State Council amended the Regulations on the Administration of Futures Trading

To serve the need of further creative development in the futures industry, State Council issued the Decision of the State Council regarding Amendment to the Regulations on the Administration of Futures Trading on October 24, 2012, with effect on December 1, 2012. 

Highlights of the Amendments

Clarifying the definition of futures trading

The amended Regulations on the Administration of Futures Trading (the “Amended Regulations”) provided the definition of “futures trading” for the first time.  “Futures trading” was defined in the Amended Regulations as “trading activities on futures contract or options contract by adopting a centralized trading method or other methods approved by the futures regulatory authority of the State Council”. Meanwhile, the provisions regarding futures trading in a disguised form were deleted.

The purpose of such amendment is to strengthen regulatory measures and rectify illegal futures trading activities. All trading activities that fall out of the definition of futures trading is illegal and therefore futures trading in a disguised form is not necessary to be otherwise defined. 

Opening of specific futures to qualified foreign investors

New provision was added in Article 24 of the Amended Regulations.  “Foreign institution meeting specified conditions may engage in futures trading regarding specific futures in futures exchange.  Detailed measures shall be formulated by the futures regulatory authority of the State Council.”

According to the plan of the regulatory authorities, several creative businesses in futures industry including crude oil futures will be introduced in the near future. In January 2012, Premier Wen said in the national financial work conference that commodity futures like crude oil futures and other financial derivatives products shall be introduced in a moderate manner. The aforesaid amendment not only provides the room for foreign investors to directly engage in crude oil futures trading but also internationalizes the crude oil futures trading in China through which China may strive for international pricing power.

Exemption of administrative approval procedure for certain circumstances

Certain circumstances that require administrative approval in the original Regulations were exempted in the Amended Regulations such as changing company form, business address or person-in-charge, qualification for providing intermediary business to futures companies, engaging in futures settlement and margin deposition and etc. 

Such amendment on one hand improves efficiency of operation of futures companies, on the other hand facilitates carrying out business in margin deposition by small and mid-sized banks other than the big five state banks.

Clarifying the duty of futures exchange as central counter party

Central counter party system was generated in the development of futures market.  It plays a key role in prevention of counter party’s credit risk, control of multilateral netting risk and facilitation of futures trading. One of the basic rules for futures trading is that settlement institution shall act as the central counter party as opposed to other parties in the futures trading and making clearance on a daily basis under the daily no debt clearing system.  The Amended Regulations further clarify the duty of futures exchange as a central counter party by stipulating futures exchange’s duty of provision of centralized performance guarantee for futures trading.

Remarks

The Amended Regulations provide basis for developing creative futures business and internationalizing the futures market.  However, it remains to be seen how the Amended Regulations will impact on futures trading practice and what subsequent rules would be issued.