Explainer: China aims to challenge Brent, WTI oil with crude futures launch
By Meng Meng and Tom Daly
BEIJING (Reuters) - The launch of China's yuan-denominated oil futures will mark the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) aimed at giving the world's largest energy consumer more power in pricing crude sold to Asia.
The exchange said on Friday it had set the opening price for the front month of its crude futures contract launching on Monday at 416 yuan ($65.80) per barrel.
WHAT ARE THE CONCERNS AMONG FOREIGN INVESTORS?
* Worries include how to freely exchange the yuan because of a Chinese clampdown on capital outflows, while some concerns remain about Beijing's heavy handed intervention in its commodity markets in recent years, traders and analysts said.
The obligation to trade Shanghai crudes in yuan will also add a currency risk to the market, which some traders are reluctant to take.
* The Shanghai International Energy Exchange (INE), the unit of ShFE running the contract, has strict daily limits on the number of canceled orders allowed per account, aimed at curbing spoofing. This involves placing bids to buy or offers to sell futures contracts with the intent to cancel them before execution. By creating an illusion of demand, spoofers can influence prices to benefit their market positions.
For a larger client placing orders of more than 300 lots, equivalent to 30,000 barrels of oil, the limit is 50 a day. Users with smaller orders are allowed 500 cancellations.
That's different to international exchanges, like the CME, which uses a ratio based on an investor's traded volume.
On days when price volatility and volumes are high, overseas investors new to Chinese markets could get penalised if they exceed those restrictions as they try to adjust their positions, traders say.
* Chinese commodity futures investors do not typically trade steadily over the months, but instead pick specific months in which they deal. That could complicate efforts to trade spreads between Brent, WTI and Shanghai.
Take iron ore <0#DCIO:>, one of China's most-active futures markets: most of the more than 2.3 million lots of open interest are in May and September contracts, with delivery months in between ranging from tens of thousands of lots to in some cases fewer than 10.
In contrast, liquidity across the first five months of the Brent and WTI contracts <0#LCO:> <0#CL:> is relatively evenly spread out, reflecting their popularity among hedge funds and other financial players, who like to trade month by month.
* There will be a 1.5-hour gap between the settlement and a price published by price reporting agency S&P Global Platts, which provides a price assessment for the region at 4:30 p.m. Singapore time in what it calls the Market On Close (MOC) process, which is closely watched by the industry.