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Measures for the Administration of Option Trading of Zhengzhou Commodity Exchange

Measures for the Administration of Option Trading of Zhengzhou Commodity Exchange

(Revised at the 5th meeting of the 7th Board of Governors on August 27, 2020, and the revised part shall come into force since September 29, 2020)

Chapter 1 General Provisions

Article 1 These Measures are formulated based on actual market conditions and in accordance with the Regulation on the Administration of Futures Trading and Bylaws of Zhengzhou Commodity Exchange for the purposes of regulating option trading behaviors, protecting lawful rights and interests of option market participants and public interests, and improving the functions of the option market.

Article 2 Option trading shall refer to the trading activity of buying and selling certain option contracts by open and centralized trading means or other means approved by the China Securities Regulatory Commission (hereinafter “the CSRC”).

Article 3 Zhengzhou Commodity Exchange (hereinafter “the Exchange”) shall organize option trading on the principles of openness, fairness, impartiality and trustworthiness.

Article 4 These Measures shall be applicable to on-exchange option trading activities. The Exchange, members, market makers, clients, futures margin depository banks designated by the Exchange and other market participants shall comply with these Measures.

Chapter 2 Option Contract

Article 5 An option contract shall refer to a standardized contract designed by the Exchange that gives the buyer the rights to buy or sell an agreed underlying asset at a certain price at some point in the future.

Article 6 The option contract specifications shall include but not limited to the underlying asset, contract type, trading unit, price quotation, minimum price fluctuation, price limit, contract months, trading hours, last trading day, expiration day, strike price, exercise style, product code and listed exchange.

Article 7 The underlying asset of an option contract shall be the object to which the rights and obligations of the buyer and seller are attached.

An option contract whose underlying asset is a futures contract shall be called an option on futures.

Article 8 Option contract can be classified into call option and put option.

A call option gives the buyer the rights to buy the agreed underlying asset at a certain price at some point in the future. The seller of a call option shall fulfill the corresponding obligations.

A put option gives the buyer the rights to sell the agreed underlying asset at a certain price at some point in the future. The seller of a put option shall fulfill the corresponding obligations.

Article 9 The trading unit of an option contract is “lot”. Option trading shall be conducted in the multiples of a lot. The number of underlying assets covered by per lot is specified in the option contract specifications.

Article 10 The price quotation of an option contract shall be identical to that of its underlying asset.

Article 11 Minimum price fluctuation shall refer to the minimum increment or decrement of price movement that is allowable for an option contract.

Article 12 The price limit of an option on futures shall be the same as that (the settlement price of the previous trading day multiplies corresponding proportion) of the underlying futures contract.

Article 13 The contract months of an option on futures shall refer to the delivery months of the corresponding underlying futures contract.

The Exchange may adjust the contract months of a listed option contract according to market conditions.

Article 14 Last trading day shall refer to the last day on which the option contract can be traded.

Article 15 Expiration day shall refer to the last day on which the buyer of an option contract could exercise the option.

Article 16 Strike price shall be the price specified in an option contract at which the buyer is entitled to buy or sell the underlying asset at some point in the future.

Strike price interval shall be the price difference between two adjacent strike prices.

Strike price shall be the integral multiple of strike price interval.

The Exchange may adjust the number and interval of strike prices of an option contract based on market conditions.

Article 17 Exercise styles shall include American style, European style and other styles specified by the Exchange. The buyer of an American option can exercise the option on the expiration day or any trading day before the expiration day. The buyer of a European option can only exercise the option on the expiration day.

Article 18 The product code of an option contract shall consist of the product code of the underlying asset, contract month, call option code (C) or put option code (P), and strike price, etc.

Chapter 3 Option Trading

Article 19 Non-futures brokerage members (hereinafter “non-FB member”) and clients shall use the same trading codes as the futures trading in option trading. One without a trading code shall apply to the Exchange according to relevant regulations on futures trading.

Article 20 Investor suitability requirements shall be applicable to option trading. The specific measures of investor suitability management shall be separately prescribed by the Exchange.

Article 21 Market making system shall be applicable to option trading. The specific measures for the management of market makers shall be separately prescribed by the Exchange.

Article 22 Non-FB members and clients may send requests-for-quotations (RFQ) to market makers. The contracts to which RFQs apply and the frequency of sending RFQs shall be determined and announced by the Exchange. The Exchange may make adjustments according to market conditions.

