Guidelines for Risk Control of Shanghai Futures. Exchange. Chapter I General Principles. Chapter II System of Margins

Transcription

1 Guidelines for Risk Control of Shanghai Futures Exchange Amendment Chapter I General Principles 1.1 Subject to Trading Rules of Shanghai Futures Exchange, the guidelines herein are stipulated to strengthen the risks management of futures trading, protect the legal rights and benefits of involved parties and ensure the normal operation of Shanghai Futures Exchange, henceforth the Exchange. 1.2 The Exchange adopts systems of margins, price limits, speculative position limit large position reporting, forcibly close-out of positions and risk signal. 1.3 The Exchange, members and clients are bound to guidelines herein. Chapter II System of Margins 2.1 The Exchange adopts the system of margins. The minimum margins of Futures contracts of Copper Cathode, henceforth copper, Aluminum, and Natural Rubber are 5% of the contract value. For fuel Oil futures contracts, the ratio is 8%. With approval of CSRC, the Exchange may adjust the level of margins. In the following situations, the exchange may adjust the level of margins of a certain kind of contracts according to market risks. (1) The open interests accumulate to a certain amount; (2) Closing on the delivery date; (3) The accumulated fluctuation range in several consecutive trading days reaches a certain level. (4) The price limits are touched consecutively. (5) In the case of official long holidays of the state. (6) The exchange deems that market risks increase dramatically. 1

2 (7) Other situations the Exchange deems necessary. The exchange shall proclaim the adjustment of margins level, if there is, and report to the CSRC for file. 2.2 The levels of margins are different according to the size of the held positions and the stage of the contracts (from the listing day to the last trading day). The details are as follows. (1) The exchange adjusts the levels of margins according to the size of positions. Table 1 Margins of copper and aluminum Futures contracts with ifferent Size of Positions From the first trading day of the third month previous the delivery monthif the total positionsx reach the following amount: Level of Margins X 120,000 5% 120,000X 140, % 140,000X 160,000 8% X160,000 10% Ps: X represents the bilateral total positions of contracts matured in a certain month, Unit: lots Table 2 Margins of natural rubber Futures contracts with ifferent Size of Positions From the listing day of contractsif the total positions (X) reach the following amount: Level of Margins X 120,000 5% 120,000X 160,000 7% 160,000X 200,000 9% X200,000 11% Ps: X represents the bilateral total positions of contracts matured in a certain month, Unit: lots Table 2 Margins of fuel oil Futures contracts with ifferent Size of Positions From the listing day of contractsif the total positions (X) reach the following amount: Level of Margins 2

3 X 100 8% 100 X % 150 X % X200 15% Ps: X represents the bilateral total positions of contracts matured in a certain month, Unit: lots In the trading of a day, the level of margins remains unchanged even though the positions of a certain kind of contracts reach the interface of two levels (Refer to table 1, table 2 and table 3). In the daily settlement, the exchange will adjust the margins level according to the total positions. The margins shall be increased, if necessary, before the opening of the next trading day. (2) The exchange adjusts the level of margins at different phases of futures contracts (closing on the delivery date). Table 4 Margins level of Copper contracts in different phases Trading ate Level of Margins From the listing day 5% From the tenth trading day of the second month before delivery month 7% From the first trading day of the first month before delivery month 10% From the tenth trading day of the first month before delivery month 15% From the first trading day of delivery 20% From the second trading day before the last trading day 30% Table 5 Margins level of Aluminum contracts in different phases Trading ate Level of Margins From the listing day 5% From the first trading day of delivery month 10% From the sixth trading day of delivery month 15% From the previous trading day before the last trading day 20% 3

