Differences between Onshore and Offshore Futures Markets
- Diverse Trading Choices
Mainland China's (onshore) futures markets transact via electronic trading, while futures markets outside mainland China (offshore) transact alternatively through electronic trading or open outcry systems, or both methods simultaneously.
- Types of Futures Contracts
Currently, onshore futures markets only have 25 types of futures contracts available for trading, of which 24 are commodity futures and one is stock index futures. There's no options trading. Offshore futures markets, on the other hand, cover all types of products from major exchanges around the world, including futures and options trading of metals, forex, indexes, energy, agricultural products and interest rates, which can satisfy trading needs of different investors with their various investment strategies.
- Trading Schedule
Onshore futures markets are open only 4 hours a day. In contrast, offshore futures markets allow nearly 24-hour trading each day because of the dual trading systems including electronic trading and open outcry that are adopted alternatively or simultaneously. This helps eliminate the risk of pricing gaps at opening.
- Rules of Position Opening and Squaring
Offshore futures markets only have buy and sell orders, and do not deploy the creation and close-out orders that exist in onshore markets. If a customer places transactions of the same underlying asset with contracts in the same month but in an opposite direction, the system will automatically square and close out the positions, instead of forming hedging positions. (London Metal Exchange's swaps trading is an exception.)
- Limit-Up and Limit-Down Mechanism
Offshore futures markets do not have a limit-up/limit-down mechanism in place for most futures contracts. Some products carry a fuse mechanism, which is triggered when the price hits a certain level. At that time, trading may be either suspended and or is allowed to only fluctuate within a certain range. (For details, please see transaction rules.)
- Margins and Fees
In offshore futures markets, margins are typically a fixed amount, while margins in onshore markets are based on a percentage of the contract's value. There are initial margin and maintenance margin. An initial margin is the equity required to initiate a futures position. A maintenance margin emerges when a customer faces a loss and reaches a certain risk level. At this point, the Company would give a margin call to customers or it would enforce liquidation and close out the position. (The Company will make adjustments to margin requirements in the case that exchanges adjust margins according to market conditions.) Fees of offshore futures markets are a fixed amount, with the exception of LME metals, which charge fees on a pro rata basis.
- LME Swaps
- Products of the London Metal Exchange (LME) generate a new contract for that day automatically on each trading day. The contract expires on the same day three months later. If the customer opens a position and wants to close the position on the same day, he or she needs to open another contract with the same expiration but opposite direction to offset the position. When an investor opens a position and open s another position in an opposite direction one or more days later, he or she can only square positions by conducting a swap. A swap refers to moving contracts with different expirations to the same expiration date. The adjustment involves the premium or discount between the two contracts. The value of the premium or discount isn't derived through calculation but price quotes provided by members of the exchange. Calculating the daily premium and discount simply by dividing the premium and discount in three months by 90 days is a misunderstanding.
- Factors Affecting Premiums and Discounts
There are no fixed rules for premiums and discounts as they are completely determined by the market.
The size of premiums and discounts depends on the concentration of long positions, conditions of delivery taking and making, the distribution of swap transactions, (Sometimes backwardation may be very high over a certain period. But it's possible the supply-demand condition in the spot market doesn't support such high premiums. This may be because during that period more people are borrowing, that is, more people are doing swap shorts (a need to borrow more), while few people are lending (fewer people lend)).
Excluding market factors, premiums and discounts theoretically reflects capital interests and the cost of storing positions.
- Relationship Between Results of Swaps and Market Premiums and Discounts
Opening Long Position: When there're premiums in the market, it is disadvantageous to close the position. Where there're discounts in the market, it's advantageous to close the position.
Opening a Short Position: When there're premiums in the market, it is advantageous to close the position. Where there're discounts in the market, it's disadvantageous to close the position.
LME-Select is the London Metal Exchange's electronic trading platform. As it involves swaps, when a customer places an order via the platform but launches another position in the opposite direction in the next day or beyond, the two contracts will be deemed as hedging positions until the customer calls the Company's trading department to inquire about swaps. Then, the company will help the customer to conduct a swap transaction according to his or her instructions.
- Fees in Swaps
According to the requirements of LME, no handling fees will be charged if the difference of expiry dates between the two contracts involving a swap transaction is within 14 days (including the 14th day). A one-sided handling fee on the forward contract will be charged as the handling fee for the swap transaction if the difference is over 14 days.
- LME Undue Profits and Losses
According to the requirements of the LME, undue profits in the contracts before and after a swap transaction can be used as an opening margin but advance withdrawal is not allowed or interests will be charged. (One should ask exchange members for details). If the loss at a contract's expiry is larger than the balance, additional cash payments will be required.
All information in relation to products (including but not limited to LME) and trading mechanism contained herein is for reference only. It does not cover or represent the rules and regulations of the relevant exchanges and clearing houses. Different products may be subject to their own rules and regulations. As these rules and regulations may from time to time be amended or revised, the information contained herein may not be applicable at the time when an order is placed.