Unlocking Futures: A Beginner’s Guide to Clearing and Settlement in Chinese Markets

1. Introduction

Futures contracts are agreements to buy or sell a commodity at a predetermined price on a future date. For example, a trader may agree to purchase 10 tons of rebar at 2,000 CNY in December.

The essence of futures trading is the future delivery of a contract, similar to buying steel today but with settlement occurring later.

2. Clearing Concepts

Clearing (Clearing) calculates the amounts payable and receivable for futures contracts and aggregates them into settlement accounts. Settlement (Settlement) finalizes the obligations of both parties, often occurring simultaneously with delivery.

Delivery involves transferring securities or cash based on the clearing results.

Accounting records the economic activities using monetary units, providing information for decision‑making.

3. Trading System

All six Chinese futures exchanges follow the Futures Trading Management Regulations and the Futures Exchange Management Measures . While core rules are similar, differences exist in contract design, margin requirements, price limits, delivery methods, trading hours, and participant structures.

4. Settlement Principles

Key principles include Central Counterparty (CCP), daily mark‑to‑market, netting, tiered settlement, and margin systems.

CCP : The exchange acts as the counterparty to all trades, eliminating credit risk.

Mark‑to‑Market : At each day’s close, positions are re‑valued and profits or losses are settled, ensuring no negative balances.

Netting : Offsets positions to reduce the number of settlements.

Tiered Settlement : A three‑level structure (exchange → clearing member → client) isolates risk.

5. Margin System

Traders post a margin, a fraction of the contract value, to leverage their positions. The margin formula is:

Margin = Trade Price × Contract Multiplier × Margin Rate × Quantity

Insufficient margin triggers margin calls or forced liquidation.

6. Participants

Key participants include regulators, exchanges, clearing organizations, intermediaries, investors, delivery service providers, and supporting institutions. The clearing department calculates P&L, guarantees performance, manages member funds, and oversees physical delivery.

7. Clearing Process

The generic clearing workflow (illustrated in the opening diagram) covers order entry, trade matching, margin calculation, daily settlement, and final delivery. Physical settlement is used by SHFE, DCE, and ZCE; cash settlement by CFFEX; multi‑currency settlement by GFEX.

8. Valuation and Accounting

Valuation uses settlement prices per the China Securities Investment Fund Accounting Standards. Accounting entries include:

Deposit margin: Debit Settlement Reserve, Credit Bank Deposit.

Withdraw margin: Debit Bank Deposit, Credit Settlement Reserve.

Open long: Debit Derivative Asset (Initial Value), Credit Derivative Liability.

Open short: Debit Derivative Liability, Credit Derivative Asset.

Close or delivery: Transfer initial values using weighted‑average method.

Trading fees: Debit Trading Expense, Credit Settlement Reserve.

Daily mark‑to‑market: Adjust fair value and record P&L.

All accounting follows Chinese Accounting Standard 22 – Financial Instruments and exchange‑specific rules.

9. Data

Futures generate large volumes of data (trading, accounts, market data, settlement). Margin monitoring interfaces connect brokers with regulators, ensuring transparency and risk control. Technical specifications are published by the China Futures Market Monitoring Center.