4 Table 6 Margins level of Natural Rubber contracts in different phases Trading ate Level of Margins From the listing day 5% From the tenth trading day of the second month before delivery month From the first trading day of the first month before delivery month From the tenth trading day of the first month before delivery month 10% 15% 20% From the first trading day of delivery 30% From the second trading day before the 40% Table 7 Margins of Fuel Oil Futures Contracts in different phases Trading ate Level of Margins From the listing day 8% From the first trading day of the second month before delivery month From the tenth trading day of the second month before delivery month From the first trading day of the first month before delivery month From the tenth trading day of the first month before delivery month From the second trading day before the last trading day 10% 15% 20% 30% 40% When a certain kind of futures contracts reaches the interface of two levels of margins, the exchange shall settle the total positions at the new level on the day before the new level is adopted. The margins shall be increased, if necessary, before the opening of the next trading day. Within the delivery month, sellers may use standard warrants as guaranty of performance of futures contracts with the same quantity and delivery month. And in this case, no margins are charged on the open interest. 3The illustration of operation period of a certain kind of futures contract: take Cu0305 for example, its operation period is from May 16 th, 2002 to May 15 th, Then, May 16 th, 2002 is the listing day of the contract, May 15 th, 2003 is the last trading day, May 14 th, 2003 is the previous trading day before 4

5 the last trading day and May 13 th, 2003 is the second trading day before the last trading day. May in 2003 is the delivery month, April in 2003 is the previous month before the delivery month, March in 2003 is the second month before the delivery month and February is the third month before the delivery month. (Refer to the following chart) Listing month of futures contracts the third month before the delivery month the second month before the delivery month the previous month before the delivery month elivery month Operation period mentioned in other Articles is subject to the prescription in this article. 2.3 When the price limits are reached, the margins are charged in compliance with the related stipulations in Chapter III. 2.4 In the event that the accumulated fluctuation range ( N ) of Copper or Aluminum futures contracts in three consecutive trading days (i.e ) reaches 7.5%; Or the accumulated fluctuation range N in four consecutive trading days (i.e ) reaches 9%; Or the accumulated fluctuation range N in five consecutive trading days (i.e ) reaches 10.5%, the Exchange may take one or several of the following measures according to the market condition: increasing some or all members one-way or bilateral margins with the same or different proportion, restricting some or all members from withdrawing capital, suspending new positions opening of some or all members, adjusting price limits, setting a deadline for liquidation, closing positions forcibly and so on. The adjusted price limit shall not be over 20%. In the event that the accumulated fluctuation range ( N ) of a certain kind of natural rubber futures contracts in three consecutive trading days (i.e ) reaches9%; Or the accumulated fluctuation range N in four consecutive trading days (i.e ) reaches 12%; Or the accumulated fluctuation range N in five consecutive trading days (i.e ) reaches 13.5%, the Exchange may take one or several of the following measures according to the market situation: 5

6 increasing some or all members one-way or bilateral margins with the same or different proportion, restricting some or all members from withdrawing capital, suspending new positions of some or all members, adjusting price limits, setting a deadline for liquidation, closing positions forcibly and so on. The adjusted price limit shall not be over 20%. In the event that the accumulated fluctuation range ( N ) of a certain kind of fuel oil futures contracts in three consecutive trading days (i.e ) reaches12%; Or the accumulated fluctuation range N in four consecutive trading days (i.e ) reaches 14%; Or the accumulated fluctuation range N in five consecutive trading days (i.e ) reaches 16%, the Exchange may take one or several of the following measures according to the market situation: increasing some or all members one-way or bilateral margins with the same or different proportion, restricting some or all members from withdrawing capital, suspending new positions of some or all members, adjusting price limits, setting a deadline for liquidation, closing positions forcibly and so on. The adjusted price limit shall not be over 20%. N is calculated as follow N P t P 0 = P % t =345 P 0 : the settlement price of the business day before 1 P t : the settlement price of t t =345 P 3 : the settlement price of 3 P 4 : the settlement price of 4 P 5 : the settlement price of 5 The Exchange must report to CSRC in advance if it takes measures prescribed in this Article. 6

