General Introduction to Iron Ore

I. What is Iron Ore

II. Classification of Iron Ore
III. Relevant index of Iron Ore
Supply and Demand of Iron Ore
I. Global Iron Ore Production
II. Global Iron Ore Demand
III. China Iron Ore Production
IV. China Iron Ore Demand
V. World Iron Ore Trade
Evolution of Iron Ore Pricing Mechanisms
General Introduction to Iron Ore Derivatives Market
I. CME Iron Ore Swap
II. SGX Iron Ore Swap
III. HKEX Iron Ore Futures
DCE Rules and Regulations of International Trade of Iron Ore
I. General Introduction and Interpretation of Contract
II. Overseas Brokerage Register and Filing Procedure
III. Suitability and Account Opening Rules and Regulations
IV. Settlement Rules and Regulations
V. Delivery Rules and Regulations
VI. Hedging and Arbitrage Rules and Regulations
VII. Risk Management and Monitoring Rules and Regulations

General Introduction to Iron Ore

I. What is Iron Ore
Iron ore refers to the ore that has use value, contains iron element or iron compounds,
and is the important raw material for iron and steel production. The ore products are
gradually selected from the natural ore through the procedures such as crushing,
grinding, magnetic separation, flotation, etc. After that, XXXXXX According to the
principle of element conservation, it takes 1.6 tons of iron ore to produce 1 ton of cast
iron with 60% grade, accounting for 50%-60% of cast iron cost.
There are two ways of mining, open-pit mining as well as underground mining. Many
large-scale mines in overseas countries are open-pit, therefore, the cost is relatively low.
In China, on the other hand, few mines are open-pit, and they’ve been mined for quite
long time, therefore, underground mining prevails, and the cost soars up.

II. Classification of Iron Ore

i. Classified by ways of oxidation
a. Magnetite: a type of iron oxide with Fe3O4 as main component, is a compound of Fe2O3
and FeO. With Fe accounting for 72.4% and O accounting for 27.6%, it presents
charcoal gray with relative density of 5.15. Due to its magnetic property, it can be rather
convenient to be magnetically separated during mineral separation. However, due to its
fine texture, it can hardly be deducted and will gradually become hematite through
weathering over time.
b. Hematite: a type of iron oxide with Fe2O3 as main component. With Fe accounting for

70% and O accounting for 30%, it presents maroon with relative density of 5.26 and is
the most common iron ore. With various texture within itself, it can also be classified
into red hematite, specular hematite, micaceous hematite and red ocher, etc.
c. Limonite: an iron with ferric hydroxide. It is an umbrella name of two iron ore with
different texture, goethite and XXX. Sometimes the chemical formula of limonite can
be written as mFe2O3·nH2O. With Fe accounting for 62%, O accounting for 27% and H2O

accounting for 11%, it presents yellowish brown or brown with relative density of 3.6-
4.0. Most of limonite are attached to other iron ore.
d. Siderite: an iron with ferrous carbonate with FeCO3 as main component. It presents
steel gray with relative density of around 3.8. Most of siderite contains a significant
portion of calcium salt and magnesium salt. Since carbonate absorbs large amount of

heat and releases carbon dioxide under 800～900℃, we usually tend to put it under

calcination before put it into blast furnace.

ii. Classified by ways of putting into furnace
a. Lump ore: a natural ore that is not selected by manual enrichment, with the grade of
about 60%. Since lump ore is raw ore, the proportion ores in blast furnace shouldn’t be
too high, with a ratio of around 11%.
b. Pellet: to produce a green-ball with balanced viscosity and high intensity by adding
certain water and binder to ore fines. Then, to calcinate under oxidizing atmosphere
after desiccation and preheating and make the green-ball cake into pellet. Pellet has
good cold intensity and reducibility, and the proportion ores in blast furnace should be
within the scope of 12%-15%.
c. Agglomerate: First, to add certain fuel, flux, water to various fines that contain iron
element. Then, mix them together, pelletize them before putting them into sintering unit
and undergoing series of physical and chemical changes, and ultimately bond mineral
powder particles into lump. Agglomerate is main component in blast furnace
ironmaking in China, and the proportion ores in blast furnace usually exceeds 90%.
iii. Classified by variety and grade
a. Pb Fines/ Pb Lumps: originated in Australia, also known as Pilbara Blend (operated
by BHP Billiton). Pb Fines is part of limonite and has a grade of around 61.5% with
good sintering character. Pb Lumps is part of limonite and has a grade of around 62.5%
with good reducibility and ordinary heat intensity.
b. Mac Fines: Generally, the grade of Mac Fines is around 61.5% and in China market,
the grade is around 58%. It is part of limonite with good sintering character and 5% of
crystal water contained inside. It suffers high burning loss during ironmaking and the
successful rate to produce agglomerate is gradually decreased.
c. Newman Fines/ Newman Lumps: originated in Newman Mines in Newman County,
East Pilbara of Australia. It is part of hematite with good sintering character. The grade
of Fines is around 62.5% and the grade of Lumps is around 65%.
d. Atlas Fines: an iron ore originated in Pilbara of Australia produced by Atlas Iron
company, the fourth largest iron ore producer in Australia with a grade of 57.5%. It is
part of limonite with 9% crystal water and 8% of silicon contained inside.
e. SSFT Fines: a sinter fines produced by Companhia Vele do Rio Doce specially made
for China market. It contains 65% of iron and 4.4% of silicon.
f. SFCJ Fines: short for Sinter Feed Carajas and is originated in Carajas Mines in Brazil.
It contains over 65% of iron, 1%-2% of silicon, 1% of aluminum. 0.033%-0.045% of
phosphorus and 8%-9% water with 1.6% loss during burning.
g. Indian Fines: Indian ore fines with fine particle but it doesn’t meet the standard of
coarse powder. With grade ranging from 40% to 63.5%, is part of hematite. The one
with high grade has good smelting performance, the one with low grade contains high
proportion of aluminum silicon. Therefore, Indian Fines enjoys good smelting value.
III. Relevant index of Iron Ore
There are many impurities within iron ore and they can be divided into two categories,
the good ones and bad ones, according to their influence during smelting process and
on product quality.
1. Bad impurities (elements): refers to impurities that influence ore dressing and
smelting. The most common and major bad impurities are sulphur, phosphorus, arsenic,
potassium, sodium, fluorine, etc.
a. Phosphorus: Phosphorus exits in ore as 3CaO?P2O5, or 3FeO?As3O5. In blast furnace, all

phosphorus is reduced and most of it exits in raw iron. Iron and steel with much
phosphorus can be crispy during low-temperature processing, a.k.a., cold shortness.
b. Sulphur: Sulphur exits in ore as FeS2 or FeS?.CuS or CaSO4.2H2O\BaSO4. Part of sulphur

is reduced and exits in raw iron. Iron and steel with sulphur can be hot shortness during
hot processing. Desulfurization can be done during blast furnace smelting, however, it
requires more coke (to heat up furnace) and limestone (to increase the alkalinity of slag)
and the production cost is increased thereof. Therefore, the sulphur contained in iron
ore to be put into furnace shall be less than 0.15%.
c. Potassium, sodium: often exits in aegirine, riebeckite and marble. The worst part of
them is to decrease the softening point of iron ore which results in the accretion in blast
furnace. Iron ore with high potassium and sodium usually impede the process of blast
furnace smelting.
d. Arsenic: Arsenic rarely exists in iron ore but can be seen in limonite. It exits in ore
as FeAs2S or other oxide such as As2O3 and As3O5. Most of arsenic exits in raw iron during

smelting. When the steel contains over 0.1% of arsenic, the steel can result in cold
shortness which compromises its welding performance.
2. Beneficial elements (impurities):
Certain elements in iron ore could enhance product performance and these elements are
therefore called beneficial elements. The most common elements are manganese, nickel,
chromium, vanadium, titanium, etc.
Supply and Demand of Iron Ore
I. Global Iron Ore Production
The global iron ore reserve is 170 billion tons in 2016. The iron content reaches 85
billion tons till the end of 2015. Geographically speaking, places of origin of iron ore
are mainly distributed in Australia, Brazil, Russia, Ukraine, China and India. The iron
ore reserve in Australia is over 52 billion tons, accounting for 30% globally. The second
largest reserve is in Russia, with the reserve of 25 billion tons, accounting for 14.7%
globally. The third largest reserve is in Brazil, with the reserve of 23 billion tons,
accounting for 13.5%. The fourth largest reserve is in China, with the reserve of 21
billion tons, accounting for 12.4%. India has the reserve of 8.1 billion tons, accounting
for 4.8% globally.
100million tons
2016 iron ore reserve in major countries & grade
600 reserve grade 70%
64%
500
64% 60%
500
52%
50%
400
48%
34% 40%
300
230 35%
210 30%
200
20%
81 65
100 10%
12
0 0%
Australia Brazil China India South Africa Ukraine

