Shanghai Futures Exchange, China's only exchange trading aluminium and copper, on Friday raised margins for these metals to enhance risk control at a time of severe price volatility.

 

The margins for trading copper were raised to 9 percent from 7 percent of the contract's value, while those for aluminium were lifted to 7 percent from 5 percent, the exchange said in a statement on its website.

 

The new margin levels are expected to remain in place for a while as the price of copper and aluminium will remain high in both international and domestic markets, traders said.

 

Prior to the regulator's move, many futures brokerage firms had already lifted margins, as they are entitled to do.

 

Shanghai CIFCO Futures Brokerage Co, for instance, raised margins to 15 to 20 percent two weeks ago, trading manager Hu Kaixi told China Daily.

 

In China clients are charged margins from both the exchange authorities and the brokerage firms.

 

"Higher margins lowers leverage ratios for futures trading and therefore reduces risk in the market.

 

"On the clients' side, higher margins means less margin calls from your brokers," said Wu Bowen, a trader at the Jinpeng Futures Brokerage Co.

 

Brokers issue a margin call on a client's account when a deposit of funds in the account falls below the required level following marking-to-market adjustment.

 

Marking-to-market is a process whereby gains and losses on outstanding futures positions are recognized at the end of each trading day.

 

"Yet in the long term, higher margin levels may discourage speculators who make up the majority of futures traders and may lower liquidity in the market," added Wu.

 

Both coppers and aluminium rose close to the daily allowable limit on the Shanghai Stock Exchange on Friday, as traders are buying contracts to cover their short positions on the news, which pushed up prices.

 

Copper for delivery in August, the most actively traded contract, rose as much as 2,270 yuan (US$284), or 3 per cent, to a record of 73,860 yuan (US$9,232) per ton on the Shanghai Futures Exchange.

 

As for aluminium, deliveries in August rose 420 yuan (US$53), or 2 per cent, to 22,020 yuan (US$2,753).

 

"We are truly entering an age of bulls for coloured metals," said Shanghai CIFCO's Hu.

 

Commodity prices including copper, aluminium, oil and rubber, soared to record highs earlier this month.

 

The prices have been fluctuating at high levels, despite occasional downward corrections.

 

Traders attributed the increases mainly to surging demand from China's burgeoning economy and buying by investment funds looking for returns higher than those gained from stocks and bonds.

 

(China Daily May 27, 2006)