7 2.5 If two or more levels of margins are applicable to some contracts, margins will be charged at the highest level. The Exchange may increase the duration of margins in the case of legal long holidays of the state. Chapter III System of Price limits 3.1 The Exchange adopts the system of price limit and set daily price limit for each listed futures contract. 3.2 When the futures contracts are matched at price limit, the principle of liquidation first and time first is applied. But the principle of liquidation first is not applicable to the liquidation of the position set on the very day. 3.3 One-side market refers that there are only bids for (or asks for) a contract, or the transactions are only conducted at the price limit within five minutes before the closing of the market. If such situation lasts for two consecutive days in the same direction, it is called one-side market in the same direction. And if the situation occurs at the opposite price limit on the next business day, it is called reverse one-side market. 3.4 When the situation of one-side market occurs in the trading of certain futures contracts on one trading day (1, and the next trading days are called and so on respectively), the margins of the futures contracts are adjusted as follows in daily settlement of 1: The rate of margins of Copper futures contracts is 7% and if the original rate is higher than 7%, it remains unchanged; the rate of margins of Aluminum futures contracts is 6% and if the original rate is higher than 6%, it remains unchanged; the rates of margins of natural rubber and fuel oil futures contracts are 7% and 10% respectively and if the original rates are higher than 7% and 10% respectively, they remain unchanged. The price limit of Copper futures contracts on 2 is 5%, and 4% for Aluminum, and for natural rubber and fuel oil futures contracts it is 6% and 7% respectively. 3.5 If no one-side market occurs on 2 (i.e. The price limit of Copper and Aluminum futures contracts does not reach 5% and 4% respectively,and those of natural rubber and fuel oil futures contracts do not reach 6% and 7% respectively.), the price limit and the rate of margins return to the normal level on 3. If reverse one-side market occurs on 2, it is regarded as a new one-side market and the day becomes 1. The margins and price limit of the next trading day are set according to Article

8 If one-side market in the same direction occurs on 2, the levels of margins of the contracts are adjusted as follows in the settlement of 2: The rate of margins of Copper futures contracts is 9% and if the original rate is higher than 9%, it remains unchanged; the rate of margins of Aluminum futures contracts is 8% and if the original rate is higher than 8%, it remains unchanged; the rates of margins of natural rubber and fuel oil futures contracts are 9% and 15 % respectively, and if the original rates are higher than 9% and 15% respectively, they remain unchanged. The price limit of Copper and Aluminum futures contracts on 3 is 6% and 5% respectively, and for natural rubber and fuel oil futures contracts they are 6% and 10% respectively. 3.6 If no one-side market occurs on 3 (i.e. The price limit of Copper and Aluminum futures contracts does not reach 6% and 5% respectively,and those of natural rubber and fuel oil futures contracts do not reach 6% and 10% respectively.), the price limit and the rate of margins return to the normal level on 4. If reverse one-side market occurs on 3, it is regarded as a new one-side market and the day becomes 1. The margins and price limit of the next trading day are set according to article 3.4. If one-side market in the same direction occurs on 3 (The price limit is reached in three consecutive days), the levels of margins of the contracts are adjusted as follows in the settlement of 3: The rate of margins of Copper futures contracts is 9% and if the original rate is higher than 9%, it remains unchanged; the rate of margins of Aluminum futures contracts is 8% and if the original rate is higher than 8%, it remains unchanged; the rates of margins of natural rubber and fuel oil futures contracts are 9% and 20% respectively, and if the original rates are higher than 9% and 20% respectively, they remain unchanged. At the same time, the Exchange may suspend some or all members from withdrawing of capital. In the event that one-side market in the same direction occurs on 3 (The price limit is reached in three consecutive days), physical delivery in conducted, if 3 is the last trading day of the contracts; or the trading continues on 4 at the price limits and margins level of 3, if 4 is the last trading day; otherwise, the trading of the Copper, Aluminum, natural rubber or fuel oil futures contracts will be suspended on 4 and the Exchange may decide to take either one of the following two measures according to the market situation. Measure I: On 4, the Exchange decides and announces that one or several of the following measures may be taken according to the market situation on 5 to release market risks: increasing some or all members one-way or bilateral margins with the same or different proportion, suspending new 8

