Hubei to debut China’s first CO2 forward contract on Wednesday

Published 11:06 on April 25, 2016  /  Last updated at 13:51 on April 25, 2016  /  China, China's Pilot Markets  /  No Comments

The Hubei carbon bourse will launch May 2017 forward contracts on Wednesday, the first of China’s seven pilot carbon markets to offer on-exchange forward trading.

The Hubei carbon bourse will launch May 2017 forward contracts on Wednesday, the first of China’s seven pilot carbon markets to offer on-exchange forward trading.

The exchange, backed by the provincial Development and Reform Commission, is launching the forwards with some restrictions, partly to reduce the potential for market manipulation:

  • The price cannot rise or fall by more than 4% from the previous day, compared to a 10% limit in the spot market.
  • Institutional investors can only hold a maximum long or short position of 10,000 lots of 100 allowances, or 1 million units in total across all forward contracts, while private traders can hold 5,000 (500,000 units total). Banks are not allowed to participate in forward trading.
  • Traders will be required to put up margin of 20% to reduce delivery risk.

The full rules for trading the contract are available in Chinese here.

An exchange official told Reuters that the forward contract will have an opening offer of 21.56 yuan ($3.32), equal to the weighted average closing price over the past 20 trading days.

The opening level is some 8% above the closing price in the spot market Monday of 20.00 yuan, a new all-time low for the Hubei market.  Prices have been dented by over-allocation and uncertainty regarding the details of the transition to a national market late next year.

Although the Guangdong market issued rules for OTC forward trading earlier this year, the Chinese pilot markets have been limited to spot deals because the China Securities Regulatory Commission (CSRC) only allows futures trading in a handful of commodity markets.

Observers say this has hampered liquidity in the pilot markets as it makes trading less attractive to financial players. It also means the pilot schemes have not been able to provide a future carbon price signal for emitters, reducing the markets’ ability to drive emission cuts.

Hubei’s foray into this territory is likely to be limited due to the restrictions on trading activity, but may still provide useful experience for emitters and regulators alike.

The latest NDRC draft ETS regulations include provisions for a futures market in the national ETS, although documents revealed that the CSRC, which holds the final authority on the issue, opposes it.

The Shanghai carbon exchange is also hoping to launch an on-exchange forward contract in September.

By Stian Reklev – stian@carbon-pulse.com

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