Unique daily delivery method
The futures contract of Shanghai Stock Exchange adopts the method of daily delivery, that is, spot delivery and settlement can be carried out on any working day. The transaction is based on the price of three months, and the basis is increased and decreased at each maturity date. LME can only use semi-electronic trading because of the basis difference, that is, March futures are electronic, and the traditional quotation is still used for price adjustment.
Monthly delivery is the mainstream way of commodity futures trading today. Its advantages are simple contract basis and easy electronic transaction, but its disadvantages are long interval between spot deliveries. Therefore, subsidiaries of futures companies can consider designing "spot delivery OTC swap contracts" products to convert monthly delivery contracts into multi-point delivery contracts. "Instant delivery of OTC swap contracts" is beneficial to realize the price discovery function and meet the needs of many entity users.
Convenient settlement price
The LME settlement price of the day refers to the spot delivery price of the seller at the end of the transaction on the second floor of the trading day. The settlement price of the day is not the average price in a certain period of time, but the actual transaction price at that time, and each trading customer can carry out spot hedging according to the settlement price. Most international contracts for basic metals adopt this price as the benchmark price for spot contracts. For example, a spot dealer signed a nickel product purchase contract with foreign investors, the quantity was 120 tons, the shipment month was 2011June, the purchase price was 2011May, and the monthly average price of LME spot settlement price was negative 100. Worried about the rising purchase cost, spot dealers can lock in the purchase cost by means of average transaction. LME brokers can also expand trading volume through off-exchange average price trading. The subsidiaries of futures companies can launch similar "settlement OTC futures contracts" to form their own risk exposure management capabilities in the role of market makers.
Standardized delivery process
The spot pricing ability reflected by the mutual conversion ability between commodity futures contracts and spot is an important basis of price discovery function. LME has more than 700 warehouses around the world, with reasonable layout and complete and practical spot delivery and warehousing processes. The mainstream manufacturers in the global large-scale non-ferrous metal industry regard the brand registered in LME as a symbol of high quality, and at the same time provide a very guaranteed channel for the purchase and sale of their products.
LME's management of warehouse receipts is very standardized, with unified warehouse receipt standards to meet the needs of spot transactions. LME basically has no restrictions on registering warehouse receipts and canceling warehouse receipts. If the spot delivery is artificially graded and limited for the purpose of strictly controlling risks, it will inhibit the enthusiasm of spot participants to use the futures market for trading and pricing.
LME warehouse receipt is an anonymous document representing ownership, which is delivered by transferring the warehouse receipt certificate from the seller to the buyer. LME warehouse receipts are transferred through electronic transfer system. For example, China traders import electrolytic copper from Chile. If the price difference between London and Shanghai is large, they can hand it over to the warehouse of Lunjiao Exchange in Busan, South Korea. When making warehouse receipts after warehousing, electronic warehouse receipts are used to complete the sale of warehouse receipts through London brokers in a very short time, without waiting for the delivery of paper warehouse receipts.
Huge warehouse receipt secondary market
LME has a huge secondary warehouse receipt market trading system, and the warehouse receipt transaction price is reflected in the form of premium, which mainly includes brand premium and delivery place premium. Warehouse receipt premium and spot premium are closely related, but they are not exactly the same.
The secondary warehouse receipt market of domestic futures exchange needs to be expanded. Exchanges should take the lead in relaxing restrictions on spot delivery, enriching delivery brands (including international brands with mutual certification), expanding the scope of delivery warehouses and launching warehouse receipt trading systems. At the same time, we can also consider introducing companies with capital or spot background as market makers in the secondary warehouse receipt market to guide industrial demand and financial capital to participate in warehouse receipt transactions.
International exchanges and cross-market transactions
LME trades six varieties of nonferrous metals, each with world-class spot pricing ability. Among them, nickel and tin are unique trade varieties of LME.
The demand of domestic trade and investment and financing makes the cross-market transaction between LME and SHFE flourish. Due to the huge demand for cross-market transactions, subsidiaries of futures companies can consider designing "cross-market parity OTC futures contracts" to be delivered monthly as market makers and directly trade at parity. It should be noted that the necessary conditions for the formation of price comparison contracts include not only the needs of entity users and the management ability of risk exposure, but also the compliance of domestic and foreign trading channels and the liquidity between local and foreign currencies.
Options and forward basis
LME registered option is a futures option, which belongs to the American option of monthly delivery. The term of option contract varies with different commodity varieties. The longest period of registered options for LME aluminum and copper is 63 months, and the types of registered options include call options, put options and average price options.
It is the general trend for China to introduce non-ferrous metal variety options. Considering the risk exposure, management experience, capital background and position hedging ability of the subsidiaries of futures companies, metal options should be officially standardized in the exchange and market makers should be introduced. After market makers have certain management experience and liquidity, they can design targeted OTC personalized options.
In addition, because the main trading months of on-site futures contracts are concentrated and the time span is short, it is very necessary for production enterprises, especially those engaged in resource projects with long development cycle.