9 positions of some or all members, adjusting price limits, restricting withdrawing capital, setting a deadline for liquidation, closing positions forcibly and so on. The adjusted price limit shall not be over 20%. The margins shall be increased to the adjusted level, if it is necessary, before the open of the market on 5. If the price limit is not reached on 5, the price limit and the rate of margins return to the normal level on 6; If one-side market in the same direction as that on 3 occurs on 5, the Exchange may announce the situation of emergency and irregularities and take risk control measures according to related stipulations. If reverse one-side market occurs on 5, it is regarded as a new one-side market and the day becomes 1. The margins and price limit of the next trading day are set according to Article 3.4. Measure II: In the settlement of 4, the Exchange will automatically match the liquidation application, which is unmatched at the close of the market on 3 at the price limit, with the positions of clients (or proprietary members, the same in the following contents) who gain profit from their net positions according to the proposition of held positions. If one client holds positions in both directions, the positions shall be offset by his own opposite ones first and then the liquidation is carried out following the above methods. (1) eciding the quantity of liquidation application The quantity of liquidation application is the sum of unmatched application at the close of 3, which is applied through the computer system at the price limit, and meanwhile the unit loss of clients net positions is more than or equal to 6% (8% for natural rubber and fuel oil futures contracts) of the settlement price on 3. Clients who are reluctant to close their positions in the above way may cancel their orders before the close of the market and the cancelled orders are no longer regarded as liquidation application. (2) The calculation method of average profit or loss of clients net positions average profit or loss of clients net positions = the sum of profit or loss of net positions / the net positions of clients (tons) The sum of profit or loss of net positions means the sum of price difference between historical strike price and settlement price of the very day of the held contracts with an amount equal to net positions. (3) eciding the range of liquidation for clients with profitable net positions The speculative positions with unit profit of net positions, calculated in the above way, as well as the hedging positions with unit profit of net positions over or equal to 6% (8% for natural rubber and fuel oil futures contracts) of the 9

10 settlement price on 3 are in the range of liquidation. (4) The principle and method of allocation of liquidation quantity: A. the principle of allocation of liquidation quantity a. Within the range of liquidation, liquidation quantity is allocated at four levels in order of profits and the categories of speculation or hedge. First, the speculative positions whose unit profit of net positions is over or equal to 6%(8% for natural rubber and fuel oil futures contracts) of the settlement price on 3 Second, the speculative positions whose unit profit of net positions is over or equal to 3% (4% for natural rubber and fuel oil futures contracts) but less than 6% (8% for natural rubber and fuel oil futures contracts) of the settlement price on 3 Third, the speculative positions whose unit profit of net positions is less than 3% (4% for natural rubber and fuel oil futures contracts) of the settlement price on 3 Finally, the hedging positions whose unit profit of net positions is over or equal to 6% (8% for natural rubber and fuel oil futures contracts) of the settlement price on 3 b. The allocation proportion at each level is the result of dividing applied liquidation quantity by the quantity of profitable positions that can be used in liquidation. B. the method and procedures of allocation of liquidation quantity (refer to the attachment) a. the method and procedures of allocation of liquidation quantity for Copper and Aluminum futures contracts If the quantity of speculative positions with over 6% profit is more than or equal to the quantity of the applied liquidation, the quantity of applied liquidation will be allocated to clients with over 6% profit according to the proportion of the applied liquidation quantity to the quantity of speculative positions with over 6% profit. If the quantity of speculative positions with over 6% profit is less than or equal to the quantity of the applied liquidation, the quantity of speculative positions with over 6% profit will be allocated to clients who apply for liquidation 10

