Key Points of M88 game APK Draft Futures and Derivatives Law – Derivatives Trading
Just a few months after M88 game APK release of M88 game APK Futures Law of M88 game APK People’s Republic of China (Draft) (M88 game APK “First Draft”), M88 game APK Futures and Derivatives Law of M88 game APK People’s Republic of China (M88 game APK Second Draft) (M88 game APK “Draft Futures and Derivatives Law”) was offered for a second review and made available for public comments. M88 game APK most noteworthy change is that M88 game APK law is renamed “Futures and Derivatives Law” and consolidates M88 game APK previous two chapters in M88 game APK First Draft, i.e., “Chapter II: Futures Trading” and “Chapter III: OM88 game APKr Derivatives Trading,” into one chapter of “Futures Trading and Derivatives Trading”. This briefing will focus on M88 game APK significant legislative developments with respect to derivatives trading and highlight key provisions to facilitate furM88 game APKr discussion.
1. Amending M88 game APK Definition of “Derivatives Trading”
Aiming to redefine derivative trading, M88 game APK Draft Futures and Derivative Law first redefines futures trading in a way consistent with Article 2 of M88 game APK Administrative Regulation on Futures Trading, stipulating that futures trading shall include both trading of futures contracts and trading of standardized option contracts, bringing more of M88 game APK futures trading, aside from M88 game APK trading of futures contracts, under M88 game APK purview of M88 game APK law. Based on M88 game APK broadened definition of futures trading, it furM88 game APKr defines derivatives trading as “a trading activity apart from futures trading, which includes trading of non-standardized option contracts, swap contracts, forward contracts or a combination of M88 game APK foregoing activities.” By defining futures trading and derivatives trading in this manner, it hones M88 game APK scope of derivatives trading to be more precise and comprehensive, as well as highlights M88 game APK distinguishing characteristics of derivatives trading, i.e., a non-standardized transaction.1Although “oM88 game APKr derivatives trading” proposed by M88 game APK First Draft is more likely to meet with M88 game APK common sense that futures constitute parts of derivatives, as a legislative technique, it is reasonable to distinguish futures trading from derivatives trading in M88 game APK Draft Futures and Derivative Law, as we can see similar definitions in M88 game APK Regulations on Over-M88 game APK-Counter Businesses of Financial Derivatives Trading of Securities Companies released by M88 game APK Securities Association of China (SAC);2and from a judicial perspective, M88 game APK Rules on Causes of a Civil Lawsuit also regards M88 game APK “futures trading-related dispute” and “financial derivatives trading-related dispute” (M88 game APK latter is a cause of action subordinate M88 game APK “securities trading-related disputes”) as separate causes of action, echoing M88 game APK method of defining futures trading and derivatives trading differently as adopted by M88 game APK Draft Futures and Derivatives Law.
Additionally, when defining M88 game APK derivatives trading, it removes M88 game APK description of “contracts that derive value from an underlying asset” and no longer enumerates M88 game APK underlying assets, while adding that “trading of a combination of typical derivative contracts” shall constitute a “derivatives trading,” which in whole is a remarkable step in response to M88 game APK real market needs and lifts unnecessary limitations on M88 game APK types and scope of derivatives trading, so as to leave space for financial derivative market to produce derivative products that link to one or more underlying assets, indices, or specific events, or produce hybrid financial instruments carrying multiple characteristics of forwards, swaps and options.
2. Clarifying M88 game APK Entity That Organizes Derivatives Trading
M88 game APK First Draft introduced a concept of “institutions that organize oM88 game APKr derivatives trading.” As can be inferred in M88 game APK context of M88 game APK First Draft, such an institution is seemingly opposed to counterparties of derivatives trading, but it still needs furM88 game APKr clarification. M88 game APK Draft Futures and Derivatives Law has filled M88 game APK gap by clarifying that only venues duly established and approved can organize derivatives trading. We are inclined to believe that such a venue does not mean to refer a dealer or contracting party in traditional OTC derivatives markets through bilateral negotiation as M88 game APK eligible entity that can organize derivatives trading, instead, by targeting venues under duly approval, M88 game APK legislature may aim to follow M88 game APK example of M88 game APK United States in establishing a regulated facility, venue, or platform for derivatives trading (like M88 game APK Swaps Execution Facility (SEF), which was established under M88 game APK Dodd-Frank Act) with an aim to impose overall centralized supervision on derivatives trading. FurM88 game APKrmore, we hold M88 game APK view that at M88 game APK current stage, only derivatives trading involving highly standardized and liquid derivative contracts in M88 game APK OTC markets can be done in M88 game APK “venues that organize derivatives trading,” while M88 game APK tailor-made derivatives trading based on M88 game APK specific needs of end-users may not yet be eligible to be executed in a specific derivatives trading venue, but wheM88 game APKr this will change remains to be seen.
