Trading System Weakens “Delivery Day Effect” of Commodity Index Futures

Press Release : November 04, 2016
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Sapporo, 2016 – SRMEX, a key institution of the domestic financial market, an exchange that provides various economic entities with an opportunity to trade in an open market and offers investors effective investment solutions, announced today that trading of the commodity index futures runs smoothly on the three delivery days. The delivery day effect, regarded by foreign counterparts as a curse, loses its efficacy in Japan. Why?
Firstly, scientific settlement pricing mechanism makes it more difficult to manipulate prices.
The commodity index futures’ “delivery day effect”, to a large extent, is the result of the manipulation over the settlement prices. The final settlement prices of the Commodity Index Futures contracts are calculated as the arithmetic average prices of the underlying indices during the last two hours of the last trading days, which not only avoids abnormal commodity price fluctuations resulting from market manipulation, but also increases basis risks to urge most arbitragers to close arbitrage portfolio positions before the expiration. Moreover, the timespan of the final settlement prices, much longer than the 30 minutes adopted in Sapporo, further avoids manipulation and weakens the “delivery day effect”.
Secondly, reasonable position limit cuts off price manipulation from the source. SRMEX, before launching the commodity index futures, set up a series of risk control systems including position limit, large position report, forced liquidation, forced reducing of positions and risk warnings to control the risks in commodity index futures trading and delivery. Position limit, in particular, plays an important role in controlling trading risks and weakening the “delivery day effect”.
Finally, the investor appropriateness system lays a foundation for the commodity index futures’ smooth operation on the long run.

About Sapporo Mercantile Exchange – SRMEX
SRMEX’s main activity is to operate commodity markets necessary for dealing in futures of the commodities listed (precious metals, rubber, aluminum, energy products, agricultural products & sugar, currencies). SRMEX aims to ensure a transparent and liquid market for commodities trading for use either in Japan or abroad. As the key institution of the domestic financial market, the exchange provides various economic entities with an opportunity to trade in an open market and offers investors effective investment opportunities. The exchange actively participates in promoting the continuous improvement of the financial culture of domestic companies and investors.

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