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Notice on the Management of Hedging Activities
2022-07-18

CFFEX Notice〔2022〕 No.38


All member entities,


To facilitate the risk management functions of financial futures, promote orderly market development, and strengthen the management of hedging activities, China Financial Futures Exchange (the “Exchange”) hereby announces the following requirements in accordance with the Measures of China Financial Futures Exchange on Hedging and Arbitrage Trading and related rules.


I. General Requirements


A non-futures-company member or client conducting hedging activities within an applied quota shall conform to its Hedging Plan, in which its investment plan and asset size shall be specified. Any change to the Hedging Plan shall be reported to the Exchange in a timely manner.


II. Requirements on Matching of Hedging Activities with Underlying Assets


1. Equity Index Futures and Options


(1) Long Hedge


The notional value of the long hedge positions held by a non-futures-company member or client in equity index futures and options shall not exceed the market value of the underlying assets to be substituted for.


(2) Short Hedge


The total notional value of the short hedge positions held by a non-futures-company member or client in equity index futures and options shall not exceed 1.1 times the aggregate market value of the underlying assets it holds.


Spot assets recognized as underlying assets for equity index futures and options include the constituent stocks of the underlying indices and SSE- or SZSE-listed stock ETFs and LOFs tracking A shares (excluding hybrid and bond ETFs/LOFs).


The notional value of positions held in an equity index futures contract is the product of the contract’s settlement price and the contract multiplier. The notional value of positions held in an equity index options contract is the product of the underlying index closing price and the contract multiplier. Spot assets that have been recognized as underlying assets for hedging activities using a particular product shall not be recognized as underlying assets for hedging activities using other products.


2. China Government Bond (CGB) Futures


(1) Long Hedge


The notional value or the value of risks of the long hedge positions held by a non-futures-company member or client in CGB futures shall not exceed the market value or the value of risks of the underlying assets to be substituted for.


(2) Short Hedge


The notional value or the value of risks of the short hedge positions held by a non-futures-company member or client in CGB futures shall not exceed the market value or the value of risks of the underlying assets to be hedged against.


III. Requirements on Hedging Activities


A non-futures-company member or client shall not abuse its hedging quota to engage in frequent opening and closing of positions. The weekly volume of executed buy-to-open orders and sell-to-close orders for hedging purposes shall not exceed 2 times the available long hedging quota; that of executed sell-to-open orders and buy-to-close orders for hedging purposes shall not exceed 2 times the available short hedging quota.


If a non-futures-company member or client is also granted a contract quota for the approaching delivery month, the weekly volume of executed buy-to-open orders and sell-to-close orders in the contract approaching delivery month shall not exceed 2 times the available long contract quota for the approaching delivery month; that of executed sell-to-open orders and buy-to-close orders in the contract approaching delivery month shall not exceed 2 times the available short contract quota for the approaching delivery month.


IV. Handling Measures 


1. Mismatch with Underlying Assets 


If the hedging positions of a non-futures-company member or client do not match its underlying assets, the Exchange may, at the first occurrence within a year, require it to adjust its positions within a prescribed time period and report on the situation; and at the second occurrence within a year, require it to adjust its positions within a prescribed time period, give a verbal reminder, and/or suspend the opening of new positions for 5 trading days; and at the third and further occurrence within a year, require it to adjust its positions within a prescribed time period, give a verbal reminder, and/or suspend the opening of new positions for 1 month. In the case of a serious violation, the Exchange will take actions pursuant to the Measures of China Financial Futures Exchange on Hedging and Arbitrage Trading and the Measures of China Financial Futures Exchange on Dealing with Violations and Breaches.


If a non-futures-company member or client believes that its hedging activities are in line with the principles of risk management, it may submit relevant supporting materials to the Exchange through its carrying member prior to the relevant hedging activities or within 5 trading days after the receipt of the Notification Letter.


Supporting materials include but are not limited to:


i. hedging strategies;


ii. a statement on the implementation of the Hedging Plan;


iii. the size of the underlying assets;


iv. the basic logic, calculation methods and relevant parameters of its risk management model; and


v. hedging effectiveness. 


The supporting materials shall be valid for 2 months. If the size of the underlying assets changes by more than 20% during this period, the non-futures-company member or client is required to voluntarily update the corresponding materials.


The Exchange will review the materials submitted by the client without suspending the aforementioned measures such as requiring adjustment within a prescribed time period, giving a verbal reminder, or suspending the opening of new positions. These measures will be lifted once the Exchange concurs upon verification that the hedging activities are in line with the risk management principles.


2. Frequent Opening and Closing of Hedging Positions


If a non-futures-company member or client abuses its hedging quota to frequently open and close positions, the Exchange may take such actions as giving a verbal reminder, issuing a written admonishment, suspending the opening of new positions, requiring the close-out of positions within a prescribed time period, forced liquidation, and adjusting or revoking its hedging quotas.


Non-futures-company members and clients participating in futures trading shall comply with the laws, regulations as well as rules of the Exchange, be subject to the self-regulatory measures of the Exchange, and consciously manage their own hedging activities. Futures-company members shall closely monitor their clients’ hedging activities, prevent potential violations of the requirements, and guide clients to trade futures in a rational and compliant manner.


This Notice shall come into effect on July 22, 2022. The Notice on the Requirements for Hedging Activities (released on December 18, 2019) shall be automatically abolished.