Update on China Crude Oil Futures Market Products

Update on China Crude Oil Futures Market & Products Department, INE 2018. 09

Outline Ø Introduction of China Futures Market Structure Ø Design of China Crude Oil Futures Ø Update on the Development of China Crude Oil Futures Ø Summary & Near-Term Plan

Ø INTRODUCTION OF CHINA FUTURES MARKET STRUCTURE

INE Shareholder Structure SHFE Group SHFE Shanghai Futures Exchange 100% SFIT 99% Shanghai Futures Information Technology 1% INE Shanghai International Energy Exchange

Planned INE Productline Listed on SHFE** Listed on INE Crude Oil To be listed on INE LPG Gasoline Electricity Jet Fuel Rubber #20 LNG Diesel Copper*** Zinc Aluminum Lead Rubber RMG 380 Fuel Oil Rebar Wire-rod Gold Silver Bitumen Hot Rolled Coil **SHFE is ranked 9 th in FIA Futures Exchange Annual Volume of 2017 ***Most popular in China and well known globally

Milestones of China Crude Futures Market 2012. 10. 24 • State Council’s Decision in 2013. 11. 06 Modifying《 Regulation on the • INE was Administration of registered Futures Trading》 and setup 2013. 09. 29 • CSRC《Policy on Capital Market Supporting China FTZ (Sanghai) 》 2018. 09. 03~07 *INE SC First Delivery 2015. 06. 26 2015. 07. 23 • CSRC《Interim Measures for • Ministry of Commerce 2015. 08. 20 2015. 02. 09 the Administration of Notice on 《 • Customs • NDRC’s Notice on Overseas Traders’ & Brokers’ Preparation for Non. Announcement on 《 The Bonded 《Management Engagement in the Trading of state Owned Entities of Imported Delivery of Crude Oil Specified Domestic Futures Application for the Oil Crude Oil》 Products》 Import Qualification 》 Futures Contracts》 2014. 12 2015. 04. 08 • CSRC Approval • Ministry of Finance/State of the launch of INE Crude Contract Administration of Taxation’s Notice on 《the Value. Added Tax Policies for the Bonded Delivery of Crude Oil and Iron Ore Futures Contracts》 2018. 02 • AQSIQ Announcement on “Inspection and Supervision of Crude Oil for Futures Delivery” 2017. 05. 11 2015. 07. 20 2015. 07. 31 • PBOC Circular on • SAFE Circular on《 Foreign • INE Finalized 《Strengthen the administration of cross-border settlement of trades of domestic crude oil futures》 Exchange Administration for Overseas Traders and Brokers Engaging in Futures Trading under Specific Domestic Categories》 and Published Exchange Bylaw and Rules 2018. 03. 26 • Crude Futures Launched 2018. 03. 13 • MOF , SAT & CSRC’s Circular on “Tax Policy Supporting the Open-up of Futures Market on Crude Oil and Other Commodities

Ø DESIGN OF CHINA CRUDE OIL FUTURES

Design Framework Globalized Platform , RMB Denomination, Net Pricing & Bonded Delivery Denomination Trade Price Delivery Mode Participant Types Underlying Denominated in RMB & accepting foreign currencies as margin collaterals Net Pricing—Quoted price net of custom taxes or VAT Bonded Physical Delivery—Using standard bonded storage warrants Onshore and Offshore Participants Medium Sour Crude

Crude Oil Futures Contract Spec. Underlying Contract Unit Price Quotation Tick Size Medium Sour Crude Oil 1, 000 Barrels/lot Yuan（RMB）per barrel（Net quotation price） 0. 1 Yuan（RMB）per barrel Daily Price Limit 4% above or below the previous day’s settlement price for such contract month Listed Contracts Monthly contracts of recent twelve (12) consecutive monthly contracts starting with the month immediately following the current calendar month followed by eight (8) quarterly contracts Trading Hours 9: 00 - 11: 30 a. m. and 1: 30 - 3: 00 p. m. , Beijing Local Time; and other hours designated by INE Last Trading Day The last business day of the moth preceding the delivery month. INE is entitled to adjust the last trading day in accordance with China National Holidays Delivery Period 5 consecutive business days after the last trading day Grade and Quality Specification Delivery Points Medium Sour Crude Oil, for which the benchmark quality are: the gravity 32 degree API and sulfur content 1. 5% by weight. The grades of crude acceptable for delivery and the price differentials are stipulated by the Exchange Locations designated by the Exchange Minimum Margin 5% of contract value Settlement Type Physical Delivery Product Code SC Listing Exchange INE