The Exchange shall manage RFQs in the market. Where there are abnormalities in RFQs, the Exchange may notify relevant members or clients by phone and require them to make reports, and the members and clients shall assist and cooperate with the Exchange. The futures brokers shall manage the RFQs of their clients and require them to send RFQs reasonably.

Article 23 The price of an option contract shall refer to the premium per price quotation of the option contract.

Option premium shall be the price the buyer pays to obtain the corresponding rights.

Article 24 The relevant provisions on the opening price, closing price, highest price, lowest price, latest price, price change, highest buying price, lowest selling price, buying volume, selling volume, trading volume, open interest, auction, and matching principle of futures trading shall be also applicable to option trading.

Article 25 The maximum order size of the limit order, market order and spread order in option trading shall be the same as that of the futures trading. The Exchange may make adjustments according to market conditions.

Order attributes shall be attached to an option spread order. Order attributes include fill and kill, and fill or kill, etc.

Article 26 The strategies of option spread order shall include:

Ⅰ. long straddle, which shall refer to buying a call and a put at the same time with the same underlying asset, expiration day, quantity and strike price;

Ⅱ. short straddle, which shall refer to selling a call and a put at the same time with the same underlying asset, quantity, expiration day and strike price;

Ⅲ. long strangle, which shall refer to buying a call and a put at the same time with the same underlying asset, quantity and expiration day, but with a higher strike price for the call and lower for the put;

Ⅳ. short strangle, which shall refer to selling a call and a put at the same time with the same underlying asset, quantity and expiration day, but with a higher strike price for the call and lower for the put.

During the auction period, the Exchange shall not accept spread orders when there is a limit-locked market for an option contract.

Article 27 The listing of an option contract shall comply with the following principles:

Ⅰ. the listing time of a new month option on futures shall be the next trading day after the listing day of the underlying futures;

Ⅱ. the newly listed option contract shall include an at-the-money option contract and several in-the-money and out-of-the-money option contracts;

Ⅲ. after an option contract is available for trading, the Exchange shall set the strike price of the at-the-money option according to the daily settlement price of its underlying asset. In case that the number of in-the-money and out-of-the-money option contracts is less than the number specified in the contract, more option contracts with new strike prices shall be listed;

Ⅳ. the theoretical price of a newly-listed option contract shall be determined and published by the Exchange.

The term “at-the-money option” in item Ⅱ of  paragraph 1 of this Article shall refer to the option whose strike price is the same as (or close to) the settlement price of its underlying asset on previous trading day. When the mean of the two adjacent strike prices is equal to the settlement price of the underlying asset, the higher price shall be taken as the at-the-money option’s strike price. In-the-money option shall refer to the call (put) option whose strike price is lower (higher) than that of the at-the-money option. Out-of-the-money option shall refer to the call (put) option whose strike price is higher (lower) than that of the at-the-money option.

Article 28 An option contract can be settled in three ways: liquidating, exercising and waiving the exercise.

Liquidating shall refer to the way in which a client closes out the long (short) positions of an option contract by selling (buying) the same option contract with the same quantity. The option contracts with the same underlying assets, types, contract months, expiration days and strike prices are the same option contracts.

Exercising shall refer to the way in which a buyer closes out the positions of an option contract by exercising the rights of buying or selling the underlying asset at the strike price according to rules, or by clearing the cash difference at the set settlement price.

Waiving the exercise shall refer to the way in which a buyer closes out the positions of an option contract by not exercising the option when the option contract expires.

Article 29 A non-FB member and client may apply to have their long and short speculative positions in the same options contract under the same trading code offset against each other. The positions being offset shall be deducted from the option open interest of the current day and be included into the option trading volume. The time and method of application shall be separately announced by the Exchange.

Chapter 4 Exercise and Assignment

Article 30 A client’s option shall be exercised and assigned on the Exchange with the help of and in the name of a member.

Article 31 An option buyer shall have the rights to submit the applications for exercising and waiving the exercise within the specified time period prescribed by the Exchange.

An option seller has the obligation to assign an option contract. Assignment shall refer to that the option seller shall, if the buyer chooses to exercise, buy or sell a certain number of underlying assets at the strike price prescribed in the option contract, or clear the cash difference at the settlement price prescribed in the option contract.

Where an option buyer submits the application for exercising the option, the sellers’ speculative positions shall be matched in priority, and then the arbitrage positions and hedge positions. Among the positions with the same attribute, the positions having been held for longer time shall be matched in priority.

