CHINA Trends and Developments Contributed by: Tao (Andy) Qin, Yanhua (Xavy) Xu, Ran (Addie) Cheng and Tianbing (Yasmin) Zhou, DeHeng Law Offices
conducted in designated derivative trading venues, and call on industry associations, trading venues and clearing institutions to enhance transaction standardisation. The rationale behind these pro - visions is to prevent regulatory failures caused by nested, complex or opaque products, which could create shortcuts for improper profit transfer. Chapter 3 of the Measures for Derivatives Trading is devoted to prohibited trading behaviours, includ - ing prohibition of illegal and irregular activities such as fraud, insider trading, market manipulation of securities, and evasion of supervision through derivatives trading. Among these provisions, the rules regarding “shareholders, actual controllers, directors, supervisors and senior executives of listed companies” are designed for the purpose of protecting the rights and interests of investors, preventing such parties from achieving disguised reduction of shareholdings through OTC derivative instruments (eg, the combination of equity swaps and securities lending hedging) to evade share sale restrictions. • Flexibilisation of the settlement system: The Meas - ures for Derivatives Trading expand the forms of margin to include marketable securities with strong liquidity such as cash, government bonds, stocks, fund units and standard warehouse receipts, while also leaving room for the CSRC to make additional supplements in the future. This is of great signifi - cance for traders to activate their existing assets, but a major challenge for derivatives clearing houses and registrars. The Measures for Derivatives Trading further stipulate and refine provisions related to derivatives practition - ers, business segregation and other matters – repre - senting a key advancement in the laws and regulations governing derivatives trading. However, they may still face challenges from complex trading practices. Observations on the revision of the Measures for the Supervision and Administration of Futures Companies (Draft for Comment) The revision of the Measures for the Supervision and Administration of Futures Companies (Draft for Comment) (the “Measures for Futures Companies”) is intended to align with the practical experience and development needs of the industry. It aims to improve
the supervision and administration of futures compa - nies on the principles of implementing the Futures and Derivatives Law, optimising and strengthening the supervision of futures companies, while tempo - rarily refraining from specifying regulations on foreign- related matters. Specifically: • Comprehensive and professional transformation of futures companies’ business: In response to calls from industry professionals, following the revision, in addition to engaging in traditional brokerage business, futures companies will also be allowed to conduct business such as futures trading consult - ing, futures market-making transactions, futures margin financing, proprietary futures trading, derivatives trading and asset management. For different types of business, the requirements for access thresholds have been refined to effectively enhance the risk prevention and control capabili - ties of futures companies. These changes will help futures companies diversify their profit models and align more closely with the diverse needs of the real economy. However, given the raised business thresholds for futures companies, smaller-scale futures companies may gradually lose their market competitiveness for failing to meet the standards for certain businesses. • Strengthening supervision over the daily business operations of futures companies: This includes improving corporate governance; strengthening multifaceted management of futures companies in areas such as shareholding control, fund man - agement and internal control systems; clarifying that futures companies may provide financing and guarantees for their qualified subsidiaries; and improving the protection for Chief Risk Officers (CROs) in the normal performance of their duties. These revisions integrate external supervision with internal self-inspection. For futures companies, the focus is on establishing internal systems (including but not limited to those for protecting fund secu - rity), clarifying key systems such as related-party transactions and financing guarantees, and giv - ing play to the independent functions and roles of CROs in abiding by legal supervision requirements and identifying potential risks.
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