The Research On The Actualization Institution Of The Treasure Bond Future In China

China first launched treasury future in 1992 in the Shanghai Stock Exchange. The program officially entered the experimental stage on October 25, 1993. During that time, the creation of treasury future helped improve the liquidity of treasury, stimulated the financial market, promoted treasury issuance. But in 1995, the experiment halted due to a series of unlawful practices.In the beginning of China's 21^st century, the scale of treasury market encountered unprecedented development. Both the management field and the academic circle have clearly realized that treasury risk brought by the lack of a sales/trading mechanism will form a systematic risk of the entire treasury market. It is also recognized that once such a risk broke out, all financial institutions will suffer. Treasury market can become a direct reason causing China's financial crisis. With treasury's sensitivity level to interests rates continue to climb up, and that in 2003, many low interest treasury showed large price drops under the influence of 2003 interest rate increase, many financial organizations (mainly banks and insurance companies) holding this kind of treasury suffered many losses.This article makes horizontal and vertical comparisons of China's historical treasury future trading policy and foreign interest rate future trading policy. It combines the research on the current state of China's treasury market; surveys observed data and materials, with a research method that utilizes policy economics. Based on the analysis, synthesis, summary, and abstraction of related materials, we analyse the need of re-launching treasury future in China and the choice of operating policy with the aim to build a trading and policy framework that fits our treasury market reality.Policy economics points out that under different policies, trading (transaction) costs vary widely. The lower the cost of a single transaction, the more efficient the policy is. Developing countries lag behind developed countries in that developing countries face high policy cost. As a special kind of market system, treasury future market can not avoid the problem of market failure, in which monopoly is the most challenging threat. Once monopoly and monopolist are present in treasury future market, it will easily create market manipulation and collusion issues. Comparing with other financial products market and derivative market, monopoly in treasury future market will not only damage investors' interests, disrupt normal market process, but also directly encourage irrational arbitrage behaviours, and increase market risks of the treasury future market.The outline of this article is as follows: From the policy economics perspective, to point out existing problems in China's treasury future market in its experimentation periods; Laying out principles of how policy determines trading costs and effectiveness; Proving that good policy can save costs and improve effectiveness; Convincing that operating policy is the key in the process of China's relaunching treasury futures; and finally proposing policy frameworks for China's future treasury future market.Operating policy in the treasury future market is a body of several individual policies all aiming for a smooth operation of treasury future trading. It includes trading policy, settlement policy, transaction policy and risk control policy. A well designed operating policy is the guarantee for the healthy and sustainable development of the treasury future market in China.Trading policy is a series of regulations that apply when traders reach a transaction either through price bidding in a particular exchange or the automatic price matching via computerized system. It includes contract design policy, price setting policy and other regulations. Treasury future contract is the carrying body and medium for treasury future transactions. It provides the basic regulation and definitions for treasury future trading, making the trading an ordered process according to contract terms. An ill designed treasury future contract will cause increased market arbitrage, increased market risk, market disorder and even market break down. Therefore, the relaunching of China's treasury future trading should borrow the successful lessons from developed countries, in order to design scientific and rational treasury future contract. Give the current distribution landscapes of treasury terms between banks and exchanges, China can choose 3-year and 10-year contract as the principle contracts for long term treasury future. It should use nominal bond as trading target, and allow future parties to trade either type of treasury whose term is long enough, in order to avoid price setting problem caused by the loss of balance between the size of the future market and corresponding treasury issue volume. In addition, using nominal bond as trading target can effectively avoid the negative influence brought by real bond's payment when term is up, so that treasury future can run smoothly and continuously. In terms of pricing policy, this article intends to crease an optimal, friction free price setting system. An effective, fully liquid treasury future market is characterized by investors' interactive competitions, sufficient information dissemination; it does not have arbitrage opportunities, therefore the replica of any random cash flow cost should have the price of this random cash flow. This is the basic pre condition for the pricing theory in a non-arbitrage market. According to the non-arbitrage theory's basic principles, in a non-arbitrage market, when the market is balanced, financial product's current price have certain innate connections with its future cash flow. This connection is the basic guideline for the price setting of financial products.Settlement policy is an important area of the treasury future market. In the experimentation stage, China's settlement policy copied after the securities trading settlement policy, in many ways, this does not fit the treasury future operation needs, and can easily increase settlement risk. The relaunching of treasury future should pay attention to the followings in the design of settlement policy: 1. use an independent settlement policy system; 2. use a settlement policy membership system; 3. use a daily no debt settlement system; 4. use settlement margin and co-margin system. To really enforce these four aspects in the settlement system design, can effectively mitigate settlement risk.Transaction policy is an important component of treasury future trading mechanism. The design principle is to create a safe and efficient treasury future market operating system. In difference markets, transaction policies show different traits during China's experimentation stage of treasury future market. Can the relaunching of treasury future create a rational transaction policy system? We are looking at the following aspects: 1. using virtual bonds as target bond type, make sure the transcendence of the contract design, so that the price signal provided by the treasury future will be free of the influence of any particular treasury product; and to truly reflect the ongoing interest level of the financial market;2. to setup transactable treasury future varieties according to period;3. the calculation of the changing factor should be based on theoretical prices, and not the average of certain prices; 4. use any business day transaction, so that transactors can access the most transaction chances.The risk management policy is in the core position of the design of treasury future system. This article will research such risk system topics as margin policy, upper limit share numbers policy, and price control policy. 1. Margin policy follows the principles of feasibility, fixed quantity, and flexibility. A good margin policy can control market risk, and help robust capital flow in the market. Based on this, we learned lessons from our past and borrowed Western countries' success stories, and use a multi-category insurance money policy: first, the margin money, which includes initial margin and maintenance margin; then, risk management margin: the basic principle for this is to set different margin levels for investors with different risk tolerance levels.2. Setting upper limit of holding shares is to prevent future contracts to be held by a small number of traders, in order to avoid market price setting. In other words, setting upper limit for holding shares is to prevent certain investors engage in price control and other illegal behaviour such as 'forced sell out'. During the experimentation stage, we encountered many times 'forced buy in'. A major reason is that there is no upper limit set for share holdings, and this caused a small number of investors to monopolize and manipulate the market. In the relaunching of treasury future market, we should set limits for share holdings according to the different traits of trading contracts and treasury volume.3. During the relaunching of treasury future, we borrow Western countries' price control system to mitigate price fluctuation. Price control system includes CircuitBreaker and Price Limit policy. CircuitBreaker, PriceLimit, and SpeedBumps are the currently internationally used three types of automatic price stabling system. CircuitBreaker is a process break used before PriceLimit. This can be compared to the flashing of yellow lights before red lights are on, to signal risks to investors. PriceLimit can set limits to the maximum and minimum profit/loss an investor and member can make in one single day, therefore to effectively slow down and mitigate the threat to the treasury future price caused by disruptive events and out-of-control arbitrages.In addition, the success of the treasury future market is determined by whether the above mentioned policies are well designed, well implemented, regulated and executed. Therefore an improved regulation of the treasury future market is also an important factor for the smooth operation of the treasury future market.