CHINA Law and Practice Contributed by: TieCheng Yang, Yin Ge, Lin (Avery) Huang and Weijun (Elliot) Yi, Han Kun Law Offices
platforms. Furthermore, the misuse of credit or fiscal funds for trading in futures or derivatives is strictly prohibited. Requirements for Financial Institutions Specifically, financial institutions conducting deriva - tives business are subject to a dedicated set of busi - ness conduct requirements that emphasise regula - tory approval, client protection and compliance with supervisory rules. Financial institutions must obtain prior approval or registration before engaging in deriv - atives activities and are obligated to implement suit - able management procedures, including know-your- customer, verification of transaction authenticity and client risk assessment. Furthermore, financial institutions are required to com - ply with conduct standards specific to their industry. For example, banks must not engage in misleading marketing or promise return guarantees when offering derivatives products. Securities firms are prohibited from improper solicitation, facilitating regulatory arbi - trage or acting as a conduit to circumvent eligibility rules. 3.1.7 Commercial End Users Under the FDL and the trading rules of PRC futures exchanges, there are generally no specific exemptions or reliefs for commercial end users. The core trading conduct rules apply uniformly to all market partici - pants, such as those relating to market manipulation, insider trading and information disclosure. However, due to the functionally segmented regu - latory structure in China, most derivatives regula - tory requirements are directed at regulated financial institutions such as banks, insurers, securities firms and futures companies, rather than commercial end users themselves. As a result, commercial end users are often indirectly regulated through the compliance obligations imposed on their financial counterparties. 3.2 Local The local bureaus of China’s national financial regula - tors are responsible for certain on-the-ground super - visory functions in relation to derivatives activities, handling both administrative approvals and regulatory enforcement within their respective jurisdictions.
• Provincial-level NFRA bureaus are responsible for approving derivatives business applications by city commercial banks, rural small and medium-sized banks, and certain foreign banks. NFRA’s pro - vincial and municipal bureaus are responsible for the ongoing supervision, inspection and discipli - nary measures related to these banks’ derivatives operations at the local level. • Provincial-level CSRC bureaus are tasked with approving derivatives business qualifications for securities firms, as well as monitoring the conduct of securities and futures companies through on- site inspections and enforcement actions within their local jurisdictions. • For foreign exchange derivatives, banks other than policy banks and nationwide commercial banks need to apply to their local SAFE branch for approval to conduct RMB/FX derivatives business. These local SAFE branches also perform compli - ance oversight and carry out regulatory enforce - ment concerning such foreign exchange deriva - tives activities. 3.3 Self-Regulatory Organisations, Independent Authorities, and Exchanges Self-Regulatory Organisations a) Securities Association of China (SAC) SAC is a self-regulatory organisation established under the PRC Securities Law and operates under the guidance of CSRC, with all securities firms reg - istered as its members. SAC is responsible for the self-regulation of the OTC markets and OTC deriva - tives business conducted by securities companies, fund management companies and their subsidiaries, as well as their associated personnel. In this capacity, SAC formulates industry conduct standards, publishes standardised derivatives trad - ing agreements for the securities and futures markets, and oversees risk management practices related to derivatives trading. It also conducts self-regulatory inspections of OTC activities and administers the fil - ing and data reporting processes for in-scope OTC derivatives transactions. b) China Futures Association (CFA) CFA is the national self-regulatory organisation for the futures industry established under the FDL and oper -
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