The China Securities Regulatory Commission has recently issued the second draft of proposed measures (“Measures for the Supervision and Administration of Derivatives Trading”) related to derivatives trading. Public consultation is open until 17 December. The proposed changes are intended to better meet market needs and promote derivatives trading in support of the real economy. The key proposed changes are summarised in this short paper by our partners Zhiyi Ren and Blake Wang.
After releasing the first draft (the “1st Draft”) of the Measures for the Supervision and Administration of Derivatives Trading (the “Measures”) for public comments in March 2023, the China Securities Regulatory Commission (the “CSRC”) has now issued the second draft of the Measures (the “2nd Draft”) on 17 November 2023 for further public comments, allowing one month for comments until 17 December 2023. We highlight below some key amendments under the 2nd Draft.
Principles/Purposes
Article 1 of the 1st Draft provides that the Measures are formulated for the purpose of, among others, serving the “real economy” (实体经济, by which is generally meant the production and sale of physical goods and services). The corresponding wording under the 2nd Draft is “facilitating derivatives trading to serve the real economy” (促进衍生品市场服务实体经济).
Article 3 of the 1st Draft requires that derivatives trading shall aim to serve the real economy and be directed to meet the risk management needs of investors (以服务实体经济为目的，以满足交易者风险管理需求为导向). Under Article 3 of the 2nd Draft, this specific requirement is removed and derivatives trading is encouraged to utilize functions of risk management, resource allocation, and serving the real economy (发挥管理风险、配置资源、服务实体经济的功能).
Scope of Derivatives Operating Institutions
Derivatives operating institutions (衍生品经营机构) enumerated in the 1st Draft of the Measures include securities companies and their subsidiaries, and futures companies and their subsidiaries. Under the 2nd Draft, the subsidiaries of securities companies and futures companies have been removed.
Regulatory Reports for New Varieties/Structures
Article 7 of the Measures sets out reporting obligations for launching new varieties/structures. Compared with those under the 1st Draft, the applicable circumstances of these obligations are expanded under the 2nd Draft, as follows:
Performance Security/Forms of Margins
Article 9 of the 2nd Draft expressly requires that, for derivatives trading, performance security shall be provided for example by collecting margins. The forms of margins under the 1st Draft include, among others, China government bonds (国债), while under the 2nd Draft this has been changed to refer to the broader term, bonds (债券).
Information Kept for Hedging Transactions
So far as derivatives contracts relevant to hedging transactions are concerned, Article 12 of the 1st Draft requires derivatives operating institutions to keep records of relevant data and information including, among others, trading strategies. Article 11 of the 2nd Draft still requires that they keep records of relevant information, but now removes the requirement to record trading strategies from the scope of information to be kept.
Extraterritorial Application
The amendment mentioned under Item V., above, may be applicable to offshore investors. This is the case where offshore operating institutions (境外经营机构) conduct derivatives trading offshore but their hedging transactions take place onshore, since, in this case, they are subject to the record keeping requirement.
Further, the 1st Draft appears to suggest that such offshore institutions shall also be subject to Articles 14 to 22 thereunder, which include rules on position aggregation and prohibited activities. Under the 2nd Draft, relevant rules on position aggregation and prohibited activities (Articles 13 to 22) are now applicable to offshore derivatives trading related to onshore targets (在境外开展与境内标的物相关的衍生品交易的).
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