Following the approval of the China Securities Regulatory Commission (CSRC), the exchange of futures for physicals (EFP) on Treasury futures will be officially launched on January 17, 2019. On December 28, 2018, the China Financial Futures Exchange (CFFEX) released the amended Trading Rules of China Financial Futures Exchange (the “Trading Rules”), Detailed Trading Rules of China Financial Futures Exchange (the “Detailed Trading Rules”), and other amended market rules, as well as the new Detailed Rules of China Financial Futures Exchange for Exchange of Futures for Physicals on Treasury Bond Futures Contracts (the “Detailed Rules for EFPs”). These rules took effect on January 2, 2019, from which date CFFEX began accepting registration by members and institutions for EFP transactions on Treasury futures.

This round of amendment involves the Trading Rules and the Detailed Trading Rules among others. The amended Trading Rules state that “the Exchange permits the exchange of futures for physicals”. The Detailed Trading Rules add a new chapter named “Exchange of Futures for Physicals” which sets out the definition and general procedures for EFP, rules governing member management and rules on identifying and handling violations and breaches. The new Detailed Rules for EFPs provide the specific eligibility and registration requirements for clients intending to engage in EFP transactions on Treasury futures, the scope of the corresponding securities or related contracts, and the specific steps of an EFP transaction.

Exchange of futures for physicals (EFP) refers to the transaction wherein, upon the mutual agreement of the parties thereto, one party is the buyer of the Exchange contract and the seller of corresponding securities or related contracts, and the other party is the simultaneous seller of the Exchange contract and the buyer of corresponding securities or related contracts. As the complementary of central order book trading, EFP allows the simultaneous exchange of futures and corresponding securities or related contracts, thereby enabling investors to lock in the spread and more effectively manage risks with better precision. Moreover, as an alternative trading mechanism, EFP lowers the costs of executing trading strategies and meets investors’ diversified needs for price negotiation and flexible trading, thus facilitating the healthy development of the Treasury futures market.

A CFFEX official in charge of the EFP program commented that, as the next step, CFFEX would supervise its members to prepare for the launch of the EFP on Treasury futures, and would strictly control market risks, in order to ensure a smooth launch and orderly trading.