The Exchange may adjust the time of application for exercising and waiving the exercise on the expiration day.

Article 32 A non-FB member and client may apply to have its long and short futures positions obtained upon the exercise of option contracts under the same trading code offset against each other, or offset the futures positions obtained upon the exercise of option contracts under one trading code against existing futures positions. The positions being offset shall not exceed the larger one between the speculative buying positions and speculative selling positions obtained from the exercise. The positions being offset shall be deducted from the futures open interest of the current day and be calculated into the futures trading volume. The time and method of application shall be separately announced by the Exchange.

Article 33 After a call option on futures is exercised and assigned, the buyer will obtain long positions in the underlying futures at the strike price, and the seller will correspondingly obtain short positions in the underlying futures at the same strike price. After a put option on futures is exercised and assigned, the buyer will obtain short positions in the underlying futures at the strike price, and the seller will correspondingly obtain long positions in the underlying futures at the same strike price.

Article 34 Prior to the expiration day of option contracts, members shall remind the clients to properly manage the option positions.

Article 35 Where the application for exercising an option or waiving the exercise is not submitted to the Exchange within the specified time, the Exchange shall handle the option positions in the following ways:

Ⅰ. where the strike price of a call option is lower than the settlement price of the underlying asset on current day, the positions shall be exercised automatically;

Ⅱ. where the strike price of a put option is higher than the settlement price of the underlying asset on that day, the positions shall be exercised automatically;

Ⅲ. the exercise of other option positions will be waived automatically.

Article 36 Where the buyer exercises an option on futures, the balance of the buyer’s margin funds shall satisfy the futures margin requirements.

The member shall not accept the application for exercising an option if the buyer does not have sufficient funds. If the buyer’ positions of satisfy the requirements under items Ⅰ and Ⅱ of Article 35 but the buyer has insufficient funds, the member shall submit the application for waiving the exercise on behalf of the buyer to the Exchange.

Chapter 5 Clearing Business

Article 37 The special clearing account and special fund account used in option trading shall be the same as those in futures trading.

Article 38 A buyer shall pay the premium but is not obligated to pay the trading margin in option trading. A seller shall receive the premium and pay the trading margin in option trading.

Article 39 A buyer shall pay the premium according to the filled price when establishing the positions in an option. A buyer shall receive premium according to the filled price when liquidating the option positions.

A seller shall receive premium according to the filled price when establishing positions in an option. The seller shall pay the premium according to the filled price when liquidating the option positions.

The Exchange may adjust the balance of a member’s clearing reserve fund according to the amount of premium being collected and paid.

Article 40 When a seller opens new positions in an option contract, the Exchange shall collect trading margin from the seller according to the option contract’s margin rate at the time of clearing on the preceding trading day; when the seller closes positions in an option contract, the Exchange shall release corresponding trading margin.

Article 41 During daily clearing, the Exchange shall calculate and collect the seller’s trading margin based on the settlement price of the current day, calculate and collect the transaction fees and exercise (assignment) fees from both the buyer and the seller based on the trading volume and the quantity of exercised (assigned) contracts, transfer the receivables or payables and correspondingly credit or deduct members’ clearing reserve funds.

The standard of transaction fees and exercise fees shall be determined by the Exchange. The Exchange may adjust the standard of fees according to market situations.

Article 42 During daily clearing, the eligible option and futures positions will be automatically confirmed as covered option spread positions by the Exchange. Covered option spread shall be classified into covered call spread and covered put spread.

Covered call spread shall refer to a strategy in which a trader shorts the call and longs the underlying futures contract with the same quantity at the same time. Covered put spread shall refer to a strategy in which a trader shorts the put and shorts the underlying futures contract with the same quantity at the same time.

Article 43 The determination of the settlement price of an option contract shall be:

Ⅰ. the settlement price of an option contract on the current day except for the last trading day shall be its theoretical price determined based on the implied volatility;

Ⅱ. the settlement price of an option contract on the last trading day shall be calculated as follows:

the settlement price of a call option =Max (the settlement price of the underlying asset-strike price, 0);

the settlement price of a put option =Max (strike price-the settlement price of the underlying asset, 0);

Ⅲ. when the settlement price of an option contract is obviously unreasonable, the Exchange may make adjustments accordingly.

The term “implied volatility” mentioned in item I of paragraph 1 of this Article shall refer to the price volatility of the underlying asset which is calculated based on the market price of the option by using option pricing model.

