On November 17, 2023, the China Securities Regulatory Commission (“CSRC”) released the Measures for the Supervision and Administration of Derivative Trading (Second Consultation Draft) (the “Second Draft”, and its final version is referred here as the “Measures”) and the corresponding drafting statement (the “Drafting Statement”), wherein CSRC reiterated and clarified the guiding principles and considerations when formulating these Measures.
Pursuant to the Drafting Statement, these Measures were formulated to implement the relevant requirements of the Futures and Derivatives Law of the People's Republic of China (“FDL”) and to establish a unified regulatory framework of the OTC derivative market. They reflect a strengthening of the supervision of the OTC derivative market and prevent and resolve financial risks. When drafting these Measures, the CSRC considered the regulatory approaches of “regulation by function” and “integrated regulation”. “Regulation by function” means that the same rules shall apply to all activities of the same type, and that any breach of those rules would lead to legal liabilities. “Integrated regulation” reflects the regulatory need to strengthen the integrated supervision of the physical market (i.e., the stock market) and the derivative market, as well as the integrated supervision of the exchange-traded derivative market (i.e., futures market) and the OTC derivative market, to eliminate regulatory differences and prevent regulatory arbitrage.
The Drafting Statement highlights that the CSRC has set out an independent chapter called “prohibited trading activities” (Articles 15 to 22) to prohibit any activity that is either illegal or intends to circumvent regulation by entering into a derivative transaction. It also highlights that a real-name account regime shall be established for derivative trading, derivative operation institutions shall open real-name accounts for trading institutions according to unified requirements provided by derivative trade repositories, and trading institutions shall be prohibited from lending their trading account to or borrowing the trading account of others. The real-name account regime may facilitate cross-market supervision and monitoring and help to increase the transparency of derivative market.
These Measures only apply to derivative trading and related activities within the jurisdiction of the CSRC and shall exclude interbank derivative markets and OTC derivative markets organized by banking and insurance financial institutions. In addition, considering the particularity of exchange-traded credit derivatives, the CSRC may formulate special provisions for credit derivatives, leaving space for future rulemaking.
We set out below the major changes proposed by the CSRC to certain key provisions by reference to our written comments that have been submitted to the CSRC for the First Draft and share with our clients our interpretations and observations.
1. We note that under the current self-disciplinary rules of the Securities Association of China (SAC), securities companies are prohibited from conducting swap transactions or OTC options with so called “sensitive clients” that hold shares of a listed company, if the underlying assets of the swap transaction are the shares of such listed company. (See Article 32 of the Management Measures for the Swap Business of Securities Companies; Article 37 of the Management Measures on the OTC Option Business of Securities Companies.)