member’s holding positions in accordance with the General Exchange Rules and the related implementing rules.