On 11 October 2024, several Chinese authorities including the China Securities Regulatory Commission (the CSRC), the People's Bank of China (the PBOC) and the National Administration of Financial Regulation (the NAFR) issued the Opinions on Strengthening Supervision, Preventing Risks and Promoting High Quality Development of Futures Market (the Opinions).
The Opinions are the subset guidelines relating to the futures market under the overarching guidelines to promote high quality developments of the capital market issued by the State Council in April this year. The document sets out the roadmap of upcoming regulatory developments in the futures area. Many measures reflect a continuity of the current regulatory trend, but there are still some interesting items. For example, the Opinions set out certain measures to enlarge the opening of the futures market to foreign investors, though indicate that those measures should be taken in a prudent manner.
We highlight a couple of points in the Opinions that may interest investors to engage in futures trading or enter into the futures market in China.
* The PRC or China refers to the People's Republic of China, and solely for the purpose of this article, excludes Hong Kong, Macau and Taiwan.
Among others, the Opinions set out the following regulatory roadmap to further develop the futures market in high quality, as elaborated below.
- To strictly supervise futures trading activities and combat trading irregularities;
- To orderly and prudently expand the opening of the futures market to foreign investors; and
- To strengthen the full-cycle supervision of futures companies.
1. To strictly supervise futures trading activities and combat trading irregularities
Under the structure of the Opinions, this stream immediately follows the general objective section. This means that the measures in this stream are high on the regulatory agenda and will continue being the focus of the regulator.
Specific measures under this stream include the following, among others:
- To strengthen look-through regulations over trading activities. There are a number of items set out towards the objectives to prevent and penalize the evasion of position aggregation or trading collusion deriving from the failure to report trading accounts under the same actual control. More specifically: to urge intermediaries such as futures brokers to observe client management duties more diligently, to strictly implement the real-name account requirement and investor suitability requirement; to raise the market entry threshold for new market participants; to optimize methods and parameters to identify and manage trading accounts under the same actual control; to strengthen surveillance over position holdings and improve position holding aggregation rules; to improve large trader reporting rules and increase the ease of use of reporting data; to improve parameters to identify and process to handle abnormal trading activities; to effectively regulate trading accounts with similar trading behavior patterns; to closely track the evolution of new trading technologies and strategies, and to carry out forward-looking research and preemptively prepare regulatory tools in the toolbox.
- To strengthen full-cycle regulations of high frequency trading (HFT). The Opinions stressed that the aim is to maintain fairness in trading and market stability. More specifically, the upcoming measures are to continue optimizing reporting requirements and rules for designated algorithm trading; to improve rules on the regulation of HFT; to optimize the scope of trades charged of order fees as the market condition allows; to regulate fee reduction arrangements of exchanges and futures brokers respectively, and cancel the fee reduction for HFT; to strengthen the regulation of trading units of futures brokers and client equipment and system connections; and to regulate the server colocation of future brokers with futures exchanges.
- To strengthen enforcement against irregularities. More specifically, to strictly crack down on irregularities such as market manipulation, insider trading, and fabrication and dissemination of false information, and to increase public exposures of irregularities and impose market bans for severe violators; and to investigate and handle major cases in the futures market strictly and quickly, striving to achieve precise and efficient law enforcement.
- To strengthen supervisory collaborations across markets and authorities, including, among others, to strengthen exchanges of supervisory data acquired from overseeing the futures market, cash stock market, bond market and funds.
Comments
(1) The above measures are a continuity of the regulatory trend since the beginning of this year.
For example, the CSRC and futures exchanges have been striving to cast closer surveillance to identify trading accounts under the same actual control, and crack down on irregularities in this regard especially those involving HFT.
In February 2024, CFFEx (i.e. China Financial Futures Exchange) published a case where a private fund manager engaging in HFT on CFFEx failed to report trading accounts under the same actual control (including three fund ones, one under the name of the actual controller of the manager and two under the names of the actual controller's relatives) as required, and in turn violated the position limits for trading of several stock index futures contacts. In that case, CFFEx decided to confiscate illegal profits of close to RMB9 million, publicly criticize the persons committed the wrongdoings, impose trading bans over involved trading accounts for a period of 12 months, and record the track-record of receiving the aforementioned disciplinary measures into the capital market credit and integrity record database.
