2015.01.20 XIE, Qing (Natasha)、Jianping DONG、Blake (Hui) WANG
On January 9, 2015, the Chinese Securities Regulatory Commission (“CSRC”) released the Measures for Administration of Pilot Scheme on Stock Option Trading (“Pilot Measures”) and the Guidelines for Securities and Futures Operation Institutions to Participate in the Stock Option Trading Pilot Scheme (“Pilot Guidelines”). At the same time, the Shanghai Stock Exchange (“SSE”) promulgated the SSE Rules for Pilot Stock Option Trading, the SSE Guidance on Investor Suitability Management of Pilot Stock Option, the SSE Guidance on Market Maker Business of Pilot Stock Option, and, jointly with China Securities Depository & Clearing Corp., Ltd. (“CSDC”), formulated the Management Measures of SSE and CSDC on Risk Control for Pilot Stock Option Trading. On the same day, the CSRC also approved the SSE to launch the first stock option trading pilot program - the first pilot product will be the SSE 50ETF Option and the formal listing date is set as Feb 9, 2015. The subject matter of the SSE 50ETF Option is the SSE 50ETF, managed by China Asset Management Co., Ltd., which, up to January 9, 2014, has 9.897 billion fund units with a scale of RMB 25 billion.
1. Stock Option Contracts and Qualified Underlying Stocks or ETFs
Stock option contracts are defined as the standardized contracts that are uniformly formulated by the exchanges and under which buyers shall be entitled to buy or sell agreed stocks, exchange traded funds (“ETF”) tracking stock index or other subject matter at specific times and prices in the future. Stock options include both single stock options and ETF options. Currently, the stock option pilot program will be limited to ETF options only; single stock options are temporarily excluded and no timetable has been announced for introducing single stock options.
The Pilot Measures require that the subject matter of an option contract must have sufficient spot trading basis, be sufficient in market competitiveness, and have adequate volume available for delivery. In accordance with the SSE Rules for Pilot Stock Option Trading, only qualified stocks or ETFs may be selected as the subject matter of an option contract and certain conditions will apply, such as the underlying securities must be the subject matter of margin trading and securities lending, and the stocks have been listed or the funds have been set up for no less than 6 months etc.
2. Stock Option Operation Institutions
According to the Pilot Measures, the stock option operation institutions include securities companies, futures companies and other financial institutions approved by the CSRC to engage in stock option business. Securities companies may engage in brokerage, proprietary trading, and market making of stock options; while futures companies may engage in brokerage of stock options and the brokerage of physical securities relating to covered call and exercise of stock options. Futures companies are prohibited from engaging in proprietary trading business or market making of stock options, while upon the CSRC’s approval the subsidiaries of futures companies may engage in market making of stock options. Furthermore, futures companies may accept one or more securities companies’ entrustment, introduce clients to it or them to participate in stock option trading, and provide other related services.
3. Option Market Making
The Pilot Measures stipulate that stock option trading may adopt market maker system. According to the SSE Guidance on Market Maker Business of Pilot Stock Option (“Guidance on Market Maker”), market makers refer to the institutions that provide bilateral consecutive quotations or bilateral responsive quotations and other services as stipulated by SSE or according to the market making agreement. Prime market makers shall provide all of the aforesaid market making services, while the services that can be provided by general market makers should not include providing investors with bilateral consecutive quotations. Market makers are required to engage in market making business by using their own funds. A single option contract may have multiple market makers offering services.
The Guidance on Market Maker also specifies market making indexes, including the maximum bid-ask spread, the minimum bid spread, participation rate, contract covering rate, the maximum responding quoting time and the minimum reserve time for responding quoting. When specified situations occur, market makers may apply to the SSE for exemption of market making obligations. The Pilot Measures also require option market makers to establish and improve information isolation system and prevent any conflict of interests between market making business and other businesses.
4. Monitoring of Margin
As for the monitoring over safe deposit of margins, the China Securities Investor Protection Fund Corporation Limited and the China Futures Margin Monitoring Center shall respectively be responsible for monitoring the safe deposit of investors' funds involved in the stock option business of securities companies and futures companies.
5. Investor Suitability System and Brokerage Contract
An option broker will conduct stock option trading for investors in its own name as entrusted by investors and the trading results will be borne by investors. Investor suitability systems must be adopted by the brokers for stock option trading. Brokers shall evaluate the suitability of investors, establish investor suitability examination system, test investors’ basic knowledge about options, and cautiously evaluate investors’ risk bearing ability. The exchanges will formulate specific standards for stock option investors.
Same as futures trading, a brokerage contract and a written risk disclosure are required to be executed by investors. The brokerage contract shall include: (i) the risk management measures adopted by the operation institution in respect of the investor, (ii) the methods for handling the circumstances where there is default of delivery or insufficiency of margins on the part of the investor, (iii) the relevant terms relating to forcible position closing, and (iv) the relevant implementation process for the exercise of options.
6. Option Account Opening
According to the SSE Rules of Pilot Stock Option Trading, investors must use an account system independent from that of the spot market. The securities depository and clearing institutions are designated to be responsible for allocating and distributing the codes for investors' derivatives contract accounts. Investors should apply to option operation institutions to open derivative contract accounts and corresponding margin accounts. Investors who apply to open option contract accounts must have already had their own SSE securities accounts, and the registration information of the derivatives contract account of an investor shall be consistent with that of the RMB common stock account of the same investor.
7. Premiums and Margins
Buyers of stock options shall pay premiums while sellers of stock options shall collect premiums and pay margins in accordance with the provisions of the exchanges and the securities depository and clearing institutions. Margins must be paid in cash or securities recognized by the exchanges and the securities depository and clearing institutions.
8. Mark-to-market Clearing and Tiered Clearing
In accordance with the Pilot Measures, stock option clearing participants are defined as institutions qualified as clearing participants in stock option clearing business of the securities depository and clearing institutions. The securities depository and clearing institution, as the common counterparty of all stock option clearing participants, shall provide multilateral netting services for stock option business and conduct clearing of option exercise in accordance with the delivery-versus-payment principle.
Mark-to-market clearing system is adopted for stock option trading. The securities depository and clearing institution shall promptly notify the clearing results to clearing participants on the same day and the clearing participants shall conduct clearing for investors based thereon and notify the investors of the clearing results timely in a manner agreed with the investors.
Where a clearing participant has insufficient margin or defaults in delivery, the securities depository and clearing institution shall have the right to take measures against it. Similarly, where an investor has insufficient margin or defaults in delivery, the operation institution may take certain measures against the investor in accordance with the relevant business rules and the brokerage contract. Furthermore, a clearing participant may authorize the securities depository and clearing institution to transfer the securities suspended from delivery to an investor to the securities disposal account of the clearing participant for disposal.
9. Risk Control Systems
The Pilot Measures require that, for stock option trading activities, the exchanges shall establish margin, price limit, position limit, large position reporting, risk reserve and risk alert systems as well as other risk management systems prescribed by the CSRC and shall specify in the business rules the requirements for directors, supervisors, senior managers or shareholders whose shareholding reach certain threshold, of listed companies, to engage in stock option trading; the securities depository and clearing institutions shall establish margin, mark-to-market, forcible position closing, clearing guarantee, risk reserve systems as well as other risk management systems prescribed by the CSRC. The SSE Management Measures on Risk Control for Pilot Stock Option Trading further provide detailed rules on risk control measures such as margin, position limit, large position reporting, forcible position closing, trading cancellation, clearing guarantee and risk alert systems etc.
