CHINA Law and Practice Contributed by: TieCheng Yang, Yin Ge, Lin (Avery) Huang and Weijun (Elliot) Yi, Han Kun Law Offices
exchanges with the permission of CSRC. This will be discussed further in 2.1 Futures and Options . CIBM Direct After pre-filing with PBoC, eligible foreign institution - al investors and the products they issued may have direct access to the China Interbank Bond Market (“CIBM Direct”), while bond forwards, forward rate agreements and interest rate swaps are available to these international investors only for hedging their bond holding from CIBM Direct. International inves - tors may open an account directly with onshore set - tlement agents or adopt a custodian model. In addition, foreign institutional investors are permit - ted to trade onshore FX derivatives to manage FX risk exposure arising from their CIBM Direct investments. FX risk exposure consists of the principal, interest and market value fluctuations of bond investments, etc. Foreign institutional investors with actual CIBM Direct bond holdings can trade onshore FX forwards for hedging purposes. Internationalised futures products For specific futures contracts designated by CSRC (“Internationalised Futures Products”), internation - al investors may trade through domestic or foreign brokerages as intermediaries, or trade directly on the exchanges, subject to certain criteria. To date, China has introduced 15 futures contracts and nine options contracts for trading by foreign investors, with general eligibility criteria set by the domestic futures exchanges. Northbound Swap Connect The eligibility for the Northbound Swap Connect is the same as that for CIBM Direct. Under the Swap Connect regime, international investors can leverage their familiar offshore trading platforms to trade inter - est rate swaps in the China interbank market without the need to open accounts or adopt complex custody arrangements onshore. This will be discussed further in 2.2 Swaps and Security-Based Swaps . 1.2 Historical Trends and Looking Forwards Introduction of the FDL The FDL came into effect on 1 August 2022 and is an important milestone in the construction of the rule of
law in China’s capital markets. As the “basic law” for China’s futures and derivatives markets, the FDL pro - vides a legal basis for the high-quality development of the futures and derivatives markets. The FDL applies to futures transactions, derivatives transactions and related activities conducted within China, and those conducted outside China that dis - rupt the domestic market order or damage the lawful interests of domestic traders. In terms of scope of application, the FDL focuses on regulating the futures market, while also considering the OTC derivatives market, and leaves room for future reform and inno- vation. Notably, the FDL for the first time recognises in law the enforceability and effectiveness of a close-out netting regime and the single agreement concept, paving the way for China to become a clean close-out netting jurisdiction. The FDL effectively eliminates the con - cerns over bankruptcy administrator powers in deriva - tives transactions with respect to cherry-picking and clawback rights. Meanwhile, it is worth noting that the FDL has extra - territorial effect on offshore entities under certain circumstances, in addition to purely offshore futures and derivatives transactions and related activities that disrupt the onshore markets. For example, offshore futures trading venues will generally need to register with CSRC and accept its supervision if they provide onshore entities or individuals with direct access to their trading system for trading services. Also, off - shore futures, options or derivatives contracts listed in offshore futures trading venues that reference the prices of contracts listed onshore must comply with the relevant CSRC rules. In addition, marketing, pro - motion and solicitation activities in China conducted by offshore entities require CSRC approval and are subject to the relevant provisions of the FDL; onshore entities will also need to obtain CSRC’s approval if they intend to engage in such activities for the benefit of offshore entities. This echoes the increasingly tight - ened regulatory position over marketing activities by offshore entities in China.
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