Non-futures-company members and clients may apply for the hedging and arbitrage quotas in accordance with the Guidelines of China Financial Futures Exchange on Hedging and Arbitrage Quotas, and the Exchange will reply to the application after reviewing the application materials. The application procedures are as follows:
1. Preparation of Materials
Non-futures-company members and clients shall prepare the application materials for the hedging and arbitrage quotas according to applicable requirements.
2. Submission of Materials
Where a client authorizes a futures-company member to apply for the hedging and arbitrage quotas, the futures-company member shall review the application materials and submit the same to the Exchange through the member service system. A non-futures-company member that applies for the hedging and arbitrage quotas shall directly submit the application materials to the Exchange through the member service system.
3. Exchange Review
The Exchange reviews the application materials in accordance with relevant rules.
4. Review Results
A futures-company member shall inform its client of the review results after receiving them through the member service system. A non-futures-company member receives the review results through the member service system.
These Guidelines are formulated in accordance with the Measures of China Financial Futures Exchange on Hedging and Arbitrage Trading and other relevant rules to further regulate the hedging and arbitrage quotas.
I. Hedging and Arbitrage Quotas
Hedging or arbitrage quota is classified into product quota and contract quota for nearby delivery month. Non-futures-company members and clients applying for hedging and arbitrage quotas shall submit the following application documents to the Exchange:
(1) CFFEX Hedging and Arbitrage Quota Application Form (signed or sealed by the applicant, Annex 1).
(2) Hedging/Arbitrage Plan.
Information contained in a hedging plan shall include but not be limited to the trading strategies, the necessity and justification for the quotas it requires for managing risk exposure (with supporting materials attached), measurement of correlation between the futures and the underlying assets to be hedged (including calculation methods and parameters), hedging effectiveness, and overview of the investment team. A plan for long hedging shall also specify the need for executing a futures substitution strategy and the size of the assets to be substituted for.
Information contained in an arbitrage plan shall include but not be limited to the trading strategies, the necessity and justification for the arbitrage quotas (with information on assets or financial resources attached), risk-neutral evaluation of the arbitrage portfolio (including evaluation methods and parameters), overview of the investment team, and overview of the trading system.
If the applicant has submitted its latest hedging or arbitrage plan to the Exchange within one year prior to the application and no change has been made thereof, it is not necessary to resubmit the plan.
(3) Where an applicant applies for a contract quota for nearby delivery month, it shall report to the Exchange its net assets (in case of an institution) or net value (in case of an investment product) as well as information on the deliverable China government bonds (CGBs) it holds (Annex 2).
(4) Statement on quota usage
A statement on quota usage provides a brief description of the use of the hedging and arbitrage quotas over the past year prior to the application, which shall include but not be limited to the execution of the hedging or arbitrage plan, usage of the quotas, compliance records and other documents required by the Exchange.
Where an applicant reapplies for hedging or arbitrage quota in a specific product, it shall submit a statement on historical quota usage if the previous quotas have been used for trading in the one year prior to the application date. This statement is not required if the applicant has not used the previous quotas, or if such a statement has already been submitted to the Exchange within one year prior to the application date.
(5) Other documents as required by the Exchange.
2. Adjustment and Cancellation
Any non-futures-company member or client seeking to adjust its hedging or arbitrage quota shall follow the procedures prescribed in “Section 1: Application”.
Any non-futures-company member or client seeking to cancel its hedging or arbitrage quota shall submit a Statement on Quota Cancellation (Annex 3).
3. Renewal of Product Quota
A product quota shall be valid for 12 months effective from the trading day following the date of approval.
Non-futures-company members and clients shall apply to the Exchange for new product quota at least ten trading days before the expiry of the existing quota if they wish to continue hedging or arbitrage trading after the existing quota expires.
If a non-futures-company member or client fails to apply to the Exchange for renewal of product quotas within the prescribed time limit, it shall close out its hedging or arbitrage positions before the expiry of the existing quotas.
II. Contract Quota for nearby Delivery Month
A contract quota for nearby delivery month shall be valid from the trading day preceding the delivery month of a given contract to the last trading day of the contract.
An applicant shall apply for a product quota prior to or simultaneously with a contract quota for nearby delivery month. The contract quota shall not exceed the product quota.
A non-futures-company member or client applying for a contract quota for nearby delivery month shall file the application with the Exchange between the first trading day two months prior the delivery month of the contract and five trading days prior the delivery month.
If a non-futures-company member or client has obtained a hedging product quota for CGB futures, but has not applied for a hedging contract quota for nearby delivery month, it will, from the trading day preceding the delivery month, acquire a long or short hedging contract quota for nearby delivery month equal to the lesser of:
1. the long or short positions held by the non-futures-company member or client with the hedging product quota in the contract entering the delivery month after settlement on the second trading day preceding the delivery month; or
2. the delivery month position limit for relevant contracts of the product.
If a non-futures-company member or client is not granted a contract quota for nearby delivery month, it shall close out its hedging or arbitrage positions in the contract before the trading day preceding the delivery month.
III. Management Obligations of Members
1. Members shall duly review and manage the applications for hedging and arbitrage quotas. Members shall upload relevant application materials through the member service system, and ensure the accuracy of relevant information such as the quotas being applied for, spot market account number, and contact details of the applicants. The Exchange will take corresponding measures against any member that provides untruthful materials or erroneous information.
2. When quotas are adjusted or about to expire, futures-company members shall remind relevant clients to timely adjust their positions or renew their quotas.
3. Futures-company members shall urge the clients applying for hedging or arbitrage quotas to duly report and manage their spot market accounts and timely update relevant information .
A member may change or adjust a client’s spot market account numbers via the “Report on Spot Market Account Number (Hedging)” or “Report on Spot Market Account Number (Arbitrage)” functions of the member service system.
The Exchange will take corresponding measures in the case of any misstatement, omission, or delayed update of a spot market account number.
4. Members shall log into the member service system to review the hedging and arbitrage trading information on a daily basis. Futures-company members shall keep their clients informed of relevant information in a timely manner.