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Client Alert - Circuit Breaker Mechanism for Index Will Come Into Force On 1st January

2015.12.31 XIE, Qing (Natasha)

Upon approval by the China Securities Regulatory Commission (“CSRC”), the rules for circuit breaker mechanism for index issued by the Shanghai Stock Exchange (“SSE”), the Shenzhen Stock Exchange (“SZSE”) and the China Financial Futures Exchange (“CFFEX”)(collectively, “Exchanges”) will come into force on January 1, 2016.


The launch of the circuit breaker mechanism is a response to the A-share crisis during the second half of 2015. Notably, CSRC pointed out in the press conference held on December 4 that the proposed circuit break mechanism was developed with full consideration of the current market rules and practices, with the aim to draw on overseas experience while still considering China’s own market conditions, and hopefully to achieve better effects. We also note that due to the existence of the current price limit system, the effects of the circuit break mechanism have yet to be seen.


Below is an overview of the relevant rules issued by the Exchanges. Specifically, the Exchanges have issued the new rules in the following notices: the Notice of Adding Section 5 Circuit Breaker Mechanism for Index to Chapter 4 of "SSE Trading Rules" (Shang Zheng Fa (2015) No. 94 Document), the Notice of Adding Section 6 to Chapter 4 of “SZSE Trading Rules” (Shen Zheng Hui (2015) No. 389 Document), and the Notice of Amending “CFFEX Trading Rules” and Its Relevant Implementing Rules. The Exchanges simultaneously released the Circuit Breaker Mechanism for Index Business Q&A (“Q&A”) to provide guidelines for investors to understand how the circuit breaker mechanism for Index will operate.


Circuit Breaker for Index


The Circuit Breaker for Index refers to when the variation of an index reaches a certain threshold, exchanges will pause trading for a certain period of time or close trading with a public announcement in an effort to control the intraday volatility of stock prices.


Circuit Breaker Limits


There are two limits for the circuit breaker, 5% and 7%, which once triggered, will cause the suspension of trading or close of the trading day. The relevant stock-related varieties will be suspended when any of the following circumstances occurs on the CSI 300 Index: (1) where the CSI 300 Index moves 5% or more up or down compared to the previous trading day’s closing point, the circuit breaker will last 15 minutes, and trading will be resumed after the circuit breaker expires. If the circuit breaker is enacted between 2:45 pm and 3:00 pm, the circuit breaker will last until 3:00 pm, and trading will not be resumed that day; (2) where the CSI 300 Index moves 7% or more up or down compared to the previous trading day’s closing point, the circuit breaker will last until 3:00 pm, and trading will not be resumed on that day.


The table below illustrates the respective circuit breaker mechanism applicable to each of the Exchanges.



SSE

SZSE

CFFEX

Applicable varieties

Stocks   (A share, B Share), funds (excluding gold trading-based open-ended securities   investment funds, trading-based money market funds, bond trading-based   open-ended index funds), convertible corporate bonds and exchangeable   corporate bonds.

Stocks   (A share, B Share), funds, convertible corporate bonds and exchangeable   corporate bonds.

(The   applicable varieties of SZSE will be kept consistent with SSE after the new   system operates.)

All   stock index futures contracts (excluding Treasury bond futures contracts).

Declaration and cancellation

Where   the circuit breaker ends prior to 3:00 pm, both the declaration and   cancellation or orders are accepted during the circuit breaker period. Where   the circuit breaker lasts until 3:00 pm, SSE will only accept the   cancellation of orders during the circuit breaker period.

SZSE   will accept both declaration and cancellation of orders during the circuit   breaker period.

When the   CSI 300 Index triggers the limit at 5% and the relevant contracts enter a   12-min circuit breaker period, all trading is suspended during such period,   no declaration or cancellation of orders will be accepted. Upon the end of   the circuit breaker, 3-min call auction starts, both the declaration and   cancellation will be accepted.

When the   CSI 300 Index triggers the limit at 7%, or the relevant contracts trigger the   limit at 5% during the last 15 minutes before the close, the trading will be   suspended until the close, and no declaration or cancellation of orders will   be accepted.

For   lending of refinancing securities, if the circuit breaker for index ends   before 3:00 pm, the lending and returning of the relevant refinancing   securities remain normal. If the circuit breaker lasts until 3:00 pm, it will   refer to the stock suspension system, the relevant securities cannot be used   in refinancing securities lending transaction on the same day. The securities   which shall be returned on the same day shall be postponed to the next   trading day.

In case   the circuit breaker for index continues across the lunchtime break, the   arrangements of the Exchanges thereunder remain consistent with the current   market close arrangement, that is, no investor will be allowed to place   declaration and cancellation within such period.

Disclosure of reference trading price and volume

During   the circuit breaker period and the period of call auction upon the expiration   of a circuit breaker period, the Exchanges shall not disclose the virtual   reference price, virtual matching volume or virtual trading volume.


It is worth noting that CFFEX also adopts the following special arrangements:


(i) Since currently the delivery settlement price of the stock index futures is calculated at the last two-hour arithmetic average price of the underlying stock index on the stock index futures settlement day, to ensure normal settlement of stock index futures, the circuit breaker mechanism will no longer be implemented after 1:00 pm on the stock index futures settlement day, specifically: (1) no circuit breaker will be implemented from 1:00 pm to 3:00 pm, (2) any circuit breaker implemented in the morning will at latest end by 1:00 pm, and the trading will then be resumed.(ii) The trading hours of stock index futures will be adjusted to the same as the stock market, namely, the call auction period for stock index futures shall be 9:25 -9:30 am on each trading day and the continuous auction trading hours shall be 9:30 -11:30 am and 1:00 -3:00 pm on each trading day.

(iii) The price limit of stock index futures is adjusted from ±10% of the settlement price on the previous trading day to ±7%. However, the price limits on the final trading day remains at ±20% of the settlement price of the previous trading day.

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