CHINA Law and Practice Contributed by: TieCheng Yang, Yin Ge, Lin (Avery) Huang and Weijun (Elliot) Yi, Han Kun Law Offices
Mainland interbank market via Hong Kong infrastruc - ture providers. The Southbound Swap Connect, in the opposite direction, will allow Mainland China investors to access the Hong Kong financial derivatives market through mutual access between infrastructure institu - tions in both places. Swap Connect started initially with the Northbound Swap Connect, while currently the Southbound Swap Connect is not yet available and will be explored in the future. With regard to the Northbound Swap Connect, off - shore investors that meet the requirements of PBoC, have completed filing for participation in CIBM Direct and have been granted permission by CFETS can par - ticipate in the Northbound Swap Connect. Swap Con - nect shares the same operational model with existing OTC Clear products. Even though the ultimate trad - ing and clearing requests are confirmed and executed onshore via CFETS and SHCH, the offshore investors only face offshore electronic trading platforms (such as Bloomberg and Tradeweb) and OTC Clear without altering their existing trading and settlement practices. As of the end of April 2025, a total of 20 onshore mar - ket makers and 79 offshore investors executed more than 12,000 IRS transactions through the Northbound Swap Connect, with total notional principal exceeding CNY6.5 trillion, according to a PBoC announcement. Regulatory Considerations for Offshore TRSs on Chinese Securities and Futures For many years, given that China’s capital markets have not been fully accessible to foreign investors, overseas institutions need to utilise regimes like QFI, Stock Connect, Bond Connect, Internationalised Futures Products or CIBM Direct to access A shares, domestic futures and domestic bonds. As a result, many foreign investors engage in TRSs offshore to obtain economic exposure to Chinese securities and/ or futures. From a derivatives regulatory perspective, these off - shore TRS transactions generally fall outside of the PRC regulators’ jurisdiction. From a securities law and futures law standpoint, the total return receiver is not deemed to be the legal owner of the underlying securi - ties or futures and thus is exempt from foreign own - ership limits, duties of disclosure of interest, futures
position limits and short-swing profit rules. However, for TRSs on Chinese securities, where the equity amount receiver in a TRS in fact controls voting rights or governance over the underlying securities during the swap’s term, Chinese regulators may treat it as an indirect shareholder subject to applicable ownership and disclosure restrictions. Additionally, regardless of contractual structuring, both the TRS equity amount receiver and payer remain potentially subject to PRC insider trading and market manipulation laws. Meanwhile, as mentioned in 1.2 Historical Trends and Looking Forwards , the Draft Derivatives Trading Measures are intended to have extraterritorial scope, applying to derivatives transactions conducted over - seas that concern underlying assets in China and/or hedging transactions executed within China. In this regard, where an offshore TRS with hedging transac - tion takes place with China, the onshore securities and futures exchanges may require the derivatives operating institutions (ie, brokers) to provide informa - tion related to such offshore TRS transaction, such as the details of the counterparty and the TRS transac - tion elements, based on the exchanges’ monitoring needs. Besides this, where an offshore TRS transac - tion is in connection with domestic underlying assets, it remains subject to the futures position limit and large position reporting requirements, securities disclosures of interest rules, and the prohibitions on fraudulent, manipulative, insider-trading, short-swing and other unlawful activities. Considering such potential impacts of the Draft Derivatives Trading Measures when effec - tive, it is worth keeping an eye on the finalisation of In China, forwards are regulated based on the type of underlying assets and the type of market partici - pants involved. The principal forward products traded in China include interest rate forwards, FX forwards, bond forwards and commodity forwards. FX forwards include currency forwards and standard - ised currency forwards. They are primarily traded on CFETS and are regulated by SAFE. these measures. 2.3 Forwards Interest rate forwards include bond forwards, forward rate agreements and standardised bond forwards,
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