From 2002 to 2011, the global iron ore production has increased 1.05 billion tons, with
an annual increase of 105 million tons and a growth rate of 8.49%. During 2003 to 2007,
the annual growth rate exceeds 10%. In 2012, due to price fluctuation of iron ore, the
global iron ore production has first seen a decrease since 2009, with the production
output of 1.904 billion tons. Later, the production output has increased gradually and
reaches 2.054 billion tons in 2014. In 2015, with the small and medium scale mines
falls below the cost line and withdraw from the market, the production decreased to
2.006 billion tons. In 2016, the mineral price increased stably. With the expansion of
the four largest mines and the resumption of production of small and medium scale
mines, the global iron ore production increased again and reaches 2.204 billion in the
year of 2017, which increased by 12.6% compared with that in the year of 2011.
The global iron ore production is relatively centralized. In terms of countries, Australia,
Brazil are the largest iron ore production country around the word. India and Russia are
the next. The first ten largest iron ore production countries generate an output of over
80% globally, Australia and Brazil among which accounts of over 60% and the market
is further centralized. In terms of mines, Vale in Brazil, RIO Tinto, BHP and FMG in
Australia controls the global iron ore supply. The production output of the first four
largest mines in 2017 reaches 1.17 billion tons, accounting for 53.95% of global iron
ore production output, which occupies 72.8% of world import volume. Vale production
output reaches 367 million tons, RIO Tinto reaches 268 million tons, FMG reaches 191
million tons, accounting for 16.84, 16.02%, 12.3% and 8.79% respectively.