Article 44 As for the buyer and seller who exercise an option or waive the exercise, the Exchange will decrease their the option positions correspondingly and release the seller’s trading margin at the same time.

The futures positions converted from the exercise of an option contract shall not be included in the calculation of the futures settlement price on current day.

Chapter 6 Risk Management

Article 45 The risk management measures of option trading shall include margin requirements, price limit, position limit, trading limit, large position reporting, forced liquidation and risk warning.

Article 46 Margin requirements shall be applicable to the Exchange’s option trading. Trading margin collected from a seller of an option on futures will be calculated based on the greater of:

Ⅰ. the settlement price of the option contract × the trading unit of the underlying futures contract+the trading margin of the underlying futures contract-half of the out-of-the-money amount of the option contract;

Ⅱ. the settlement price of the option contract × the trading unit of the underlying futures contract+half of the trading margin of the underlying futures contract;

Hereinto,

Out-of-the-money amount of the call option= Max (the strike price-the settlement price of the underlying futures contract, 0)×the trading unit of the underlying futures contract;

Out-of-the-money amount of the put option= Max (the settlement price of the underlying futures contract–the strike price, 0)×the trading unit of the underlying futures contract.

Article 47 The trading margin arising from selling an option straddle or an option strangle shall be the sum of the greater of the trading margin arising from selling call option and selling put option, and the premium of the other positions.

Article 48 The trading margin of covered option spread shall be the sum of the premium and the trading margin of the underlying asset.

Article 49 Price limit shall be applicable to the Exchange’s option trading. The calculation formulas of limit prices of an option on futures are as follows:

Ⅰ. limit up price = the settlement price of the option contract on previous trading day + the settlement price of the underlying futures contract on previous trading day×the percentage of the limit up of the underlying futures contract.

Ⅱ. limit down price = MAX (the settlement price of the option contract on previous trading day –the settlement price of the underlying futures contract on previous trading day×the percentage of the limit down of the underlying futures contract, the minimum price fluctuation of the option contract)

Article 50 The market will be a limit-locked market if any of the following circumstances occurs within five (5) minutes before market close of an option contract: a. there are only buy (sell) orders and no sell (buy) orders existing at limit price; b. all the sell (buy) orders are instantly filled and the last price is the same with the limit price.

If the settlement price of an option contract on previous trading day is less than or equal to the price limit on that day, and there are only sell orders but no buy orders existing at the lowest quoted price during the five (5) minutes before the market close of the current day, or all the buy orders are instantly filled and the last price is the same as the limit price, then the Exchange shall not treat this circumstance as the limit-locked market.

Article 51 If a limit-locked market with the same direction occurs to an option contract for three (3) consecutive trading days, the Exchange will not conduct forced position reduction.

Article 52 If the trading of the underlying futures contract is suspended, the corresponding option contract trading shall also be suspended. If the trading of an option contract is suspended all day long on the last trading day, then the last trading day and the expiration day of the option contract shall be postponed to the next trading day correspondingly.

Article 53 When there are adjustments to the trading margin rate and price limit of the underlying futures contract, the trading margin rate and price limit of the option contract shall be changed correspondingly as well.

Article 54 Position limit shall be applicable to the Exchange’s option trading. The option position limit shall refer to the maximum quantity of one-sided speculative positions held by non-FB members and clients in one contract month.

Article 55 One-sided positions of an option contract shall be the sum of long call option positions and short put option positions, or the sum of long put option positions and short call option positions.

The quantity of speculative positions held by non-FB members and clients shall not exceed the position limit prescribed by the Exchange. The position limit of an option contract shall be determined and published by the Exchange. The Exchange may make adjustments according to market conditions.

The position limit of non-FB members and clients engaging in the business of hedging, arbitrage and market making shall be implemented in accordance with the relevant provisions of the Exchange.

Article 56 The Exchange may implement option trading limit in accordance with the Measures for the Administration of Risk Control of Zhengzhou Commodity Exchange.

Article 57 In case that the futures positions held by non-FB members and clients exceed the futures position limit due to option exercise, the Exchange shall implement forced position liquidation in accordance with relevant regulations.

Article 58 Large position reporting shall be applicable to the Exchange’s option trading. The requirements of large position reporting and required documents are prescribed in the Measures for the Administration of Risk Control of Zhengzhou Commodity Exchange.

