CHINA Law and Practice Contributed by: TieCheng Yang, Yin Ge, Lin (Avery) Huang and Weijun (Elliot) Yi, Han Kun Law Offices
which are also traded on CFETS and are primarily regulated by PBoC and NFRA. Commodity forwards include products linked to met - als, agricultural products and energy. Depending on the types of products, commodity forwards may be traded OTC through OTC platforms affiliated with exchanges such as DCE, ZCE or SGE. The regulatory authorities typically are CSRC, PBoC and the relevant trading platforms. 2.4 Listed v Over-the-Counter In China, exchange-traded derivatives include the futures and options described in 2.1 Futures and Options and certain credit-related derivatives such as credit protection contracts and credit protection certificates, which are traded on SSE and SZSE. OTC derivatives, by contrast, involve a wide variety of prod - ucts and markets. Commodity derivatives dominate the exchange-trad - ed market, while FX derivatives dominate the OTC market. Exchange-traded markets such as SSE, SZSE and the futures exchanges apply mature risk management mechanisms, including margining, daily mark-to-market and large position reporting require - ments. The regulation of exchange-traded markets is discussed more fully in 3. Regulation of Derivatives . New product listings require CSRC approval and are generally standardised in structure. By contrast, OTC derivatives are mostly non-standard - ised and primarily trade under three master agreement frameworks: (1) the NAFMII framework for the inter - bank market; (2) the SAC framework for the securities and futures OTC market; and (3) the ISDA framework for the bilateral market used by foreign institutions. Each framework features its own trading venues, pri - mary products and market participants. The NAFMII market primarily covers interbank FX and interest rate derivatives and is generally traded on CFETS, SHCH and SGE for trading and/or clearing. The SAC frame - work governs the OTC derivatives markets for securi - ties companies and futures companies, and includes both bilateral and quote-driven platforms. The ISDA framework generally governs bilateral trading between domestic financial institutions and foreign institutions.
In China’s OTC derivatives market, trading venues and clearing and settlement infrastructures vary by under - lying assets. All interbank derivatives transactions that reference interest rates, FX and credit are executed through CFETS. Most interest rate swaps are centrally cleared and settled at SHCH. Equity derivatives are executed via CSIS and are cleared and settled on a bilateral basis. Commodity derivatives are executed on various electronic platforms operated by exchang - es such as DCE and SGE. Notably, Chinese regulators generally discourage and restrict overly complex product structures in the domestic OTC markets. 2.5 Asset Classes The primary underlying asset classes for derivatives in China are commodities for exchange-traded products and FX for OTC products. Emerging asset classes include carbon-related prod - ucts. Pilot markets in Shanghai, Hubei and Guangzhou have introduced carbon forward contracts, which are bilaterally cleared, with Shanghai utilising SHCH for clearing. As mentioned in 2.1 Futures and Options , derivatives linked to virtual currencies remain strictly prohibited in China as their trading is considered an illegal financial activity. Meanwhile, to prevent insider dealing and oth - er illegal actions, controlling shareholders, directors and senior management personnel of listed compa - nies are prohibited from trading derivatives linked to their own company’s stock. In addition, listed compa - nies and investors may not use derivatives to circum - vent regulatory requirements. 2.6 Exemptions, Non-Derivative Products and Spot Transactions Current Chinese regulations do not provide exemp - tions for specific derivatives products. Spot commodities trading is regulated by the Min - istry of Commerce, PBoC and CSRC. The Ministry of Commerce oversees national planning, informa - tion and statistical management for commodity spot markets to ensure healthy market development. PBoC supervises financial aspects and non-bank payment
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