Latest Legislation on Opening-up/Liberalisation of the PRC futures market

Clarifying the rules on cross-border futures activities

The highly anticipated PRC Futures and Derivatives Law (the New Futures Law), being the first comprehensive legal framework for the futures and derivatives markets in China, was officially promulgated, and came into effect, on August 1, 2022. Amongst various other highlights, the New Futures Law sets out a clear registration and approval regime in respect of cross-border futures activities, summarised as follows: 

• PRC domestic entities or individuals should engage PRC futures brokerage entities which are qualified to conduct overseas futures brokerage business to conduct overseas futures trading.
  
  If qualified PRC brokers engage overseas futures brokerage entities to conduct the underlying futures trading, such overseas brokers shall be registered and be subject to the administration of the competent PRC regulatory authority (that is, CSRC or its local counterparts). 

• where overseas entities engage in futures marketing, promotion and solicitation activities in China, or a domestic entity engages in such activities on behalf of an overseas entity, it shall obtain an approval from the competent PRC regulatory authority. 

The New Futures Law heralds a positive signal that CSRC will re-open the application and approval for PRC futures brokers to conduct overseas futures brokerage business. However, it also suggests that overseas futures brokers should still be cautious in their activities in and relating to China as they would fall within the regulatory ambit of CSRC pursuant to the New Futures Law. 

In addition, the New Futures Law also leaves ambiguities in a few areas, which CSRC may shed light on in subsequent implementation rules. For example, historically qualified state-owned entities (SOEs) are explicitly permitted to conduct futures trading at overseas market for hedging purpose only, and in practice, such SOEs may have engaged overseas futures brokers directly to conduct the underlying trading. From reading the New Futures Law, such business structure seems no longer acceptable – a qualified PRC futures broker must be engaged to intermediate such trades. It remains unclear whether such existing business structures may remain in their status quo or would need to be restructured pursuant to the New Futures Law.

Updating administrative rules on futures companies

Following the promulgation of the New Futures Law, CSRC has been actively progressing legislative updates with the aim of aligning with the new law and to facilitate its implementation. Those legislative updates cover a wide range of specific activities - stock option trading, position management, derivative trading, administrative rules on futures companies and individual practitioners. 

Here is a summary of the various updates under the draft Amended Administrative Measures on Futures Companies (the Draft Measures) that may be of interest to foreign investors.

Expanded business scope of futures companies 

As one of the key updates, the Draft Measures expand the permitted business activities that futures companies may conduct directly. Those permitted activities, as expressly outlined in the Draft Measures, include futures brokerage (both commodity futures and financial futures), overseas futures brokerage, futures trading consultancy, futures market making, futures margin financing, futures proprietary business, derivative trading, asset management and other businesses that CSRC may approve.

Futures brokerage can be conducted by futures companies upon establishment, whilst the other businesses are still subject to certain qualification requirements and separate approval by CSRC. Specifically, futures margin financing, futures proprietary business and overseas futures brokerage are subject to separate rules to be stipulated by CSRC.

It is common in practice that futures companies may have established special purpose subsidiaries to conduct the derivative trading business, asset management business and market making business. According to the Draft Measures and several ancillary draft notices issued by the China Futures Association (being a self-regulatory organization for the China futures industry), such businesses would need to be transferred back to the futures companies within a prescribed grace period (e.g. 36 to 48 months) after the Draft Measures come into effect

The Draft Measures, however, do not contain more detailed rules on the conduct of cross-border futures activities as addressed in the New Futures Law, such as the registration rules for overseas brokers to conduct overseas futures trading per engagement by onshore PRC brokers, as well as the regulatory requirements that overseas futures institutions shall meet in order to obtain CSRC approval to conduct futures marketing, promotion and solicitation activities in China. According to CSRC's official explanatory note, those subjects are pending further research and analysis by CSRC.

Requirements on shareholders/actual controllers 

Like the current regime, the major shareholders of future companies (i.e. those with a shareholding greater than 5%) are subject to various qualification requirements relating to capital/asset size, source of funds, track record, status of credit and debts, etc. A controlling shareholder and the largest shareholder of a futures company are subject to additional requirements, such as having strong advantages in technical capabilities, management and service skills, staff training and/or marketing channels, and capital replenishment capability. 

A look-through regulatory approach is still adopted by CSRC. Direct shareholders of futures companies are required to disclose their upper-level shareholding structure, i.e. information of actual controller/ultimate beneficiary, person acting-in-concert and related parties. The Draft Measures expressly provide that certain specific qualification requirements (e.g. net capital/net assets, track record) which apply to the direct shareholders should equally apply to the actual controllers, and this is what the current regime is silent on. 

The Draft Measures also set out certain restrictions on the disposal of shares by the shareholders. The shareholders or actual controllers of futures companies are expressly prohibited from signing agreements or entering into arrangements involving a valuation adjustment mechanism, under which a share redemption or transfer of equity would be triggered as between a specific shareholder and the underlying futures company if and when the futures company fails to meet specific conditions . Futures companies are also required to report such arrangements to the local office of CSRC within five working days after being aware of the same.

Expanding the futures varieties available for trade by foreign investors

On May 25, 2023, the Shanghai Futures Exchange held the 20th Shanghai Derivatives Market Forum. Mr. Xinghai Fang, vice chairman of CSRC, in his opening speech remarked that China would continue to expand the "width and depth" of the liberalisation of the Chinese futures market and will allow qualified foreign institutional investors to trade in a wider range of futures varieties.

According to Fang, up to 23 specific futures varieties are now available to offshore investors, as well as 39 commodity futures option varieties available to the Qualified Foreign Institutional Investors (QFIIs) and RMB Qualified Foreign Institutional Investors (RQFII).