Underlying Commodity Medium Sour Crude fur Sul ent nt Co By API Gravity Nitroge n Para ffin Wax Gel Content …… By Sulfur Content Classification API Classification Content (%) Light ＞ 34 Sweet ＜ 0. 5 Medium 20~34 Medium 0. 5～ 2 Heavy 10~20 Sour ＞ 2 Extra Heavy ＜ 10 Remark：The classification of crude grades by API and sulfur content are varied by countries. Please be noted above classification may not matched with other region’s owned classification

Underlying Commodity Medium Sour Crude Oil Production Classification by Quality Source：ENI《World Oil and Gas Review 2017》

Underlying Commodity Medium Sour Crude China Crude Imports 2017 Russia 14, 32% Ro. W 33, 29% Saudi Arabia 11, 49% Qatar 0, 40% Yemen 0, 90% USA 2, 12% Russia Saudi Arabia 39% From Middle East Angola 11, 27% Iraq 10, 48% UAE 2, 20% Oman [CATEGORY NAME] 6, 58% [PERCENTAGE] Angola Iraq Iran Oman UAE USA Yemen Qatar Ro. W

Deliverable Grades, Quality Specification and Price Differentials INE Circular [2018] No. 2 Nation Deliverable Crudes United Arab Emirates Dubai 30 2. 8 0 United Arab Emirates Sultanate of Oman State of Qatar Upper Zakum Oman Qatar Marine 33 30 31 2. 0 1. 6 2. 2 0 0 0 Republic of Yemen Masila 31 0. 8 5 Republic of Iraq Basra Light 28 3. 5 -5 24 1. 0 -5 People’s Republic of China Shengli 1. API gravity = (141. 5 / S. G. 60/ 60 °F) – 131. 5; S. G. : as per ASTM D 1298 2. Sulfur content: as per ASTM D 4294. Minimum Maximum Price Differential API Gravity Sulfur (%) (Yuan / Barrel)

Designated Delivery Hubs Currently the approved storage capacity is 5. 15 million m 3, among which 2. 85 million will be put in use in Phase 1, and the other 2. 25 million are backups. The storage capacity in Phase 1 is 2. 6 million tones, which is about the capacity of 8 VLCCs. INE is still reviewing other depots, among which private and foreign owned are among them.

Supporting Policies Date Policy Circular No# OVERSEAS PARTICIAPTION: CSRC’s Interim Measures 26 -JUN-2015 20 -JUL-2015 for the "Administration of Overseas Traders’ and Overseas Broker’s Trading of Specified China Futures Contracts”, in which INE crude is defined as one of the Specified Contracts FX: PBOC’s Circular on the "Administration of Cross-border Settlement for Onshore Crude Futures Trading” CSRC Order #116 PBOC Circular [2015] No. 19 31 -JUL-2015 FX: SAFE’s Circular on the “Notice on the Administration of Foreign Exchange for Overseas Traders’ and Overseas Broker’s Trading of Specified China Futures Contracts Huifa [2015] No. 35 20 -Aug-2015 Customs: GACC’s Circular on “Customs Administration for GACC Circular[2015] No. 40 Bonded Delivery of China Crude Futures Contract” 13 -Mar-2018 TAXATION: Futures Trading and Income Tax Exemption for offshore institutional and individual traders temporarily. Caishui [2018] No. 21

Globalized Platform Overseas Participation Accesses ACCESS 1：FUTURES FIRM ACCESS 2：FUTURES FIRM SHFEINE ACCESS 3：OSBP OVERSEAS INTERMEDIARY OVERSEAS INVESTORS Global Participation Accesses ACCESS 4：OSNBP Note: For accesses 3 & 4, An OSP(Overseas Special Participant) trades shall be cleared by a Futures Firm

