Silver futures on SHFE from May 10

In a sea of change, Shanghai Futures Exchange is all set to introduce silver futures on May 10.

China, although the main producer and consumer of silver has remained on the sidelines uptil now in silver trading. They take pricing cues from London and the US. However, China now wants more control on the precious metal's pricing policy.

Introduction of silver futures on the exchange would provide direct access to silver for Chinese investors. It would also be benificial to silver enterprises and industries as the metal would now be available for trading, hedging and buying at their local exchange and in the local currency.

COMEX and London Metal Exchange contracts are believed to be influenced by price manipulation which gives rise to price volatility. Trading in China is expected to control this volatility as the country is a centre for both producers and consumers.

According to Five Star Equities, this might make it more difficult for American speculators to manipulate markets in their favor.

"Since there is no authoritative price signals in China to guide production and operation and head off price fluctuation risks, China's silver production, consumption and trading enterprises are exposed to substantial market risks making it urgent to launch silver futures trading for the purpose of price discovery and hedging," said the China Securities Regulatory Commission.

In the beginning, silver prices on SHFE may take cues from and be pegged to London Spot prices, but as spot demand in China picks up for the metal, domestic cues might come in play and influence prices, Shanghai Metals Market said.

Contract specifications

SHFE silver contracts appears to be an answer to the recognized need for different rules set in a different arena.

SHFE contracts will be of 15 kg lot size and instead of being dominated by dollars, they will be traded in yuan.

Initial prices for the silver contracts are estimated to range within RMB 87898.68 - 91,478.27 ($13,923 - 14,490 at the rate of $28.8 a troy ounce of silver to $30 a troy ounce of silver). There is a minimum seven percent margin requirement and price fluctuation will be set to be limited to five percent per day.

Local availibility of silver contracts and reduced lot size may make silver more accessible to Chinese investors now, than in the past. As demand for the metal may pick up, it would prove bullish for silver on a global scale by providing a new route for money to flow into the market.

The CSRC has said silver futures trading in the nation will help "promote the rational allocation of silver resources and balanced silver supply and demand in the market."

However, regulators in China are hoping to see more than just investors benefit from this new trading vehicle.

With silver contracts on home land, silver miniers and industrial users will have the ability to hedge at home.

The CSRC hopes that this will enable such enterprises to improve management, competitiveness and promote development of related industries.