II. Global Iron Ore Demand

Since iron ore is mainly used in cast iron smelting, therefore, we tend to estimate the
iron ore demand by the output of cast iron. During 2010 to 2017, global blast furnace
cast iron output increased by 16.55%. All these years have witnessed a growing trend
except the year of 2015, which decreased by 1.83% on year-on-year basis. In 2017, the
output reaches 1.18 billion tons. China is a major iron ore demanding country. From
2010 to 2017, the output of cast iron in China accounts for over 58% globally, and the
output in the year of 2017 accounts for 60.25%. The output of cast iron in Japan
accounts for 6.64%, and the one in India accounts for 5.59%. The one in Russia and
South Korea accounts for 4.41% and 3.96% respectively. In terms of cast iron output,
Asia is still the major demanding region of iron ore, accounting for 80% globally.
Europe ranks the second, accounting for 7.95%. North America and South America
accounts for 2.79% and 2.67%, respectively.
In terms of demand, different countries have various sources of import. Japan has a 99%
degree of dependence on import, 61% of which is from Australia, 21% from Brazil.
South Korea and many European countries has a 100% degree of dependence on import,
and they mainly import from Australia and Brazil. America’s degree of dependence is
50%. Russia, Ukraine, Brazil, Australia, South Africa and India can produce its own
iron ore. China, however, is not resourceful in iron ore, besides, the mining cost is too
high, and the supply is outpaced by demand, therefore, China mainly relies on import
in terms of iron ore. By the year of 2017, the degree of dependence on import rose to
90%, and still has the momentum to rise.
The import volume is similar to the export volume in terms of global iron ore. From
2010 to 2016, the import volume increased by 42.3% with average annual growth rate
of 5.89%. The export and import volume is estimated to be 1.617 billion tons and 1.675
billion tons, respectively. China’s import volume of iron ore ranks the top globally,
accounting for 40.6% in 2010 and 67.2% in 2016. Japan and South Korea follows,
accounting for about 8% and 4%, respectively.
III. China Iron Ore Production
Though China’s reserve of iron ore ranks at the forefront around the world, yet the
output of finished mining products is relatively low due to the poor resource endowment,
not to mention the regulatory steps taken to protect environment, the output of crude
ore and concentration started to plummet thereafter. The output of crude ore was 218
million tons back in 2011, and the number rose to 1.38 billion tons in 2015 after which
the number went down though the price of iron ore started to gradually rise in 2016 and
2017, reached 1.28 billion tons and 1.23 billion tons, respectively. The grade of crude
ore ranges from 25% to 35%, so the output of finished mining products plummet after
selection. According to Bloomberg, the output of finished mining products reached 445
million tons in 2013 and decreased to 233 million tons in 2017 and is estimated to
continue to decrease.
Bohai Rim region generates the most output of iron ore. The output in Hebei province
and Liaoning province accounts for 60% across the country. If we take account of
Shanxi province and Inner Mongolia which is not far from Bohai Rim region, the whole
area generates about 65% of iron ore output across China. Specifically speaking, all
regions conduct mining except Tianjin, Tibet, Shanghai, Ningxia which are restricted
of production due to resource limit. In 2017, Hebei, Sichuan generated the most output
of iron ore, which were 580 million tons and 140 million tons, respectively. Liaoning,
Shanxi, Anhui follow, which were 120 million tons, 66 million tons and 37 million tons,
respectively.
IV. China Iron Ore Demand
After 2000, with the investment in infrastructure and rapid development of real estate
industry, the demand for steel grows rapidly, so does the demand for the iron ore. The
demand for iron ore in China reached 230 million tons in 2001 (calculated by the
production output of cast iron), 750 million tons in 2008, with an increase of 225%. In
2014, the demand hit a new high at 1.13 billion tons. Later, with the transformation of
China’s economic pattern, the demand for steel decreased gradually. In 2017, the
demand for iron ore decreased to 950 million tons. With the cut of steel capacity, and
frequently supervision of environmental agencies, the output of cast iron decreased
again in China, and is estimated to continue to drop gradually.
Bohai Rim region has the most demand for iron ore. Hebei province, Shandong
province and Liaoning province produce 43% of the cast iron output in China. Jiangsu
produce 70 million tons of cast iron. The first seven districts in terms of cast iron output
accounts for about 67% of the total output in China, the demand is relatively centralized.
V. World Iron Ore Trade
Over 90% of global iron ore trade is through sea transportation. The volume was 900
million tons in 2012, accounting for 93.8% of all trade volume.
The route between Australia and China is from port in Western Australia to Shandong
port, usually in Qingdao. It usually takes 15 days by sea transportation. Australia is the
nearest supplier for China. The route from between Brazil and China is from Tubarao
port in Brazil to Shandong port. It usually takes over 40 days by sea transportation. So
Australia has better advantage for China both in time and transportation. Therefore,
about 80% of Australia ores are exported to China and 55% of Brazil ores are exported
to China.
China’s iron ore importation volume was 92.39 million tons in 2001, an year-on-year
increase of 32%. In 2002, the importation volume of iron ore hit 100 million tons, 10.1
times bigger than the volume in 2001. In 2017, the volume hit a new high at 1.07 billion
tons.
Since 2012, the importation volume of iron ore keeps accounting for over 80% in China.
65% was imported from Australia and Brazil. Later, with the price plummeted, non-
mainstream iron withdrew from market. So the proportion continues to grow and
reached 83% in 2017.
In terms of customs clearance, over 50% iron ore declared customs at Bohai Rim region,
indicating the area to be the major entrance for iron ore. At the same time, the imported
iron ore is also unloaded at the region. From 2013 to 2017, over 15% of iron ore are
imported from other countries to Hebei, Shandong, Jiangsu province. The first five
provinces with the most importation volume accounts for 65% of domestic importation
volume.
Evolution of Iron Ore Pricing Mechanisms
Before 1950, iron ore was mainly spot traded.
Early in 1960, iron ore was traded by short-term contract.
Since 1960s, long-term contract appeared.
In 1975, iron ore exportation association was established and long-term contract was
changed into short-term contract.
Long-term negotiation mechanism was found and applied for 30 years since 1980. The
mines and steel plant negotiate with each other and set up the price of iron ore for the
financial year. Later, any part of iron ore demand side will negotiate with any supply
side before they reach census which both sides agree and accept this price for their
upcoming financial year. Over the last two decades from 1980 to 2001, Japan dominated
the price for global iron ore. Since 2004, China became the top buyer of iron ore on the
global market. The price soared up thereafter. Though the representatives from Baoshan
iron and steel plant participated the annual long-term negotiation as Chinese enterprise
yet the result is far from satisfactory. The price of iron ore keeps going up.
The sea transportation fee soared up in 2008 and the spot trade price is much higher
than the one set up by long-term negotiation mechanism, therefore, all corporate giants
in the industry started to seek the best way of pricing. Later, few steel plants in China
implement long-term negotiation mechanism and the mechanism finally broke up.
In March, 2010, Vale of Brazil first announced to change its annual benchmark pricing
mechanism to seasonal benchmark pricing mechanism. Rio Tinto and BHP Billiton
followed and made the same change. Annual benchmark pricing mechanism, which was
applied for over 30 years, collapsed and seasonal benchmark pricing mechanism was
applied. Within less than two quaters, BHP Billiton used the new pricing method, which
is monthly benchmark pricing mechanism. In June, 2011, Rio Tinto stopped using
seasonal pricing mechanism and adopted pricing strategy which is more flexible, such
as seasonal, monthly or even daily pricing strategy. At this point, the long-term
negotiation mechanism for iron ore stepped down from historical arena and short-term
pricing mechanism for iron ore prevails.
In April, 2010, three mining giants announced index pricing mechanism, which means
steel mill and mines agrees to determine the next quarter price of iron ore in the long-
term contract according to the average index price of the previous three months. The
index was released by third-party consultancy. Starting from 2010, the three mining
giants changed the iron ore price for each month or each quarter accordingly by the
index pricing mechanism and the index mainly reflects the price trend in the spot market.
Nowadays, there are TSI index, Platts index, Metal Bulletin MBIO index, etc. Platts
index was the widely used and is now the mainstream pricing standard.
Chart: 1991-2009 results of long-term negotiation mechanism for iron ore
Year Asian Market European Market
Price date Price enterprise Price Price date Price enterprise Price
limit% limit%
1991 1991-1-
hamersley 7.93 1991-1-13 CVRD-TKS 7.95
30
1992 1991-12- 1991-12-
hamersley -4.9 CVRD-TKS -4.9
17 17
1993 1993-1- 1992-12-
BHP-Japan -11 SNIM-Usinor -13.47
13 22
1994 1994-2-8 Hamersley -9.5 1994-2-8 Hamrsley-TKS -6.77
1995 1994-12- 1994-12-
BHPIO 5.8 SNIM-Usinor 5.8
20 20
1996 1996-1-
BHPIO 6 1997-1-29 CVRD-TKS 6
25
1997 1997-1- Hamrsley-
BHPIO 1.1 1997-1-29 -1.94
21 Corus
1998 1998-1-
BHPIO 2.82 1998-1-22 CVRD-TKS 2.82
21
1999 1999-2-
Hamersley -11 1999-2-19 CVRD-TKS -11
16
2000 2000-2-
Robe river 4.35 2000-2-27 SNIM-Usinor 5.42
29
2001 2001-3-
Hamersley 4.3 2001-3-20 CVRD-Riva 4.31
26
2002 2002-5-
Bhpb.hamersley -2.4 2002-5-29 CVRD-TKS -2.4
31
2003-3- Hamersley/BHP-
2003 8.9 2003-5-19 CVRD-Arcelor 8.9
21 Nippon Steel
2004 2004-1- Hamersley-
18.62 2004-1-13 CVRD-Arcelor 18.62
14 Nippon Steel
2005 2005-2- CVRD-Nippon
71.5 2005-3-3 CVRD-Arcelor 71.5
22 Steel
 2006 2005-6- 19
CVRD-JFE 2006-5-15 CVRD-TKS 19
17
2007 2006-12- 2006-12-
CVRD-Baosteel 9.5 CVRD-Riva 9.5
21 27
2008 2008-2- VALE- Nippon
65 2008-2-19 VALE-TKS 65
18 Steel
2009 2009-5- Rio Tinto- Nippon
-32.95
26 Steel

General Introduction to Iron Ore Derivatives Market

Nowadays, the following exchange has iron ore for transaction, such as SGX, CME,
HKEX and DCE. The trading of iron ore in DCE is the most active with daily average
trading volume of 2 million deals. The second most active exchange is SGX iron ore
swap. CME and HKEX, however, are not as active in iron ore trading as the previous
two exchanges. Following are brief introductions to iron ore derivatives for three
overseas exchanges.
I. CME Iron Ore Swap
In June, 2010, CME also engaged in iron ore swap trade and clearing. Three futures
swaps related to iron ore were launched and all were based on global main price index
of iron ore. Platts index swap futures was based on Platts iron ore monthly average price
index. As for the methods for delivery, CME uses cash delivery and it adds
transportation fee to China and cost as basis which is in line with international standard
in contract designing. Besides, iron ore futures contract was traded on Globex so that
all traders across the world can participate. However, it is not good for Chinese buyers
to engage spot hedging, which affects Chinese steel mill’s willingness to participate the
trading to some extent. The last trading day for iron ore futures in CME is the last
working day of the contract month. However, working day is defined by American
public holiday calendar. Therefore, if the last working day happens to be the holiday of
exchanges, the last trading day will be made one day earlier. In terms of trading time,
iron ore futures trading in CME will be made by both Globex and open outcry
alternatively, which make the trading time longer and continuous. It almost covers 24
hours per day, which avoids the risks of open sharply low or high. The contract size of
iron ore futures in CME is 500 tons per hand and the minimum price change is 0.01
USD/ton. The contract covers the same year, and the following two calendar year with
no price limit.
Chart: CME iron ore futures contract

Contract Size
500 Metric Tons

Quotation
US Dollar and Cent
From Sunday to Friday, 6:00 pm to 5:00 pm (5:00 pm to 4:00
CME Globex pm based on Chicago time). Market will suspend for 60
Electronic Trading minutes starting from every 5:00 pm.
Trading Hours
From Sunday to Friday, 6:00 pm to 5:00 pm (5:00 pm to 4:00
pm based on Chicago time). Market will suspend for 60
CME ClearPort minutes starting from every 5:00 pm.

Minimum Price Change

0.01 US dollar per metric ton

CME Globex Electronic Trading: TIO

Product Code
CME ClearPort: TIO

Clearing: TIO

Trading Contract Monthly contract for current year and three calendar years followed. Monthly
contract will be traded if the contract of last december is terminated to trade.

