CHINA Trends and Developments Contributed by: Tao (Andy) Qin, Yanhua (Xavy) Xu, Ran (Addie) Cheng and Tianbing (Yasmin) Zhou, DeHeng Law Offices
In addition to regulating trading activities, new compli - ance requirements have been put forward for futures companies regarding business expansion, enhanced supervision and standardised conduct amid the prac - tical development of the futures market. In this con - text, the practical experience so far is due to be sum - marised and the Measures for the Supervision and Administration of Futures Companies are due to be revised. The formulation of the Measures for the Supervision and Administration of Derivatives Trading and the revi - sion of the Measures for the Supervision and Adminis - tration of Futures Companies are of great significance for regulating the derivatives trading market, enhanc - ing the operational capabilities of futures companies and enabling their diversified development to adapt to economic growth and international competition, as well as stimulating the innovative vitality of the indus - try and promoting the internationalisation of China’s futures and derivatives markets. Observations on the formulation of the Measures for the Supervision and Administration of Derivatives Trading (Draft for Comment) As mentioned above, the Futures and Derivatives Law only provides basic principles for derivatives trading, including the establishment of basic derivatives sys - tems such as the single integrated agreement, net set - tlement and a trading report database. At the same time, it stipulates in Article 8 that: “The futures regula - tory agency of the State Council and any other depart - ment authorised by the State Council shall carry out supervision and administration of the derivatives mar - ket according to their respective duties,” authorising the CSRC to refine the trading rules for the derivatives market under its supervision. Subject to the scope of the derivatives market under the CSRC’s supervision, the Measures for the Supervision and Administration of Derivatives Trading do not currently regulate the interbank derivatives market nor the OTC derivatives markets organised by banking financial institutions and insurance financial institutions. The draft explanation of the Measures for the Supervi - sion and Administration of Derivatives Trading (Draft for Comment) (the “Measures for Derivatives Trad - ing”) mentions that the formulation of these rules
mainly adheres to four fundamental principles: func - tional supervision, co-ordinated supervision, strict risk prevention and reserving room for development. The Measures for Derivatives Trading contain a total of eight chapters and 52 articles, comprehensively covering General Provisions, Derivatives Trading and Settlement, Prohibited Trading Behaviours, Traders, Derivatives Business Institutions, Derivatives Market Infrastructure, Supervision and Administration, and Legal Liabilities, as well as Supplementary Provisions. The Measures for Derivatives Trading provide a more comprehensive regulation of trading behaviour in the derivatives market than previously, and some of their highlights are as follows: • Shift from institutional supervision to functional supervision: To avoid systemic risks in the financial sector, China has long adopted a regulatory model dominated by institutional supervision, which has played an effective role under the segregated operation model. With the development of mixed business, operations have increasingly over - lapped across markets. Functional supervision has emerged as an effective and progressive measure to prevent the cross-transmission of financial risks, mitigate conflicts in regulatory functions, eliminate regulatory vacuums and curb regulatory arbitrage. • Rules on trader access and suitability management are hierarchical: Article 23 of the Measures for Derivatives Trading stipulates that entities engaged in risk management activities such as hedging may be exempted from all or part of the standards for professional traders, and this regulatory relaxa - tion responds to the practical needs of enterprises in the real economy. However, how to define the scope of “hedging” and how to accommodate SMEs while serving the real economy may require verification and adjustment in practice. Further - more, the deep verification of traders’ identity and purpose not only requires traders to comply with regulatory requirements but also strengthens the due diligence obligations and compliance review requirements for derivatives business institutions. • Unprecedented efforts to combat illegal and irregular activities: The Measures for Derivatives Trading first clarify that the development of overly complex derivative contracts is restricted, require highly standardised derivative transactions to be
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