Measures to Control Futures Speculations Ordered by China Securities to Major Commodities Exchanges: Reuters

Following a surge in prices sparked fears of a boom-and-bust cycle and with the aim of controlling speculative trading activity, China’s securities regulator ordered the country’s major commodity futures exchanges to take steps, reports Reuters quoting sources.

Major institutional investors were ordered to rein in their trading by commodity futures exchanges in Dalian, Shanghai and Zhengzhou that lack a commodities background in response to the directions, reports Reuters quoting  sources.

Driving up contracts including in iron ore, rebar, cotton and even eggs, investors, including hedge funds and retail investors, have placed big bets on Chinese commodities futures this year. Similarities with a boom in the country’s stock markets, which reversed into a sharp crash last summer were found by many analysts who warned about the rally in  the futures market.

“Many local media and researchers mentioned the huge volume and volatility. The regulator felt nervous. They hope to keep stability, said one of the people,” said one of the people.

The CSRC did not immediately respond to a request for comment.

A spokesman at the Dalian Commodity Exchange said the exchange would further improve its mechanism for controlling risks but declined to comment on the CSRC order.

The Shanghai Futures Exchange did not immediately respond to a request for comment. The Zhengzhou Commodity Exchange could not be reached for comment.

The exchanges were ordered to bring speculative trading under control by the CSRC, the people said. They said the latest measures are partly aimed at cracking down on high-frequency trading, although they did not provide further details.

Several measures that increase the cost of trading, such as a rise in transaction fees and minimum margin requirements and actions that has taken some of the heat out of the rally and traded volumes after the exchanges made several public announcements this week of such measures. Market trading limits have also been widened.

Dalian iron ore had risen 73 percent, and Shanghai rebar 62 percent at their peak this year. On some days, the trading volume in iron ore futures on the Dalian exchange exceeded China’s total imports for 2015.

Mode demand for commodities would be fueled by the government plans for more infrastructure spending and signs of a pickup in the economy and the analysts said speculators have been betting on this aspect. Given weakness in stocks, bonds and housing, others suggested commodities futures markets were the only place left for speculators to make quick profits.

The measures this week appear to be having an impact, while other commodities fell further, steel and iron ore futures steadied on Thursday.

“The aim is to restrict the oversized space for profiting from short-term trades, reduce elevated holdings of related products and curb speculation,” the Dalian Commodity Exchange said on Wednesday, referring to the moves to increase trading costs.

Causing some to take losses and others to reduce their positions,  the volatility in prices has already deterred some major industry players from using the futures market. It also marks a setback for attempts to give China’s domestic markets more influence over global pricing, analysts say.

(Adapted from Reuters)

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