Ways of Settlement
financial settlement
Floating prices for each contract month are average prices calculated by
Floating Prices assessment of all existing prices released by "Iron Ore Fines 62% Fe-CFR Port of
China"
Trading terminates at the last business day of the contract month. Business day is
based on public holiday calendar of Singapore. If the last business day is Bank
Trading Termination Holiday of Sinapore, than the lasting trading day will be the business day prior to
the holiday.

Positions Limit
NYMEX positions limit

Rules and Regulations of Exchange

NYMEX 919

Minimum Quota for Bulk Commodities

Lowest Threshold for Bulk Commodities

Quotation Code for Suppliers

Quotation code list for suppliers

II. SGX Iron Ore Swap

In April, 2009, SGX launched OTC clearing service of iron ore swap contract based on
TSI index. Daily settlement price was used to evaluate the contract value. Final
settlement price is set the same as TSI price, which is the average TSI index price of
the final contract month. The swap trading duration could be set as month, quarter or
year, and will be settled on a monthly basis. The longest duration is 36 months, i.e. 3
years. The active month lies in the sixth to eighth month and seasonal contract is
relatively active with regular trading volume reaching 5,000 tons or 10 hands per month.
Chart: SGX iron ore swap contract
Product Iron Ore Swap
Contract CFR China Iron Ore (62% Iron Ore Powders) Swap
Contract Size One hand = 500 mt
Ticker Symbol FE
US$0.01/mt
Minimum Price Fluctuation
Per Price Fluctuation = US$0.01*500mt=US$5.00
Up to 4 calendar years starting with current year, with 12 consecutive months
Contract Months
added upon expiry in December.

Trading Hour (Singapore 8:00 am to 4:00 am

Time) Last trading day: 8:00 am to 8:00 pm
notes: The system is suspended from 4:00:01 am to 7:59:59 am
Last Trading Day Last release date of TSI iron ore reference price in contract month
Cash settlement using the arithmetic average of all The Steel Index (TSI) iron
Final Settlement Price ore reference prices in the expiring month, rounded to 2 decimal places.
(www.thesteelindex.com)
Settlement Fee US$12 per hand (www.sgx.com/asiaclear/commodities)

III. HKEX Iron Ore Futures

In November, 2011, HKEX introduced TSI CFR China iron ore 62% iron powder
futures which is settled in cash. It is the first seasonal contract product around the world
which is traded on exchange. This means that market participants can execute buy or
sell order in order to hedge its seasonal holding positions. The trading time starts at 9:00
a.m. till 1:00 a.m. （9:00-16：30；17：15-1：00）which covers operation time of mainland
China and major overseas market and provide convenience for market participants. Iron
ore futures contract has block trade mechanism which is convenient for OTC
participants to settle in exchange and reduce the risk for both sides.
Chart: HKEX iron ore swap contract
 TSI CFR China Iron Ore 62% Iron Fines Futures Contract
Contents Monthly Contract Quarterly Contract
Minimum Fluctuation USD 0.01 per tonne
Underlying TSI Iron Ore Fines 62% Fe CFR China Index
Settlement Method Cash settled
Spot Quarter and the next seven calendar quarters
Contract Months Spot Month and the next 23 calendar months (i.e. calendar quarters are January to March, April to
June, July to September and October to December)
9:00 a.m. to 4:30 p.m. (day trading session) and
Trading Hours (Hong
5:15 p.m. to 1:00 a.m. (after-hours trading session)
Kong Time)
5:15 p.m. – 6:30 p.m. (after-hours trading session)
The last Hong Kong Business Day of a calendar The Last Trading Day of the last Monthly Contract
Last Trading Day
month that is not a Singapore public holiday in the calendar quarter
Arithmetic average of all TSI Iron Ore Fines 62% Fe Arithmetic average of the Final Settlement Prices of
Final Settlement Price CFR China Index values published in that Contract the three corresponding Monthly Contracts in that
Month, rounded to 2 decimal places Contract Quarter, rounded to 2 decimal places

Final Settlement Day The second Hong Kong Business Day after the Last Trading Day.
Trading Fee (per contract
USD 1.00
per side)
Settlement Fee (per
USD 1.00
contract per side)
Levies (per contract per
USD 0.07
side)
minimum trading volume
at least 50 contracts
of block trade
Holiday Schedule Follow HKFE holiday schedule

Iron ore futures in CME and SGX is swap transaction. The main participants are
exchanges, clearing members, brokers and traders. Since swap contract is non-public
OTC market, it requires high standard of investors, the main trading body is
professional investors instead of retail investors. Due to the same reason, the
international market has high recognition to the iron ore price made by SGX. DCE, on
the hand, could make the price more authoritative by introducing international investors
and large-size of trading volume.
DCE Rules and Regulations of International Trade of Iron Ore
I. General Introduction and Interpretation of Contract
a. Business Operation
From October 18th, 2013, its opening day, to 2017, the trading volume of iron ore futures
in DCE rose from average 94,700 hands in the first month to average 2.4024 million
hands in the last month of 2017, an increase of 24 times and the holding positions was
rose from 102,600 hands to 1.5997 million hands, an increase of 15 times, becoming
the largest iron ore futures around the world in terms of both trading volume and
holding positions. Since DCE came into market, its price discovery ability gets stronger
and stronger and the price is closely related to spot market. From 2014 to 2017, the
correlation coefficient between closing price of dominant contract and 62% PB fines in
Qingdao port lies within 0.93 to 0.97. With the active participation of enterprises
dealing spot goods, the futures price can serve as guidance for spot price. According to
statistics from DCE, there are about 12,000 corporate clients who engage in iron ore
futures trade including 88 steel enterprises, 717 traders and 10 domestic mine
enterprises, generating a total of 4.86 million tons of iron ore by far.
b. Major participants and trading strategy
Domestic iron ore traders mainly consist of industrial clients, such as steel mill, mines,
traders, and other investment institutions and small and medium sized retail investors.
Unlike SGX, most traders in DCE are retail investors looking for speculation. However,
with the introduction of overseas traders and constant improvement of relative
mechanism, the main participants are estimated to be optimized and will feature the
function of price discovery. Regarding trading strategy, industrial clients mainly trade
by taking account of both futures and spot goods in order to achieve hedging and basis
trading. When forward contract discounts, steel mill could buy the contract and
establish a virtual stock. When the trader predicts the price will go down, it can sell the
contract in order to lock the profit when dealing with spot goods. When engaging in
basis trading, two sides don’t set the price immediately. Instead, they will set the basis
according to the futures price and set the final price by adding futures price at the
purchase month and basis together, transferring the risk of spot goods price fluctuation
to futures market. When the contract is made, the trader will seek for hedging on the
futures market and close up positions after the goods are sold. The buyer, steel mill,
will be able to make the price more freely. Besides, since 60% of trade objects in DCE
are mines with medium or high grade, and 55% on spot markets are mines with low
grade, therefore, if the spot trader thinks the price between high and low will narrow,
he can sell the futures contract and buy the low grade mines in order to achieve arbitrage
and vice versa.
Institutional investors have more flexible ways of trading, including unilateral
speculation, calendar spread arbitrage, cross commodity arbitrage, cross market
arbitrage, etc. The active contracts for iron ore are 1, 5 and 9. Therefore, cross market
arbitrage happens within these three contracts. Cross commodity arbitrage happens
within deformed steel bar, hot rolled coils, coke and iron ore, including steel mill profit
arbitrage which trades between various commodities. Cross market happens between
iron ore futures in DCE and SGX. However, ordinary investors found hard to participate
since the trade is too complex itself and harsh requirement for engaging business in
SGX.
c. Interpretations of the contract
In October, 2013, DCE introduced iron ore futures, and its corresponding trading object
is ore fines with 62% grade, becoming the first iron ore futures that is settled in delivery.
Chart: DCE iron ore futures standard contract
Product Iron Ore
Trading Unit 100 MT/Contract
Price Quote CNY/MT
Tick Size 0.5 CNY/MT
Daily Price Limit 4% of last settlement price
Contract Months Monthly contracts (12 contracts per year)
9:00 - 11:30 am, 13:30 - 15:00 pm Beijing Time, Monday - Friday,
Trading Hours with extended hours trading session from 21:00 to 23:30 pm, and
other trading hours announced by DCE
Last Trading Day 10th trading day of the delivery month
Last Delivery Day 3rd trading day after the last trading day
Deliverable Grades In accordance with DCE Iron Ore Delivery Quality Standard
Delivery Location The warehouses and delivery locations designated by DCE
Minimum Trading
5% of the contract value
Margin
Delivery Form Physical delivery
Ticker Symbol I
Exchange Dalian Commodity Exchange
i. Margins Standard
DCE has different margins standard at different stages and will change the standard
according to trading status on the market.
Chart: DCE minimum trading margin of iron ore futures
Trading period Iron ore trading margin
Starting from the contract date 5% of contract value
Fifth trading day of the month prior to
10% of contract value
delivery month
First trading day of the delivery month 20% of contract value
ii. Price Limit
When iron ore futures contract undergoes continuous up limit or down limit, the
exchange can raise the price limit and margin standard as follows,
Chart: DCE iron ore futures up and down price limit
First trading halt Second trading halt Third trading halt