In July 2024, CFFEx published another case where four individuals failed to report that their trading accounts are under the same actual control and in turn violated the position limits for trading of several stock index futures contracts. In that case, CFFEx decided to confiscate illegal profits of approximately RMB16 million, issue warnings to involved individuals, impose trading bans over involved individuals for a period of seven months, and record the track-record of receiving the aforementioned disciplinary measures into the capital market credit and integrity record database.
(2) It is also noteworthy that certain measures announced in the Opinions also impose stricter intermediary duties on futures brokers. An example is the measure urging intermediaries such as futures brokers to observe client management duties more diligently, to strictly implement the real-name account requirement and investor suitability requirement. It is yet to see whether the regulator will in turn strengthen the enforcement in this area as well.
2. To orderly and prudently expand the opening of the futures market to foreign investors
The Opinions reveal a series of measures to optimize the regime to continue to open the futures market to foreign investors, and to increase the diversity of commodity futures and stock index futures.
In respect of the former, the specifications set out in the Opinions include, among others, to orderly increase the types of commodities futures and options that can be traded by foreign investors when those instruments meet certain criteria, and allow qualified foreign investors to trade more types of commodities futures and options; to research the viability of including stock index futures and government bond futures to the scope of instruments that can be traded by foreign investors under the direct access channel; and to deepen the product development and business cooperations between PRC onshore and offshore futures exchanges, and enable offshore futures exchanges to offer more instruments linking to the price of PRC onshore futures instruments.
Comments: The Opinions reveal a series of notable measures to expand the futures market opening to foreign investors. Among others, one interesting item is to research the viability of permitting foreign investors to trade stock index futures and government bond futures under the direct access channel. Currently, foreign investors may only trade certain commodity futures under the direct access channel, and strictly speaking, they may only trade certain financial futures such as stock index futures and options under QFII (i.e. qualified foreign institutional investors) for hedging purposes. This constrains the PRC onshore hedging tools available for foreign investors acquiring cash stock exposures by other means. If stock index futures and government bond futures are added to the direct access channel, it will improve the availability of hedging tools for foreign investors and potentially motivate them to enlarge cash stock positions.
3. To strengthen the full-cycle supervision of futures companies
The Opinions set out a series of measures to strengthen various respects both at the entity level and at operational level. Again, they are mostly consistent with and continue the current regulatory trend.
At the entity level, among others, the Opinions emphasize the look-through supervision of shareholders and actual controllers, and urge futures companies to optimize the transparency of corporate governance structures and systems. The Opinions also mention to strengthen the surveillance of directors, supervisors and senior managers and to closely monitor related-party transactions of futures companies, aiming to prevent the risk impairing client assets and interest and assets of futures companies.
At the operational level, among others, the Opinions require strengthening regulations of the brokerage and investment advisory business of futures companies, to tighten regulations of marketing and promotion activities in those regards. The Opinions also mention measures to guide futures companies to evolve asset management business focusing on futures and derivative transactions, effectively fulfill active management responsibilities, and promote the realization of substantive independent custody of client assets. Lastly, as one of the measures to strengthen the risk management mechanisms for futures trading and to maintain the stability of the futures market in general, the Opinions require that clearing members of futures exchange to soundly perform their risk management and loss absorption duties.
4. Others
In addition to the above, the Opinions high-level set out many other measures. For example, the Opinions set out a series of comprehensive measures to strengthen risk management mechanisms for the futures market and trade, include to improve the closed-loop margin mechanism, optimize collateral management and the multi-layered default management process, and avail the portfolio-based margin mechanism to more types of trades.
It is also noteworthy that the Opinions mention measures to deepen the regulatory reform for derivative business. This includes to improve regulations on derivatives, and strengthen the prudential supervision and behavior supervision of OTC derivative business engaged in by securities or futures institutions. Along those lines, we note that the CSRC is likely to issue the final rules of the Derivative Trading Supervisory and Administrative Measures by the end of this year according to its legislative agenda. Earlier this year, the authority also published a case where parties involved in transactions across OTC derivatives and cash stock trading were imposed of administrative penalties for found violations.
Originally published October 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
