CHINA Law and Practice Contributed by: TieCheng Yang, Yin Ge, Lin (Avery) Huang and Weijun (Elliot) Yi, Han Kun Law Offices
and the type of products involved. Building on the FDL as the overarching statutory foundation for derivatives regulation, swap transactions are subject to regulatory rules that apply to both market participants and prod - ucts (including their trading platforms), which may be
party institutions such as banks and may be traded in the secondary market. Equity-linked swaps traded in China mainly include total return swaps (TRSs), which are traded OTC under the lead of securities firms or through China Securities Index Company. These are primarily regu - lated by CSRC. Commodity-linked swaps traded in China may be traded through OTC platforms affiliated with exchang - es such as DCE and SGE, or through other OTC arrangements. Depending on the underlying com - modity, these swaps are regulated by CSRC, PBoC and/or the relevant trading platforms. Interest Rate Swaps in China IRSs, as the most widely‑used OTC interest‑rate derivatives, play a significant role in China’s deriva - tives market. IRSs were first introduced in 2006 on a pilot basis in the interbank bond market and were fully launched in 2008. Currently, swaps in China may be subject to either bilateral or central clearing. Only cer - tain standardised products are subject to mandatory central clearing. According to the PBoC’s rule issued in 2014, SHCH provides a central clearing mechanism for IRS transactions, and certain types of IRS traded between financial institutions are required to be cen - trally cleared in SHCH. This will be discussed further in 3.1.2 Clearing . Swap Connect The mutual access scheme of the Mainland China and Hong Kong interest rate swap markets (Swap Connect) was launched on 15 May 2023. It enables cross-border participation in Hong Kong and Main - land China’s interest rate derivatives markets via a mutual access scheme between the financial market infrastructures in respect of trading, clearing and set - tlement in both places. Specifically, Swap Connect is run in partnership by onshore trading platform CFETS, central counterparty SHCH, and HKEX through its clearing subsidiary OTC Clear. Swap Connect is divided into the Northbound and Southbound Swap Connects. The Northbound Swap Connect allows offshore investors in Hong Kong and other countries and regions to access IRSs in the
issued by one or more regulatory bodies. Product-Specific Regulation for Swaps
From a product-based regulatory perspective, differ - ent types of swaps fall under the regulation of different authorities. Interest rate swaps (IRSs) mainly consist of RMB IRSs and standardised IRSs. IRSs dominate China’s interest-rate-linked derivatives market. IRSs on the seven-day fixed repo rate (FR007) are the products most traded by commercial banks, accounting for up to 70% of the total interest rate derivatives turnover, based on the data from PBoC. IRSs are primarily trad - ed in the interbank market and generally regulated by PBoC, NFRA and NAFMII, depending on the specific product and counterparties involved. Swaps linked to foreign exchange (FX) in China mainly include FX swaps, currency swaps and standardised currency swaps. These products are generally traded on the CFETS and regulated by SAFE and CFETS. Within the FX derivatives category, FX swaps (includ - ing currency swaps) are the most widely traded prod - ucts, with USD/CNY swaps accounting for up to 99% of the notional number traded of all FX swaps, based on the data from CFETS. Credit-linked swaps traded in China primarily include OTC CDS, which are regulated by PBoC and NAFMII. It is worth noting that in 2010, NAFMII launched two types of credit risk mitigation (CRM) tools: credit risk mitigation agreements (CRMAs) and credit risk mitiga - tion warrants (CRMWs). While CRM instruments are regarded as China’s domestic version of CDSs, they differ significantly from international CDS products. For instance, CDSs typically reference a series of bonds issued by the same issuer with common char - acteristics (eg, governing law, currency, seniority), whereas CRM products only reference one specific bond. A CRMA is a bilateral OTC contract and cannot be transferred in the market. A CRMW, by contrast, is a standardised instrument issued by qualified third-
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