Government FX Policy for the INE Crude Futures X SHFE-INE FF USD CNY NRA ONSHORE BANK ACCOUNTS USD CNH OVERSEAS PARTICIPANT Designated Depository Bank 1. Crude futures is denominated and traded in RMB. Overseas investors may use USD or CNH to serve as margin 2. RMB is the only acceptable denomination currency in making up losses for the trade or in daily Mark-to. Market. Overseas Participant can designate to settle his/her trading or daily mark-to-market profit in either USD or CNY. Change of designated currency may be made twice a year. 3. Under the NRA bank account for crude futures trading, there is no cap on the fund transfer between onshore and offshore. However, position limit rule is applied. 3. Exchange of currency can be executed for the purpose of crude futures trading only.

Tax Exemption Income Tax Policy for Overseas Traders and Brokers ØOverseas institutional investors and brokers income from futures transaction is excluded from the taxable income base temporarily ØOverseas brokers’ revenue/income from the commission collected from customers’ futures transaction is excluded from the taxable income base. ØOverseas retail investors’ income from futures transaction is also excluded from the taxable income base for up to three (3) years starting from 26 -Mar, 2018.

Custom Policy Bonded delivery: Seller in the futures market does not need to have the Crude Import Qualification and Quota approved by the Ministry of Commerce Ø Bonded goods for futures delivery refers to goods stored in a specified location or bonded area that are supervised by the Customs District. Ø In practice, crude futures delivery requires seller to deliver eligible bonded oil warrants, and buyer to deliver the fund for the settlement to the Exchange to complete delivery obligation Ø Different sets of rules and requirements are applied to bonded crude oil delivery, Import of crude oil and domestic crude trading separately Ø After taking a bonded delivery, if a trader wishes to import the crude into China, they need to meet the importing requirements set in relavant rules.

Ø UPDATE ON THE CHINA CRUDE OIL FUTURES

Structure of Participant Types By Trading Account No. 一般�位客� Normal Institutions 特殊�位客� Specific Institutions 个人客� Retail By Trading Volume 一般单位客户 特殊单位客户 By OI 个人客户 个人客� Retail 一般�位客� Normal Institutions 特殊�位客� Specific Institutions

Onshore v. s. Offshore Participant Structure By Trading Account No. By Trading Volume 境内客户 境外客户 境内客户 Onshore Offshore By OI 境内客户 Onshore 境外客户 Offshore

Who Were There on the First Trading Day ? • On 26 -Mar, 2018, the launch date of INE Crude, there were 413 investors participate in the market open auction, and a total of 261 lots was matched in the first trade at the price of RMB 440/bbl. • Top List of Investors of the First Trade: China Oil China, UNIPEC ASIA CO. LTD. HK, CNOOC China, SINOCHEM China, NORTH PETROLEUM INTERNATIONAL CO. LTD. HK, TWINACE OIL, China, WONFULL China, TRAFIGURA PTE LTD Singapore, GLENCORE PTE. LTD. , Singapore, Freepoint Commodities Pte. Ltd. Singapore, BOCI Global Commodities LTD

Trading Volume & OI Trading Volume and OI Daily Volume MA of Vol. OI SC Dominant Contract Price Avg. OI • As of 31 -Aug-2018, accumulated Volume of the China crude contract since launch is 22. 18 million lots with daily average volume of 201 K lots and avg. daily OI of 29, 680 lots (counting buy and sell sides) • Since the launch on 26 -Mar, 2018, the contract’s front line price range is in line with global benchmarks in general. However, it’s also exploring its owned price pattern of the oil consumption market.