11 according to the proposition of the quantity of speculative positions with over 6% profit to the applied liquidation quantity. Then, the rest quantity of the applied liquidation will be allocated, in the following order, to speculative positions with over 3% profit, speculative positions with less than 3% profit and hedging positions with over 6% profit. If still there is the rest after the above allocation, it won t be allocated any more. b. the method and procedures of allocation of liquidation quantity for natural rubber and fuel oil futures contracts If the quantity of speculative positions with over 8% profit is more than or equal to the quantity of the applied liquidation, the quantity of applied liquidation will be allocated to clients with over 8% profit according to the proportion of the applied liquidation quantity to the quantity of speculative positions with over 8% profit. If the quantity of speculative positions with over 8% profit is less than or equal to the quantity of the applied liquidation, the quantity of speculative positions with over 8% profit will be allocated to clients who apply for liquidation according to the proposition of the quantity of speculative positions with over 8% profit to the applied liquidation quantity. Then, the rest quantity of the applied liquidation will be allocated, in the following order, to speculative positions with over 4% profit, speculative positions with less than 4% profit and hedging positions with over 8% profit. If still there is the rest after the above allocation, it won t be allocated any more. (5) the handling of the fractional quantity of liquidation The integral part of liquidation quantity will be allocated to each trading code first and then the fractional part will be allocated in order of size. One lot for each trading code, random allocation may be made to clients with the same fractional quantity of liquidation in the case of deficiency. If risks are relieved after taking Measure II, the price limit and margins return to the normal level on the next business day. Otherwise, the Exchange may announce the situation of emergency and irregularities and take risk control measures according to related rules and regulations. Members and their clients undertake the financial losses incurred by taking Measure II. 11

12 Chapter IV System of Speculative Positions limit 4.1 The Exchange adopts the system of speculative positions limit. Position limit refers to the allowed highest one-side positions of a kind of futures contracts that can be held by a member or an client. 4.2 The following principles are applicable to position limit. (1) The position limits of futures contracts with different category and delivery month are determined respectively according to the specific situations. (2) ifferent position limits are applied to the same contracts at different trading stages. The position limit of the contracts within the delivery month is controlled strictly. (3) The limit on members position works together with the limit on clients position so as to control the market risks. (4) The system of approval is applied to the hedging position. 4.3 In the event that one client has more than one trading code at different Brokerage members, the total positions of all the trading codes shall not be beyond the position limit of one client. On the closing of the last trading day of the first month before the delivery month, the positions of copper and aluminum futures contracts held by members and investors shall be adjusted to the integral times of 5 lots. If the adjustment cannot be made due to special market situation, it can be deferred to the next. uring the delivery month, the positions of copper and aluminum futures contracts held by members and investors shall be integral times of 5 lots. The open and close-out positions shall also be integral times of 5 lots. On the closing of the last trading day of the second month before the delivery month, the positions of fuel oil futures contracts held by members and investors shall be adjusted to the integral times of 10 lots. If the adjustment cannot be made due to special market situation, it can be deferred to the next. uring the first month before the delivery month, the positions of fuel oil futures contracts held by members and investors shall be integral times of 10 lots. The open and closeout positions shall also be integral times of 10 lots. 4.4 The proportion limit and position limit of different varieties applicable to Brokerage members, proprietary members and clients are as follows. 12

13 Table 8: The proportion limit and position limit of Copper, Aluminum and natural rubber futures contracts at different stages (Unit: lot) Copper From the listing day to the last trading day of the second month The previous month before the delivery month before delivery month Open Proportion limit% interest of a Broke Proprie Broker Proprie Brok certain rage tary Client age tary Client erage kind of mem membe s membe membe s mem futures bers rs rs rs bers contract s 120,00 0 lots Aluminum 120,00 0 lots Natural rubber 100,00 0 lots The open interest of a certain kind of futures contracts mentioned above is calculated bilaterally, while the position limit of brokerage members, proprietary members and clients are calculated one-way. The position limit of brokerage members is the base. Table 9 The proportion limit and position limit of fuel oil futures contracts at different stages (Unit: lot) elivery month Proprietar y members Client s Fuel Oil From the listing day to the last trading day of the third month before the delivery month The second month before the delivery month The previous month before the delivery month Open Proportion limit% interest of a Broker Proprieta Brokera Proprieta Brokera Proprieta kind of age ry ge ry ge ry Client Client futures memb member member member membe member Client contracts ers s s s rs s 500 thousand lots The open interest of a kind of futures contracts mentioned above is calculated bilaterally, while the position limit of Brokerage members, proprietary members and clients are calculated one-way. The position 13