Article 59 Forced position liquidation shall be applicable to the Exchange’s option trading. The Exchange shall, in any of the following situations, conduct forced liquidation based on the principles of maximum liquidity and the maximum amount of released capital:

Ⅰ. the balance of a member’s clearing reserve fund is less than zero and the member fails to make up within the specified time and does not provide a liquidation list;

Ⅱ. the positions held by non-FB members or clients exceed the position limit.

Other circumstances, principles and procedures of forced liquidation are prescribed in the Measures for the Administration of Risk Control of Zhengzhou Commodity Exchange.

Article 60 Risk warning shall be applicable to the Exchange’s option trading. The circumstances and methods of risk warning are prescribed in the Measures for the Administration of Risk Control of Zhengzhou Commodity Exchange.

Chapter 7 Information Management

Article 61 Option trading information shall refer to the option trading quotes, statistical materials of trading data produced in option trading on the Exchange, various announcements published by the Exchange and other relevant information disclosed by the CSRC.

Article 62 The ownership of option trading information shall belong to the Exchange. The option trading information shall be managed and published by the Exchange. The Exchange may manage the option trading information independently and may collaborate with a third party, or entrust a third party to manage the option trading information. No organization or individual may publish such information and use it for commercial purposes without the Exchange’s consent.

Article 63 The Exchange shall release real-time, delayed, daily, weekly and monthly option trading quotes, daily, monthly and yearly statistical information and other trading information required to be disclosed in accordance with laws and regulations.

Article 64 Real-time quotes shall refer to the trading quotes released synchronously with trading activities during trading hours. The delayed quotes shall refer to the real-time trading quotes that is postponed to be released for a certain time. The real-time and delayed quotes shall include: product code, latest price, price variation, trading volume, open interest, change in open interest, buying price, selling price, buying volume, selling volume, settlement price, opening price, closing price, highest price, lowest price and previous settlement price.

Article 65 Daily option trading information shall be released by the Exchange after the end of each trading day. Such information shall include:

Ⅰ. daily quotes: product code, opening price, highest price, lowest price, closing price, previous settlement price, settlement price, price variation, trading volume, turnover, open interest, change in open interest, Delta, implied volatility and exercise volume;

Ⅱ. the trading volumes, open interests, and the hedge quota and positions of the top 20 members in the lead month contract and the most active month contract;

The “Delta” as mentioned in item Ⅰ of paragraph 1 of this Article shall refer to the ratio of the price change of the underlying asset to the price change of the option contract. The exercise volume shall refer to the quantity of the option contracts that are closed by option exercise.

Article 66 Weekly option trading information shall be released after the end of the last trading day of a week. Such information shall include: product code, weekly opening price, highest price, lowest price, weekly closing price, price variation (difference between this week-end closing price and last week-end settlement price), week-end settlement price, trading volume, turnover, open interest, change in open interest (difference between this week-end open interest and last week-end open interest) and exercise volume.

Article 67 Monthly option trading information shall be released after the end of the last trading day of a month. Such information shall include: product code, monthly opening price, highest price, lowest price, month-end closing price, price variation (difference between this month-end closing price and last month-end settlement price), month-end settlement price, trading volume, turnover, open interest, change in open interest (difference between this month-end open interest and last month-end open interest) and exercise volume.

Article 68 Yearly option trading information shall be released after the end of the last trading day of a year. Such information shall include:

Ⅰ. the total trading volume and turnover of all option products, and the trading volume and turnover by product;

Ⅱ. the total exercise volume of all products and the exercise volume by product.

Article 69 The Exchange shall be held harmless if the normal trading of members or clients is affected due to the failure of information providers or public media in disclosing the Exchange’s trading quotes.

Article 70 No members, information providers, public media or individuals shall release any false or misleading information.

Chapter 8 Supplementary Provisions

Article 71 Matters not clearly stipulated in these Measures shall be dealt with in accordance with the Exchange’s other business rules.

Article 72 If there is any inconsistency between the Exchange’s other business rules and these Measures, these Measures shall prevail in terms of option-related business.

Article 73 The Exchange shall handle any violation of these Measures in accordance with the Measures for Penalties for Violations of Zhengzhou Commodity Exchange.

Article 74 The Exchange shall reserve the right to interpret these Measures.

Article 75 These Measures shall enter into force from September 29, 2020.

(The English version is for reference ONLY. The Chinese version shall prevail if there is any inconsistency.)

 

 

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