Price limit P P+3% P+5%

Trading margin
M M1=Max[M,P+5%] Max[M1,P+7%]
standard

When the N+2 trading day encounters the price limit with no continuous new offer and
the same direction as the N+1 trading day, if the N+2 trading day is the last trading day,
the contract will end in delivery directly. If the N+3 trading day is the last trading day,
the N+3 trading day will continue to trade, with the price limit and margin standard the
same as that of N+2 trading day. Otherwise, the exchange could take one of the
following two measures,
a. at the N+3 trading day, the exchange could raise the trading margin on one side or
both side, in the same proportion or different proportion, for part member or all member,
and suspend opening new positions for part member or all members, and adjust the
price limit, limit the withdraw of capital and close out the positions before deadline, or
mandatory liquidate the positions.
b. mandatorily reduces positions when the market closed at the N+2 trading day.
iii. price quotation unit and contract value
Iron ore futures is traded in CNY. The minimum price quotation unit is 0.5CNY per ton.
Each hand represents 100 tons, which means the unit value is 50 CNY.
iv. trading time
The trading time for iron ore futures is from 9:00 am to 11:30am, from13:30 pm to
15:00, from 21:00 pm to 23:30 pm.
II. Overseas Brokerage Register and Filing Procedure
i. Filing procedure
1. Futures company and overseas brokerage institution sign agreement of authorization
2. Futures company submits written materials to exchange
3. Exchange send filing confirmation letter to futures company after verifying the
materials
4. Futures company fill out application and the exchange examine and approve.
ii. Register procedure
1. Futures company submit register application through monitoring center
2. Monitoring center review and provide feedback
3. Futures company send relevant information to overseas brokerage institution
iii. materials required
Materials required Notes
1.Filing statement signed by authorized
signatory, filing application for
overseas brokerage institution
2.Passport or any other copy of ID
identification, resume and signature
card of representatives of overseas
brokerage institution and risk
management manager of futures business
approved by DCE
3.Materials which is notarized and
approved legally of the founding of
overseas brokerage institution
4. Credentials indicating overseas
brokerage institution has the right to
engage brokerage business
5. Regulations of authorization of
After first filing, the futures company
futures company, regulations of
no longer needs the provide the
internal control, regulations of risk
material
management
6.Letter of commitment
7.Credentials indicating the net
capital of overseas brokerage
institution is over 30 million CNY or
equivalent, credentials indicating the
institution has been running for over a
year continuously
 8.Authorization agreement to be signed
between overseas brokerage institution
and futures company member
9.Letter of authorization of the person
indicating the person is authorized
to sign
10.Other materials DCE or the
applicants deem necessary to provide
Procedures can be simplified if has been
11.equivalent filing materials
filed in other exchanges.
12.electronic CD-ROM of application
Written materials prevail if there’s
materials, including all above-
difference between written and
mentioned written and electronic
electronic application materials
application materials

III. Suitability and Account Opening Rules and Regulations

i. Suitability regulations for traders
1. Scope of application: applied to domestic and overseas clients who open new account
after March 27th, 2018.
2. Access requirement
a. available capital: balance no less than 100,000 CNY or equivalent foreign currency
in five trading days before application. (formula: foreign currency amount*central
parity rate of foreign exchange against RMB on the day released by China Foreign
Exchange Trade System Foreign exchange discount rate)
b. knowledge test: participate the online test through the platform of China Futures
Association, and the score shall be no lower than 80.
c. trade experience: has futures trade record in China or overseas within the past three
years (China: Futures trading statement by Futures company; Overseas: details of
futures trading record, document of settlement or other proof)
d. Legal compliance and integrity requirement: no bad integrity record, not banned from
entering futures market by authority, not banned from or limited to engage in futures
trade.
ii. Account opening procedure and required materials
1. Account opening procedure
· Direct account opening mode

Step1: Overseas submit ID documents and suitability materials and fill out materials
for account opening.
Step2: Futures company examine and review materials for account opening and
suitability materials and apply for trading code through monitoring center.
Step3: Monitoring center examine and review materials for account opening and will
send to exchange once the materials are verified.
Step4: Exchange examine and review materials for account opening and will send
trading code to futures company through monitoring center once the materials are
verified.
Step5: Futures company set up trading authority.
Only set up iron ore trading authority for overseas clients.

Review of suitability requirement:

Classify clients and match of suitability according to Clients’ Guide to Futures
Brokerage Contract made by China Futures Association
To conduct knowledge test for clients, to review the available capital, trade experience
and legal compliance and integrity according to Suitability Management Regulation
made by DCE

· sub-delegation account opening mode

Step1: Overseas clients submit ID documents and suitability materials and fill out
materials for account opening.
Step2: Overseas brokerage institutions examine and review materials for account
opening and suitability materials and apply for trading code through monitoring center.
Step3: Monitoring center examine and review materials for account opening and will
send to entrusted futures company for review. The futures company send these materials
to exchange once these materials are verified.
Step4: Exchange examine and review materials for account opening and suitability
documents and will send trading code to futures company and overseas brokerage
institution through monitoring center once the materials are verified.
Step5: Futures company set up trading authority.
Only set up iron ore trading authority for overseas clients.

Review suitability requirement:

To conduct knowledge test for clients, to review the available capital, trade experience
and legal compliance and integrity and to sign the proof of the clients meeting the
requirement of suitability in dealing specific products.
2. Required materials for account opening
Account opening for overseas institutions
Type of materials Materials for submission or reserve Notes
Scan copy of business
registration certificate
Scan copy of tax payment
certificate
proof of the clients meeting the Required for sub-
requirement of suitability in delegation account
dealing specific products opening
Materials to be
All institutions shall
submitted by account Chinese translation of trade code
submit except for
opening institution to application form
institutions in Taiwan
monitoring center
Scan copy of power of attorney
Full face photo of account
opening agent
Scan copy of identification paper
of account opening agent
Full face photo of executive
director or legal representative
Scan copy of valid identification
paper of executive director or
legal representative
Scan copy of referential ID
Materials to be documents of executive directors
reserved by account or legal representative
opening institution Original copy of trading code
application form and copy of all
above-mentioned documents
Transcript of client’s knowledge
test
 Proof of client’s past trade
experience
Proof of available balance in
client’s margin account
Proof that client has regulations
of internal control, risk
management, information
reporting
Proof that demonstrates client’s
legal compliance and integrity
Other proof materials of
suitability