14 limit of Brokerage members is the base. 4.5 The Exchange may adjust the position limit of Brokerage members according to their net assets and operation situation. Position limit= Base * (1+ Credit Coefficient + Business Coefficient) The base refers to the minimum level of position limit that is determined by the Exchange. (Refer to Table 7 and Table 8 in clause 4.5 Credit Coefficient: With a brokerage member s net assets of RMB30, 000,000 as the foundation (the credit coefficient at this point is 0), the credit coefficient increases by 0.1 for each RMB5, 000,000 of net assets, but the maximum of credit coefficient shall not be over 2. Business Coefficient: Five levels of business coefficient are set provisionally for Brokerage members. (Refer to Table 9) Table 10 Levels Yearly Trading value C 1 hundred million RMB Business Coefficient 1 C C C C C1 > The position limit of Brokerage members is confirmed once a year. Brokerage members shall submit the evidence materials (the audit report made by the accounting firm) before March 15th showing the value of net assets at the end of the previous financial year. The Exchange may sum up the trading volume of Brokerage members from January 1st to ecember 31st of the previous year and then confirm the position limit, which is made known to Brokerage members and announced to the public before March 20th. This position limit is applicable to the trading of all kinds of futures contracts from March 21st of the very year to March 20th of the next year. 4.7 If no evidence materials or statistics data are provided in due time or they are invalid, the base is regarded as the position limit. 14

15 4.8 The adjustment of position limit is subject to the approval of the council of the Exchange and the adjusted position limit is applicable after reporting to CSRC for file. 4.9 The positions of members and clients shall not surpass the position limit set by the Exchange. The Exchange may impose forcibly close-out of positions on the members or clients whose positions are beyond the position limit. If one client has more than one trading code at different Brokerage members and the total positions surpass the position limit, the Exchange may designate related Brokerage members to forcibly close the extra positions of the client In the event the total positions of all clients who open accounts at the same FCM surpass the position limit of the FCM, the FCM may in principle get the proportion by dividing the difference of total positions and position limit with the total positions (i.e. the proposition =(total positions position limit)/total positions), and then urge the related clients to reduce their positions in stipulated time. The Exchange may impose forcibly close-out of positions, subject to related rules and regulations, on those who don t reduce positions accordingly. Chapter V System of Large Positions Reporting 5.1 The Exchange adopts the system of large positions reporting system. When the speculative positions of a kind of futures contracts reached or surpass 80% of the speculative positions limit, members or clients shall report the status of capital and position to the Exchange and clients shall make such reports through Brokerage members. The Exchange may stipulate or adjust the reporting level according to the risk status of the market. 5.2 When the positions reach the critical point, the members and clients shall report to the Exchange before 15:00 on the next business day on their own initiative. If the re-report or compensated report is necessary, the Exchange may notify the related members. 5.3 The Brokerage members whose positions reach the critical point of reporting shall submit the following materials to the Exchange: (1) completely filled Block Trading Report of FCM,the contents of which include: name of member, number of member, contract code, present 15

16 positions, margins of holding, usable capital, the number of clients holding positions, delivery quantity and the applied delivery quantity. (2) The explanation of capital resources (3) the name, trading code, open interest, materials of opening an account and daily settlement files of the top five clients in terms of open interest (4) Other documents required by the Exchange 5.4 The proprietary members whose positions reach the critical point of reporting shall submit the following materials to the Exchange: (1) Completely filled Block Trading Report of Non-FCM, the contents of which include: name of member, number of member, contract code, present positions, margins of holding, usable capital, purpose of holding positions, delivery quantity and the applied delivery quantity. (2) The explanation of capital resources (3) Other documents required by the Exchange 5.5 The clients whose positions reach the critical point of reporting shall submit the following materials to the Exchange: (1) Completely filled Large Position Report of Clients, the contents of which include: name of member, number of member, name and number of clients, contract code, present positions, purpose of holding positions, margins of holding, usable capital, purpose of holding positions, advanced notice of delivery quantity and the applied delivery quantity. (2) The explanation of capital resources (3) Materials of opening an account and daily settlement files (4) Other documents required by the Exchange 5.6 The Brokerage members shall carry out the initial examination on the materials provided by the clients whose positions reach the critical point of reporting before they are transmitted to the Exchange. And the Brokerage members shall ensure the authenticity of the materials provided by the Exchange. 16