Price Relationship between Benchmarks Price Relationship with Global Benchmarks • As of 28 -Jun-18 WTI Brent Oman INE-SC 相关系数 WTI 100. 0% 76. 2% 68. 6% 66. 1% Brent 76. 2% 100. 0% 98. 3% 94. 6% Oman 68. 6% 98. 3% 100. 0% 95. 0% INE-SC 66. 1% 94. 6% 95. 0% 100. 0% • As of 31 -Aug-18 WTI Brent Oman INE-SC 相关系数 WTI 100. 0% 75. 1% 69. 4% 47. 9% Brent 75. 1% 100. 0% 95. 0% 42. 3% Oman 69. 4% 95. 0% 100. 0% 62. 6% INE-SC 47. 9% 42. 3% 62. 6% 100. 0% • Calculation of price correlation is based on the prices of each futures contract’s closing price • The contract is still exploring its price discovery function, while the movement is in line with global benchmarks, such as WTI, Brent and DME’s Oman

SC v. s. Global Benchmarks at the Beginning Phase WTI Volume after Its Launch Brent Volume after its Launch 6 24 . 1 99 5 6. 24 . 1 99 4 6. . 1 99 3 24 6. 24 . 1 99 2 6. 24 . 1 99 1 6. . 1 99 0 6. 24 99. 1 24 24 6. Total Market Volume 98 8 3. 30. 1987 6. 3. 30. 1986 98 3. 30. 1985 . 1 3. 30. 1984 24 3. 30. 1983 9 200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 Total Market Volume • It took NYMEX three years to reach the daily trading volume of 50, 000 lots for WTI contract • It took IPE five years to reach the daily trading volume of 50, 000 lots for Brent contract

SC v. s. Global Benchmarks at the Beginning Phase 12 89 . 2 4 . 1 9. 2 4 10 Market Open Interest • It took more than half year for 2 major oil futures contracts to build up open interests of 10, 000 lots 89 9 98. 1 9 98 8. 24 . 1 9 98 6. 24 . 1 98 4. 24 . 1 8 98. 1 98 8. 24 . 1 6. 24 98 . 3 0 . 1 11 98 9. 30 . 1 98 7. 30 . 1 98 5. 30 . 1 3. 30 Market Open Interest 88 0. 1 9 0 . 2 4 10000 88 10000 12 20000 . 1 9 20000 . 2 4 30000 10 30000 8 40000 . 1 98 3 1. 30. 1 98 4 3. 30. 1 98 4 5. 30. 1 98 4 7. 30. 1 98 4 9. 30. 1 98 11 4. 3 0. 19 84 40000 3 50000 3 60000 9 OI of Brent Contract on ICE (IPE) 2. 24 OI of WTI Contract on NYMEX

SC v. s. Global Benchmarks on Liquidity 300, 00 251, 19 250, 00 247, 77 200, 00 150, 00 100, 00 124, 53 89, 43 50, 00 9, 64 0, 42 0, 00 成交量 1, 42 Volume CME WTI 持�量 ICE Brent DME Oman 注： 3月26日至 8月17日均值 Note: Average daily value during period 26 -Mar to 17 -Aug, 2018 INE SC OI 1, 45

Ø SUMMARY & NEAR-TERM PLAN

Media Focus: IEA oil market report 2018. 04 • liquidity • Intervention • Transparency • Volatility • Trading hours • Market liberalization • Authority respond • Instrument of Physical transaction and hedging • • More representative • Improve transparency • More competitive pricing • Tax holiday/Relaxation of capital control benchmark of outright price marker

Media Focus: OPEC monthly oil market report 2018. 04 • Government interference • Currency risk • Liquidity • Limited physical buyers • Volume & OI are the keys • More useful regional marker • Price discovery • Help business to avoid risk • Regional benchmark

Summary A good start with stable growing trading volume and OI Market price discovery function has been preliminary developed Still a gap to catch up with well developed global benchmarks

展望/Near-Term Plan RMO Registration with MAS On- & Off-shore Market Education and Promotion Plan Onboarding global ISV vendors Continue Improvement on the Market Efficiency by introducing Market Makers Continue Improvement on Globalizing Exchange Rules

Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. The information contained in this document is compiled and edited by the Shanghai International Energy Exchange (INE) for general introduction of crude oil market only. Although we endeavor to provide reliable, accurate and complete information, there cannot be guarantee that such information is accurate or complete and INE assumes no responsibility for any errors or omissions. The information provided in this document is for reference only and should not be construed as a prospectus; a solicitation to buy or sell any investment. INE is not responsible for any profits or losses associated with using information in this document.