On September 16, 2022, the China Securities Regulatory Commission (CSRC) issued the Administrative Measures for Futures Exchanges (Draft for Comments) (the "Draft Measures") for public comment. In line with the current legal framework established in the Administrative Measures for Futures Exchanges (amended in 2021) (the "2021 Measures"), the Draft Measures provide for certain detailed rules based on the Futures and Derivatives Law (the "FDL"), which took effect on August 1, 2022, and aims to improve the relevant provisions in light of recent market developments and regulatory needs. Below are our observations on some of the key points.
I. Implements the Requirements Stipulated in the FDL and Improves Relevant Rules
Based on Article 85 of the FDL, Article 10 of the Draft Measures further specifies the duties of a futures exchange, such as providing trading venues, facilities and services, arranging the listing of futures contracts, supervising and monitoring the market, conducting self-disciplinary regulation and education on market participants, and ensuring the safety and stability of the information technology systems. The Draft Measures make new provisions on the listing of futures contracts. According to the 2021 Measures, "the listing, suspension, cancellation or resumption of trading products shall be subject to the approval of the CSRC”. The Draft Measures no longer require such approval; instead, it provides that the listing of futures contracts and standardized options contracts shall be registered with the CSRC through the futures exchanges, while the suspension, resumption or delisting of futures contracts and standardized options contracts shall be filed for record with the CSRC through the futures exchanges. In addition, the Draft Measures provide detailed requirements for futures contracts, i.e., "Trading products shall have economic value, the contracts shall be difficult to be manipulated and adhere to the social public interest. The trading products subject to physical delivery shall be sufficient for delivery, and the trading products subject to cash settlement shall have an open, authoritative and fair benchmark price". The foregoing provisions have echoed the relevant rules on the listing of products in the FDL.
II. Further Clarifies the Regulatory Duties of Futures Exchanges regarding Program Trading
The FDL stipulated that program trading conducted through automatic generation and the delivery of trading orders by computer programs shall be reported to the futures exchanges. On that basis, the Draft Measures further require futures exchanges to establish and improve the program trading reporting regime, which is a new requirement and highlights the regulatory duties of futures exchanges regarding program trading and the reporting obligations of program traders. This is consistent with the current market practice of program trading reporting as implemented by futures exchanges. Notably, the Draft Measures allow futures exchanges to differentiate management measures on different program trading behaviors in terms of reporting requirements, information technology systems, transaction fees etc.. This provides a legal basis for futures exchanges to further formulate relevant self-disciplinary rules.
III. Strengthens the Management of De Facto Control Relationships
Reporting and filing of de facto control relationships is a unique regime of the China futures market and the relevant rules have been embedded in the current rules of each futures exchange. The Draft Measures echo the FDL as to the reporting requirements of a de facto control relationship in futures trading and specify detailed rules as follows: (1) it requires each futures exchange to clarify in its business rules the specific determination criteria of de facto controlled accounts, the determination procedures, and the reporting and filing requirements; (2) it clarifies the definition of a de facto control relationship, i.e., the act of having or the fact that an entity or an individual has the authority to manage, use, obtain earnings from or dispose of the futures accounts of another person or entity and thus has decision-making power or significant influence upon another person or entity’s trading decisions; (3) it proposes a requirement of calculating in aggregate de facto controlled accounts in terms of the order placement, trading, and positions holding.
IV. Recognizes the Market-Making Regime for Futures Trading
In practice, each futures exchange has implemented a market-making regime and has formulated the relevant rules. The Draft Measures further specify that futures exchanges may establish a market-making regime, for which each exchange shall establish and improve the relevant rules for, among others, the market-maker qualifications, the market-making transactions and the rights and obligations of market-makers.
V. Makes Detailed Regulations regarding Cross-border Cooperation of Futures Exchanges
The FDL has for the first time set out provisions on cross-border futures business at a statute level. It stipulates that the contracts listed on overseas futures trading venues and settled at a price linked to the price of contracts listed on domestic futures trading venues, shall comply with the provisions stipulated by the CSRC. The Draft Measures stipulate that where domestic futures exchanges authorize overseas futures exchanges to list futures contracts, options contracts, and derivatives contracts that will be settled at a price linked to the price of relevant domestic-listed contracts, they shall conduct a market impact assessment, establish information sharing arrangements, and report to the CSRC in advance. In addition, the futures regulatory authority of the country (region) where the overseas futures exchange is located must have signed a regulatory cooperation memorandum of understanding (MOU) with the CSRC. Currently, the CSRC has signed MOUs with 66 countries (regions), including the United States, the United Kingdom, Singapore, Hong Kong and some other major countries (regions). This leaves room for the future collaboration between domestic and overseas futures exchanges.
VI. Clarifies the Specific Contents of Market Quotations of Futures Trading
Based on the principle stipulated in the FDL that futures exchanges shall be entitled to rights and interests in relation to market quotations of futures trading, the Draft Measures further specify the specific contents of the market quotations of futures trading. This includes the names of contracts, contract delivery months, opening prices, latest prices, price change, closing prices, settlement prices, highest prices, lowest prices, trading volumes, positions and trading amounts, as well as improving the provisions on the protection of the rights and interests relating to market quotations of futures trading. The FDL provided in principle that "The rights and interests in relation to the market quotations of futures trading shall be enjoyed by the futures trading venue. Without permission of the futures trading venue, no entity or individual shall announce market quotations of futures trading". On that basis, the Draft Measures further propose that “without permission of the futures exchanges, no entity or individual shall use the market quotations of futures trading for any commercial purposes. Any institution or individual authorized to use trading information shall not provide such information to other institutions or individuals without the permission of the futures exchanges”. In practice, the market participants use the publicized quotations of futures exchanges or purchase Level-2 market data of futures exchanges mainly for their trading, investment research, or other commercial purposes. This stipulation in the Draft Measures may arise confusion with the current market practice. We recommend that it be changed to "Futures exchanges may authorize institutions or individuals to use market quotations information and specify the obligations and liabilities of the authorized institutions or individuals in the relevant agreements or authorization documents".
We will continue to monitor the situation and keep our clients apprised of the latest updates.