17 5.7 The Exchange may check and verify the materials provided by members or clients irregularly. 5.8 In the event that clients have more than one trading code at different Brokerage members and the total positions of all the trading codes reach the critical point of reporting, the Exchange may designate and notify the related Brokerage members of the responsibility of submitting the required report on the client s situation. Chapter VI System of Forcibly close-out of positions 6.1 The Exchange adopts the system of forcibly close-out of positions, which the Exchange will close the positions of members or clients forcibly in the event that regulation noncompliance occur. 6.2 In one of the following situations, the Exchange shall close forcibly close the positions of members or clients. (1) The balance of reserve for settlement of members is negative and the deficiency is not made up within the prescribed date. (2) The open interest is beyond the position limit. (3) Forcibly close-out of positions is imposed as the punishment of regulation noncompliance. (4) Subject to the Exchange s measures in emergency, forcibly close-out of positions is a must. (5) Other situations where forcibly close-out of positions is necessary. 6.3 The executive rules of forcibly close-out of positions: Forcibly close-out of positions is firstly carried out by members and the time limit is the first session of the trading time after the open of the market unless it is set specially by the Exchange. The Exchange may carry out forcibly close-out of positions if members do not finish it within the time limit. In the event that forcibly close-out of positions is imposed due to negative reserve for settlement, building new positions is forbidden before the margins are increased to sufficiency. (1) The decision on the positions of forcibly close-out of positions carried out by members 17

18 a. The positions of forcibly close-out of positions prescribed in Clauses (1) and (2) of Article 6.2 are decided by members themselves, so long as the result of forcibly close-out of positions comply with the rules and regulations of the Exchange. b. The positions of forcibly close-out of positions prescribed in Clauses (3) (4) and (5) of Article 6.2 are decided by the Exchange. (2)The decision on the positions of forcibly close-out of positions carried out by the Exchange a. The positions of forcibly close-out of positions prescribed in (1) of Article 6.2 are decided by the Exchange in the principle of speculation first and hedge later. In each category, the contracts will be arranged in order of the size of open interest at the close of the previous trading day and the largest position will be closed first. Then, forcibly close-out of positions is conducted in the order of loss of net positions of the member s all clients. If forcibly close-out of positions is imposed on more than one member, the positions of members who are in the most serious deficiency of margins will be closed first. b. As for the forcibly close-out of positions prescribed in Clause (2) of Article 6.2, if only one member s position is beyond the limit, the Exchange may decide the size of forcibly close-out of positions of related clients according to the ratio of the member s positions beyond the limit to the speculative positions of members; if more members positions are beyond the limit, in order of size of positions beyond the limit, the member with the largest positions beyond the limit will be imposed forcibly close-out of positions first; if clients positions are beyond the limit, the extra will be closed forcibly; if members and clients surpass the position limit simultaneously, the clients will be imposed the forcibly close-out of positions first and then the members. c. The positions of forcibly close-out of positions prescribed in Clauses (3) (4) and (5) of Article 6.2 are decided by the Exchange according to the specific situation of the involved members and clients. If members are in the situations prescribed in Clauses (1) and (2) of Article 6.2 simultaneously, the Exchange may decide the positions of forcibly close-out of positions subject to the situation in Clause (2) first and then the situation in Clause (1). 6.4 The performance of forcibly close-out of positions: 18

