China’s First Ever Law on Futures and Derivatives

The Chinese government has called for further improvement in the development and supervision of the country’s futures and derivatives market.To get more news about obtain cffex license brokers, you can visit wikifx.com official website.

Approved during a meeting of the Standing Committee of the National People’s Congress, the new Futures and Derivatives Law of the People’s Republic of China (FDL) is the first of its kind since the very beginning of futures and derivatives trading in the country about three decades ago. According to the legislation, which will take effect on August 1, 2022, foreign enterprises will have to seek regulatory licensing to advertise, promote, and sell futures products in the country.The China Futures Association reported that transaction volume hit 7.5 billion lots in 2021, with the overall trading value peaking at RMB 581.2 trillion (US$90.8 trillion) – an all-time high. Specifically, China has become the leading global futures market for agricultural, nonferrous metals, coal, and steam coal items.

It is imperative for foreign stakeholders to understand both the development and regulatory setting of China’s futures and derivatives market, as it gains a significant foothold both home and abroad.
The FDL approved on April 20, 2022, is composed of 155 articles divided into 13 chapters. The China Securities Regulatory Commission (CSRC) reported that the law will be used to serve the real economy, control financial risks, and deepen financial reforms. It does so by mandating three objectives:

The FDL establishes a much-needed legal framework for cross-border futures and derivatives trading, potentially expanding the sector’s appeal to overseas investors. Foreign investors in China’s mainland financial markets have long complained about a lack of hedging and derivatives tools that would help them better manage risk. China has been hesitant to grow its derivatives market and allow international investors to join, but the process has accelerated in recent years.

As foreign entities will now need regulatory approval to advertise and promote futures goods in China, we recommend paying attention to the following legal changes and practices.

How will the FDL regulate the futures and derivatives market in China?
The law mandates regulations for derivatives exchanges, settlement institutions, and industry groups. For example, it requires futures and derivatives exchanges to get regulatory clearance before beginning operations. Financial institutions are also required to apply for approval before the start of derivatives-trading operations that are not limited to futures.

Illegal activities, such as insider trading and market manipulation, are punishable under the new law – an individual or entity found guilty of manipulating futures or derivatives markets might face penalties of up to US$1.5 million, or 10-times the value of their illegal gains. Similarly, those engaging in inside trading will be fined up to US$700,000, or 10-times their unlawful profit.

Single stock futures and close-out netting
In a critical development, the FDL legally recognizes the practices of single stock futures and close-out netting in the futures market.

The first refers to the stipulation of a futures contract between two parties, in which the buyer promises to pay a specified price for 100 shares of a single stock at a predetermined future delivery date. The latter is a procedure that involves terminating contractual commitments with a defaulting party and merging positive and negative replacement values into a single net payment. Both these practices are favorable for foreign investors, as they conform to international standards and ensure a certain level of protection from related risks.

Similar protection will be also granted to cleared derivatives, with both direct and indirect futures marketing activities by foreign institutions inside China being subject to regulatory approval.