Account opening for overseas individuals

Type of materials Materials for submission or reserve Notes
Scan copy of personal page in the
passport
Scan copy of driving license
Scan copy of social security
certificate
Scan copy of tax payment Provide at least one of
Materials to be
certificate them
submitted by account
Copy of front and back side of
opening institution to
local ID card
monitoring center
其他参考证件扫描件
proof of the clients meeting the Required for sub-
requirement of suitability in delegation account
dealing specific products opening
Chinese translation of trade code
application form
Full face photo of trader
Original copy of trading code
application form and copy of all
above-mentioned materials
Transcript of client’s knowledge
Materials to be
test
reserved by account
Proof of client’s past trade
opening institution
experience
Proof of available balance in
client’s margin account
Other proof materials of
suitability

Account opening for individuals from Hong Kong, Macao and Taiwan
 Type of materials Materials for submission or reserve Notes
Scan copy of back side of permanent
ID card of HK and Macao or
Mainland Travel Permit for Taiwan
Residents
Scan copy of driving license
Scan copy of social security
certificate
Scan copy of tax payment
certificate
Materials to be Provide at least one of
Scan copy of front and back side
submitted by account them
of Mainland Travel Permit for Hong
opening institution to
Kong and Macau Resident or ID card
monitoring center
for Taiwan residents
Scan copy of other referential
documents
proof of the clients meeting the Required for sub-
requirement of suitability in delegation account
dealing specific products opening
Required for individual
Chinese translation of trade code
trader from Hong Kong
application form
and Macao
Full face photo of trader
Original copy of trading code
application form and copy of all
above-mentioned materials
Transcript of client’s knowledge
Materials to be
test
reserved by account
Proof of client’s past trade
opening institution
experience
Proof of available balance in
client’s margin account
Other proof materials of
suitability

iii. Procedures for hedging, arbitrage

1. Hedging: Clients from overseas brokerage institution shall authorize the overseas
brokerage institution to apply for hedging before overseas brokerage institution
authorize the futures company member to apply.
2. Arbitrage: Clients from overseas brokerage institution shall authorize the overseas
brokerage institution to apply for position limits of arbitrage before overseas brokerage
institution authorize the futures company member to apply.
IV. Settlement Rules and Regulations
i. main trading body
a. clients: overseas trader, overseas economic institutions
b. settlement member: 148 futures company members, 16 non-futures company
members
c. exchange
ii. requirements of depository bank
a. depository qualification: domestic clients, overseas clients
b. business and system: standards of storage and management for specific product, NRA
account management, cross-border fund transfer, bank-option capital system, foreign
exchange settlement and sale system and data submission.
c. regulatory filings: performance of obligation of anti-money laundering and anti-
terrorist financing, authenticity, review of legal compliance, submission account
information to RCPMIS, cross-border RMB cash receipts information, declaration of
international receipts and payments, data submission of relevant account and foreign
exchange settlement and sale, etc.
iii. settlement and authorization

iv. basic regulations of settlement

1. Margins
Margins consist of settlement balance deposit and trading margins. Settlement balance
deposit are funds deposited in special settlement account in exchange before the
member makes transactions. It is margins that are not occupied by contract. Trading
margins are funds in special settlement account in exchange that is used to make sure
that the contract can be executed. It is margins that are occupied by contract. The
following entities can be traded as margins: CNY, USD, standard warehouse receipt.
2. Marking-to-Market
After the end of daily trading, the exchange shall calculate the profit and loss of all
contracts, the trading margins and commissions, and collect the one-off payment
available, to add or reduce settlement balance deposit accordingly. Settlement price of
futures contract is calculated by average futures contract transaction price weighted by
trade volume.
3. Provision of risk
Provision of risk is established by exchange, with the aim to maintain the standard
operation of futures market by providing financial guarantee and make up for the loss
that is caused by unpredictable risks.
Sources of risk provisions:
a. 20% of commissions collected by exchange
b. other sources of income that comply with national fiscal policy
v. basic principles of settlement
1. calculated in CNY
2. foreign exchange as margins
3. allow settlement of exchange of certain capital
vi. system transformation of settlement business
· CNY special settlement account
exchange
· Foreign exchange settlement account
· CNY margins special account
Futures · Foreign exchange margins special account
company member · CNY futures special capital account
· Foreign exchange futures special capital account
Overseas · NRACNY special futures settlement account
brokerage institution · NRA foreign exchange special futures settlement account
· NRA CNY special futures settlement account
Overseas trader
· NRA foreign exchange futures settlement account

vii. daily settlement business of futures company

1. fund transfer business:
2. withdraw and deposit of foreign currency:
Content
withdraw and · Electronic system of fund withdraw and deposit
deposit · 业务办理时间与人民币资金一致
· valuation：CNY amount converted from foreign currency
Actual available
· benchmark price：middle rate released by China Foreign Exchange
balance
Trade System
· Actual monetary capital=CNY capital+ CNY amount converted
Actual monetary
from foreign currency
capital
· Balanced foreign currency will generate current interest rates

3. settlement and purchase of exchange

4. marketing-to-market
a. minimum balance deposit for futures company member is 2 million CNY, minimum
balance deposit for non-futures company member is 500,000 CNY.
b. Every time a futures company member has a new overseas brokerage institution
client, the minimum balance deposit for the member should raise by another 2 million
CNY.
c. Member’s balance deposit should be made by its own funds in CNY.
5. bonded delivery settlement

· Settlement of payment: bonded exchange for physicals, one-off delivery and standard

warehouse receipt are settled by exchange

· invoice issuance：value added tax invoice issued by domestic institutions, receipt

issued by overseas institutions

Invoice issuance by fiver parties: seller client→seller member→exchange→buyer

member→buyer client, 5% of goods’ value is collected as invoice margins

If seller member fails to provide value added tax invoice seven days later than deadline,
exchange will charge 5% of goods’ value. Starting from that day, exchange will charge
another 0.5% of goods’ value per day until the invoice is provided. If the sell member
still fails to provide invoice 30 natural days later, it deems as failure to provide invoice
and the money deducted will not be returned. The deadline for providing invoice of
bonded warehouse receipt of iron ore is before marketing close of last delivery day. The
deadline for providing invoice of exchange for physicals is before marketing close of
the day exchange for physicals is approved.
V. Delivery Rules and Regulations
i. general rules and regulations of delivery
a. delivery object is iron fines (coarse powder)
b. physical delivery with delivery unit of 10,000 tons
c. delivery not allowed for individual trader and non-integral multiple of delivery unit
d. two ways including bill of lading and standard warehouse receipt with the latter one
consists of delivery duty paid standard warehouse receipt and bonded standard
warehouse receipt
e. trader’s physical delivery is handled by members and traded in exchange in the name
of members
f. When the market closed at the last trading day, all positions that are not closed out
shall be delivered. On the principle of minimum pairs, computer system will match and
pair contracts and bonded warehouse receipt is prioritized for overseas buyers.
g. invoice flowchart: five parties issue invoice in terms of bonded delivery, which
means, buyer trader issues invoice for seller member, seller member issues invoice for
exchange, exchange issues invoice for buyer member, buyer member issues invoice for
buyer trader. Overseas trader and overseas economic institution issue certificate of
receipts whereas exchange and member issue zero-tax value added invoice.
ii. delivery fee

· delivery commissions: 0.5 CNY/ ton

· storage charge: 0.5 CNY/ ton / day

· Quality inspection fee is negotiated and determined by goods owner and designated

institution for quality inspection. The fee will be borne by goods owner and the goods
will be transferred by designated delivery warehouse.

· There’s a price limit for warehouse storage and the cost standard is to be verified and

released by exchange.
iii. place of delivery

· places of warehouses: Tianjin port, Lianyun port, Rizhao port, Qingdao port,

Tangshan port, Caofeidian port

 · places of storages: HBIS Group Mining Company, Shagang International,

Ruiganglian Group, Sinosteel Deyuan Mining Products, Rizhao Steel, Hangzhou CIEC
International Co., Ltd., Shandong Huaxin Group, Ansteel, China National Building
Materials & Equipment Supply Chain, Cargill Maituo Metal Trade, HBIS International,
Sinoday.

