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Exclusive-China’s regulators check risks to futures brokers from nickel positions
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Global Banking & Finance Review®
Company
By Samuel Shen and Xie Yu
HONG KONG/SHANGHAI (Reuters) – China’s securities regulators are gathering information from futures brokerages about their clients’ short positions in nickel to prevent spillover risks from rocketing prices this week, three people with knowledge of the matter said on Thursday.
The London Metal Exchange intervened on Tuesday to calm the nickel market after prices hit records of more than $100,000 a tonne as Western sanctions threatened supply from major producer Russia.
In China, the Shanghai Futures Exchange suspended nickel trading on Thursday after the metal surged for three days in a row. The exchange would resume trading of some of its nickel futures contracts from March 11.
As a result of the sharp price swings, local bureaus of the China Securities Regulatory Commission (CSRC) have asked future brokers to submit information about how many of their clients have short nickel positions, said one of the sources.
The regulators have also asked the futures brokers in their jurisdictions to submit information about their hedging status, and whether they have nickel for delivery, the source said.
It was not immediately clear what action might be taken, if any, after those details are submitted.
“Regulators are worried,” because if their clients cannot meet margin calls, brokerages would need to make up for the shortfall, the second source said.
CSRC, which supervises the futures exchange, did not respond to a request for comment.
All the sources declined to be named as they are not authorised to talk to media.
A separate source at a major futures brokerage said the firm was directly approached by the Shanghai Futures Exchange and was asked about risk-management measures, as well as about some of its big clients trading nickel and coal.
CSRC’s health check on futures brokerages comes as China’s banking regulators also reportedly requested lenders report overseas exposure as part of efforts to contain possible fallout from volatility in global commodity prices.
In China, “the violent price movements of futures’ contracts are likely to expose brokerage companies to losses,” said Wang Yunfei, an analyst with ShenYin & WanGuo Futures Co, a Shanghai based futures broker.
“Losses could quickly exceed the deposits held in a broker’s account if, say, prices of nickel keep surging. If a client fails to top up the deposits, while the broker fails to close the positions in time, the latter might have to bag losses.”
In the most actively traded nickel contracts, Guotai Junan Futures, Citic Futures, and Ruida Futures held the biggest short positions on Shanghai Futures Exchange, according to data on Wednesday.
China’s securities regulators have access to market data including daily trading volumes, short and long positions held by each brokerage company for a particular contract.
But they are likely trying to know more about specific betting strategies placed by major investors, as they try to take early actions and avoid concentrated bets burning brokerage companies, industry insiders said.
In developed markets, “futures brokerages would conduct careful credibility check on clients,” said the second source.
“In China, opening a futures account is relatively simple,” making brokerages more vulnerable, the source added.
(Reporting by Samuel Shen in Shanghai and Xie Yu in Hong Kong; Editing by Sumeet Chatterjee and Elaine Hardcastle)
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