19 (1) Notice The Exchange may transmit the requirement of forcibly close-out of positions by sending a notice of forcibly close-out of positions, henceforth the notice. Beside the separate delivery by the Exchange, the notice will also be sent together with the daily clearing data and the related members may acquire it through the member service system. (2) Performance and confirmation a. After the open of the market, the related members shall close the position by themselves until the requirement is met and the result is subject to the check of the Exchange. b. If the members don t finish forcibly close-out of positions within the time limit, and Exchange will resume the forcibly close-out of positions directly. c. The result of the forcibly close-out of positions will be recorded and filed by the Exchange after the performance. is finished. d. The result of forcibly close-out of positions will be sent together with the daily trading record and the related members may acquire it through the member service system. 6.5 The price of forcibly close-out of positions is determined by the trading in the market. 6.6 If the force liquidation cannot be finished completely within the time limit due to the price limit or other market reasons, the rest may be closed on the next trading day, still according to Article 6.3, till the forcibly close-out of positions is finished. 6.7 If the force liquidation cannot be finished completely on the very day due to the price limit or other market reasons, the Exchange may deal with the related members according to the settlement result. 6.8 In the event that the forcibly close-out of positions has to be postponed due to the price limit or other market reasons, the person in direct charge shall answer for the losses incurred; if the liquidation is not finished completely, the holder of the positions shall assume the responsibilities of holding positions or fulfill the obligation of delivery. 6.9 The profits incurred by forcibly close-out of positions that is carried out by members shall be enjoyed by person in direct charge; The profits incurred by 19

20 forcibly close-out of positions that is carried out by the Exchange shall be allocated in compliance with the related rules and regulations of the state; The losses incurred by forcibly close-out of positions shall be resumed by person in direct charge. If person in direct charge is a client, the brokerage member who open account for the client shall assume the losses incurred by forcibly close-out of positions first and then he himself claims compensation from the clients. Chapter VII System of Risk Signal 7.1 The Exchange adopts the system of risk alert. If it is necessary, the Exchange may take one or several of the following measures separately or simultaneously: require reports of situation, talk to remind members or clients of potential risks, criticize in public, make announcement of risk signal and so on. 7.2 In one of the following situations, the Exchange may meet the designated top managers or clients to talk about risks or require members or clients to report the situations. (1) Irregularities occur in the price of futures (2) Irregularities occur in the trading of members or clients. (3) Irregularities occur in the positions of members or clients. (4) Irregularities occur in the capital of members or clients. (5) Members or clients are suspended to violate rules and regulations or breach contracts. (6) The Exchange receives complaints concerning members or clients. (7) Members are involved in judicial investigation. (8) Other situations the Exchange deems necessary. The following requirements shall be met in the talk proposed by the Exchange. (1) The Exchange shall send out a written notice to the designated top managers or clients to have a talk. Someone designated by the members shall accompany clients to have the talk with the Exchange. 20

21 (2) The Exchange shall notify members of the time, place, and requirements of the talk in written form on the previous day. (3) If the people designated by the Exchange can t participate in the talk due to special reasons, they shall report to the Exchange in advance and entrust others to handle the matter in written form with the approval of the Exchange. (4) The speaker shall state the truth and don t conceal the fact (5) The staff of the Exchange shall keep the related information of the talk in secret. Members or clients who are required to make reports to the Exchange may refer to the system of block position reporting for the form and content of the reports. The Exchange may send out a letter of risk alert if it finds out through the report or talk that members or clients are under suspension of violation or great position risks. In one of the following situations, the Exchange may criticize the related members and clients in public through the designated medias. (1) The members or clients do not make reports or talk to the Exchange according to related requirements. (2) Withhold the truth on purpose; conceal, misrepresent or omit important information (3) Purposely destroy the evidence of violation of laws and rules and don t cooperate with CSRC and the Exchange in investigation. (4) The fraud on clients is verified after the investigation. (5) Position division and manipulation of market is verified after the investigation. (6) Other transgression deemed by the Exchange. Besides the public criticism, the Exchange may deal with the transgression of members and clients in compliance with Guideline for Punishment of Regulation noncompliance of Shanghai Futures Exchange. 21

22 In one of the following situations, the Exchange may send risk alert to all the members and clients: (1) Irregularities occur in the price of futures (2) There is a big gap between the futures price and the cash price. (3) There is a big gap between the domestic price and the international price. (4) Other irregularities defined by the Exchange. Annotation 1. Any transgression of the Guidelines herein is subject to Guidelines for Punishment for Regulations Noncompliance of Shanghai Futures Exchange 2. The Exchange retains the right of final explanation of the guidelines herein. 3. The guidelines come into effect on January 18 st, Appendix Allocation Methods and Procedures of Liquidation Quantity 22