· domestic places of storages: HBIS International

· places of bonded delivery: Dalian port, other ports to be added from now on

iv. standard substances and substitutes for delivery

chart: standard substances for iron ore delivery
指标 质量标准
Fe ＝62.0%

SiO2 ≤4.0%

Al2O3 ≤2.5%

P ≤0.07%

S ≤0.03%
Pb≤0.02%
Zn≤0.02%
Cu≤0.20%
microelement As≤0.02%
TiO2≤0.80%
F+Cl≤0.20%
K2O+Na2O≤0.30%
Particle size larger than 6.3mm accounts for no more than 20%
Particle size
Particle size smaller than 0.15mm accounts for no more than 35%

Chart: quality differences and premiums and discounts for substitutes of delivery
indicator Range allowed premiums and discounts（CNY/ton）
≥60.0% and＜62.0%，decrease 1.5 per 0.1% reduced
Fe ≥60.0% ＞62.0% and ≤65.0%，increase 1.0 per 0.1% increased
＞65.0%，set the price the same as 65.0%
SiO2
+ ≤8.5% 0
Al2O3
＞4.0% and ≤4.5%，decrease 1.0 per 0.1% increased；
SiO2 ≤6.5% ＞ 4.5% and ≤6.5% ， decrease 2.0 per 0.1% increased,
accumulative calculated with the prior standard
 ＞2.5% and ≤3.0%，decrease 1.5 per 0.1% increased
Al2O3 ≤3.5% ＞ 3.0% and ≤3.5% ， decrease 3.0 per 0.1% increased
accumulative calculated with the prior standard

＞0.07% and ≤0.10%，decrease 1.0 per 0.01% increased；

；
P ≤0.15% ＞ 0.10% and ≤0.15% ， decrease 3.0 per 0.01% increased,
accumulative calculated with the prior standard

S ≤0.20% decrease 1.0 per 0.01% increased

Particle size smaller than

Particle size 0.075mm accounts for 0
no less than 70%

Chart: historical delivery summary since iron ore enters the market till now (June, 2018)

From the statistics, since iron ore enters the market, it has been delivered for 21 times
till now with a total delivery volume of 5.05 million tons. The first delivery contract is
I1405 with a delivery volume of 170,000 tons. The largest delivery volume is 1.61
million tons in the contract I1601. The smallest delivery volume is 10,000 tons in
contracts I1512, I1604, I1606. The main delivered products are SSFG, Kimbap powder,
Indian Fines, etc. After DCE updated its delivery standard of iron ore in 2017, part of
SSFG no longer meets the criteria so the main products are Kimbap powder and Indian
Fines after the contract I1809.
Bonded products of delivery shall meet the following requirements:
1. The products shall be sent directly from overseas by goods owner to bonded delivery
warehouse.
2.
v. delivery subject

· physical delivery of client shall be handled by members and conducted in the name

of members in exchange.

· overseas clients shall authorize overseas futures brokerage company to conduct

physical delivery, overseas futures brokerage company shall authorize domestic futures
company to conduct physical delivery. Bill of lading shall be handled by members.
vi. rules and regulations of delivery of overseas clients
1. ways of delivery

Overseas clients could register bonded warehouse receipt to engage in delivery, and
exchange shall make sure that overseas buyers can receive bonded warehouse receipt
by replacement of warehouse receipt.
2. ways to make sure that overseas clients could receive bonded warehouse receipt
a. matching principle: i. bonded warehouse receipt shall be prioritized to match
overseas clients ii. The insufficient part of bonded warehouse receipt shall be provided
by replacement of warehouse receipt
b. replacement of warehouse receipt: warehouse receipt service provider registers
bonded warehouse receipt and replace receipt from domestic seller.

3. ways of issue invoice

Five parties issue invoice, which means, seller client→seller member→exchange→

buyer member→buyer client. Overseas seller institution could issue receipt voucher

(commercial invoice), overseas buyer institution could receive value added tax invoice,
domestic institutions could issue and receive value added tax invoice.
4. flowchart of bonded delivery
5. procedures after receiving bonded warehouse receipt
a. continue to circulate as warehouse receipt: calendar spread delivery, exchange for
physicals, transfer of warehouse receipt
b. import customs declaration: to finish the import customs declaration after the
warehouse receipt is cancelled and provide documents for import customs declaration
to warehouse. To fill out application for domestic remittance and provide application
and documents for import customs declaration to depository bank. After application for
remittance, to provide customer copy of application for domestic remittance and other
relevant documents.
c. export customs declaration: provide export customs declaration for bonded delivery
warehouse before the warehouse provides it to exchange.
6. application methods for members in dealing international balance of payments
i. bonded delivery list and application requirement
domestic members:
register foreign exchange business directory: bring member certificate to local State
Administration of Foreign Exchange according to the third clause, appendix ii, in the
files marked as foreign exchange [2012] No. 38
declaration of income and expense of goods: two types of application shall be made
when settle accounts with overseas trader or futures brokerage institution through
depository bank: net margin settlement, restore data settlement.
ii. import payment declaration for domestic clients
requirement: processed when domestic buyer declare import customs
declaration: depository bank make payment declaration for domestic clients and receipt
declaration for futures company or exchange. Transaction code: 121030, with
transaction notes: iron ore futures.
iii. how to declare customs
provide bonded delivery settlement chart for customs declaration; provide China
Inspection and Quarantine (CIQ), settlement statement for customs declaration
(exchange), bonded warehouse receipt (warehouse) for customs declaration.
7. delivery default
5% of goods value is to be charged if one fails to provide invoice seven days later before
marketing close of the last delivery day;
If seller fails to provide warehouse receipt, buyer fails to pay off, delivery default will
occur. The default party will pay 20% worth of contract value to the other party. If both
parties default, both would be charged 5% worth of contract value.
VI. Hedging and Arbitrage Rules and Regulations
i. hedging management
DCE implements accreditation and quota management for hedging. There are two quota
limits depending on ordinary month and delivery month.
1. qualification application for hedging
a. Investors apply through futures company member. Once the application is reviewed
and verified, futures company member could perform the application procedures on
behalf of traders.
b. non-futures company member applies the procedures directly from exchange.
c. For those investors who authorize overseas futures brokerage institution for apply,
domestic futures brokerage institution will apply for overseas futures brokerage
institution.
Materials to be submitted:
a. copy of operating license of the trader
b. copy of value added tax invoice or other documents approved by exchange
c. original copy of commitment letter
2. quota application for hedging in ordinary months
(notes: ordinary months refer to the period starting from the day contract goes to the
market to the last trading day of the month prior to the delivery month)
The trader shall provide the following materials according to the trading product:
a. performance of spot goods of last year as well as operating plan while it’s in hedging;
b. quota limit in the hedging management system applied by futures company
c. other materials required by exchange
3. quota application for hedging in delivery month
(notes: delivery month refers to the first trading day till the last trading day in the
delivery month)
The trader shall provide the following materials according to contracts:
a. performance of spot goods of last year as well as operating plan while it’s in hedging;
b. quota limit in the hedging management system applied by futures company
c. hedging trading plan, including analysis of risk source and hedging target
d. supporting evidence for spot goods held or to be held, and the statement of its usage.
Relevant materials supporting the real need for transaction near the delivery month.
e. other materials required by exchange
4. quota limit that can be automatically approved
When ordinary hedging comes to delivery month, the quota limit of ordinary hedging
combined with minimum quota limit of arbitrage in delivery month could be the new
quota limit. It means that the quota limit of hedging in delivery month = quota limit of
arbitrage in delivery month + automatically approved quota limit
5. application and implementation time for hedging
 Deadline for quota limit usage for The last trading day of the month prior to delivery
hedging in ordinary months month
Deadline for quota limit usage for The first trading day till the last trading day in
hedging in delivery month delivery month
Deadline for application for quota The last trading day of the month prior to delivery
limit in delivery month month

ii. arbitrage trading management

calendar spread arbitrage: arbitrage trading between different contracts with the same
product.
inter-commodity spread arbitrage: arbitrage trading between different contracts with
different products.
Depending on various contract months, there are ordinary month arbitrage (start from
the day the contract entered the market till the last trading day of the month prior to
delivery month) and delivery month arbitrage.
Investors send the request for upgrading quota limit of arbitrage through futures
company member. Once futures company review and approve, the futures company
member will handle the application procedures on behalf of traders; Non-futures
company member apply directly from exchange; Overseas clients who entrust overseas
brokerage institutions to apply for quota limit of arbitrage will be handled by domestic
futures company member.
Required materials for applying upgrading arbitrage quota limit:
1. applying upgrading arbitrage quota limit in ordinary month
a. application form for upgrading quota limit, including basic information of applicants,
products, quantity, strategy of arbitrage trading and other information.
b. other materials required by exchange.
Exchange will examine the whole materials within five trading days and provides
feedback.
2. applying upgrading arbitrage quota limit in delivery month
a. application form for upgrading quota limit, including basic information of applicants,
products, quantity, strategy of arbitrage trading and other information.
b. application analysis of price spread deviation.
c. other materials required by exchange.
The deadline of application of upgrading arbitrage quota limit in ordinary months is the
last trading day of the month prior to the delivery month.
Exchange will examine the whole materials from the first trading day of the month prior
to delivery month for arbitrage and will provide feedback within five trading days.
VII. Risk Management and Monitoring Rules and Regulations
i. risk management
1. major reporting system: Overseas clients shall entrust overseas brokerage institution
to report, and overseas brokerage institution shall entrust domestic futures company
member to report; futures company member, overseas brokerage institution shall
review the relevant materials provided by clients and verify its authenticity and
accurateness.
2. mandatory liquidation: mandatory liquidation will be executed at 13:30 instead of
10:30. The quota limit for individual clients in delivery month is 0. Loss incurred from
mandatory liquidation will be first borne by futures company member on behalf of
overseas brokerage institution, then the overseas brokerage institution will ask from the
clients for compensation.
3. methods in abnormal transaction: during iron ore futures trading, the exchange shall
announce to be in abnormal circumstances when war, social upheaval, natural disaster
happens or is to happen which could have severe influence on iron ore importation.
4. risk alert system: the system is also applied to overseas brokerage institution, for
example, to specify under what circumstances, the exchange could alert risks or send
risk notification to high ranking officials of overseas brokerage institution or overseas
clients.
ii. flowchart for relevant international business
Notes: Major reporting system, results of mandatory liquidation, risk notification and
other procedures related to risk control shall hidden the clients’ names from member
whereas application for hedging and arbitrage requires the clients to submit relevant
supporting materials, in which case the names could not be hidden.
iii. daily risk management business
1. margins management

DCE collects trading margins first before clients’ trade.

Trading margins shall be certain proportion of the contract value. The margins are not
fixed numbers, there’s no such requirements as initial margins and maintained margins.
Margins discounts provided for portfolio holdings which meet the requirements of
Exchange, no SPAN.
2. price limits system
Daily price fluctuation shall be certain proportion to the settlement price of the last
trading day. The Exchange could adjust according to the market. Currently, the price
limits for iron ore is 8%.
When the price reaches the limit, the fluctuation will be expanded and so is the standard
for trading margins.
First trading halt Second trading halt Third trading halt
Price fluctuation P P+3% P+5%
Standard of trading
M Max[M，P+5%] Max[M1，P+7%]
margins
For example, trading margins for iron ore is 10%, the price limit is 8%

At the second trading halt, the price limit is 8+3=11%，and the trading margins is

Max(13%,10%)=13%

At the third trading halt, the price limit is 8+5=13%，and the trading margins is

Max(15%,13%)=15%
3. trade limit system
Trade limit system means the maximum numbers of positions a member of client could
open for certain contract in certain period. The exchange can set limits to different
contracts, different products in different contract months for partial or all members and
clients.
For those non-futures company member or clients who exceeds the trade limit, the
exchange could notify by phone, and request for report, request for submission of
written commitment, and list them for severe supervision or suspend their positions
opening.
Trade limit system is one major difference between China futures market and America
and other overseas market. However, it only limits the numbers of positions opening
and doesn’t limit the close out of positions. It only limits the arbitrage behavior and
doesn’t limit hedging behavior.
4. position limit system
Position limit system means the maximum number of positions held for arbitrage by
members or clients for certain contract. The number is calculated unilaterally. The
purpose of this system is to prevent the risk of market manipulation, prevent certain
investors from causing bad influence to the market due to its market share.
Unilateral position limit: The number is calculated unilaterally and both buy and sell
direction shall meet the limitation rules.
Position limit for clients: There’s position limit for non-futures company member and
clients, there’s no position limit for futures company member and overseas brokerage
institutions.
Position limit management for accounts actual controller: Clients shall declare its
identity if they are accounts actual controller. Positions held by actual controller will be
combined and calculated as one client.
Time difference: There’re three different position limit amounts for different stages.
5. hedging management
Step1: apply for hedging qualification
Non-futures company member and clients engaging in hedging trade shall have
production and operation qualification.
Step2: record spot goods size
Scale of operation of spot goods shall be provided, including the business performance
of last year and business plan of current year.
Step3: apply for quota limit for hedging
To inform Exchange the maximum quota limit of iron ore in ordinary months or
delivery month in contracts.
Step4: Exchange examine and review
During ordinary months: Exchange system will automatically calculate the client’s
positions limit everyday according to the scale of spot goods operation and the
requirement of hedging as well as positions holding in each contract under different
products.
In delivery month: To be discussed by supervision department, business department and
membership department together.
6. arbitrage management
Application submission:
a. original copy of Application Form. (Application Form will be filled out online since
April, 2018)
b. clients submit application through members
c. overseas clients submit application through overseas brokerage institution, overseas
brokerage institution submit application through members
Positions holding review:
Over 80% quota of positions holding shall belong to arbitrage. (dominant contract)
Principles of examine and review:
During ordinary months: no more than 25% of positions size.
1.5 times, twice and three times of the positions limit of clients which shall be examined
and approved step by step.
During delivery month: In principle, no examine and approve for application shall be
conducted.
7. major reporting system
One shall report its capital and positions when the position holding exceeds 80% of
positions limit.
Clients shall report through futures company member.
Overseas clients shall report through overseas brokerage company, and overseas
brokerage company shall report through domestic futures company member. (overseas
clients’ name shall be hidden from members)
8. mandatory liquidation
It is a mandatory measure taken by exchange when members or clients break the rule.
It happens when members’ capital is insufficient, clients’ position reach limit, break the
rules or under other circumstances.
The traded price is made by market transaction. Precatory price in mandatory
liquidation refers to the price of price limit.
Mandatory liquidation shall be executed at 13:30, given the time difference for overseas
clients and inconvenience of capital turnover.
9. abnormal transaction management

· Frequently submit and revoke the deal or submit and revoke the deal in large scale.
· self-trading: to trade with itself.

· programming: bulk deals can be automatically made by computer programming

which could threaten the system safety and normal business operation.

· account actual controller: portfolio of accounts which exchange believes exceed the

positions limit; self-trading, frequently submit and revoke the deal or submit and revoke
the deal in large scale will be convicted the same punishment as clients and non-futures
company member.
Appendix I: iron ore delivery warehouse

Appendix II: iron ore storage houses