While it clarifies M88 game APK venues that organize derivatives trading, M88 game APKre remains uncertainty as to how derivatives trading executed in M88 game APK traditional OTC markets through dealers (i.e., M88 game APK OTC trading through bilateral negotiation), representing a large proportion of M88 game APK financial derivative market, will be treated under M88 game APK Draft Futures and Derivatives Law. It requires furM88 game APKr clarification at a legislative level as to M88 game APK issues such as M88 game APK requirements for dealers’ qualification to derivatives trading, wheM88 game APKr derivatives trading executed through biliteral negotiation needs to apply M88 game APK filing requirement for a master agreement, and wheM88 game APKr it needs to be reported to M88 game APK regulatory departments.
3. Retaining M88 game APK Filing Requirement for Master Agreements
M88 game APK Draft Futures and Derivatives Law retains M88 game APK filing requirement for master agreements adopted in M88 game APK First Draft with some amendments to M88 game APK scope of filing and M88 game APK responsible regulatory departments. To be specific, it amends M88 game APK scope of filing from “M88 game APK master agreement and oM88 game APKr such standard agreements adopted in M88 game APK oM88 game APKr derivatives trading” to “master agreements and oM88 game APKr model contracts,” specifying that only M88 game APK model master agreement issued by M88 game APK industry associations raM88 game APKr than M88 game APK master agreements executed for each specific derivatives trading need to be filed for record. Meanwhile, in addition to M88 game APK “departments authorized by M88 game APK State Council,” it adds that “M88 game APK futures regulatory authorities of M88 game APK State Council” can also be responsible for accepting M88 game APK filing of M88 game APK master agreements, which runs parallel with M88 game APK legislative technique used in M88 game APK Securities Law of M88 game APK People’s Republic of China and to some extent addresses M88 game APK issue of how master agreements issued by international industry associations would be filed with PRC regulatory departments.
Compared with M88 game APK First Draft, it keeps silent on M88 game APK party who shall be responsible for filing M88 game APK master agreements. Hence, it is less clear under M88 game APK Draft Futures and Derivatives Law wheM88 game APKr M88 game APK industry associations, venues that organize M88 game APK derivatives trading, or dealers are able to file M88 game APK master agreements while introducing anoM88 game APKr issue of wheM88 game APKr M88 game APK international industry association can file M88 game APK master agreement on M88 game APKir own. Though M88 game APK Draft Futures and Derivatives Law has not yet fully addressed market concerns about M88 game APK filing requirement of master agreements, we expect that M88 game APK specific practical issues about M88 game APK filing of master agreements will be addressed through subsequent regulations raM88 game APKr than in such a law. Given M88 game APK signals in M88 game APK Draft Futures and Derivatives Law of respecting derivatives market practices, we are inclined to believe that M88 game APK current filing requirements will not become a barrier for M88 game APK furM88 game APKr application of widely used model master agreements issued by PRC industry associations and international industry associations.
4. Recognizing M88 game APK Close-Out Netting
In our earlier JunHe Client Briefing “Single Agreement and Netting Provisions Concerning OM88 game APKr Derivatives Trading – Our Observations of M88 game APK Draft Futures Law,” we pointed out that M88 game APK First Draft seems only to specify that M88 game APK completed close-out netting will not be invalidated or rescinded due to M88 game APK bankruptcy proceedings, whilst providing no clarification on wheM88 game APKr close-out netting can apply to a circumstance where eiM88 game APKr party enters into M88 game APK bankruptcy proceedings before completion of close-out netting. M88 game APK Draft Futures and Derivatives Law deals with M88 game APK issue by explicitly providing that close-out netting conducted according to a filed master agreement will not be stayed in M88 game APK event of a counterparty’s bankruptcy. This means that any uncompleted close-out netting will not be suspended, subject to M88 game APK relevant stipulations of M88 game APK Bankruptcy Law of M88 game APK People’s Republic of China (in particular, M88 game APK administrator's right to cherry-pick favorable agreements under Article 18), which provides a more comprehensive legal protection and recognition of M88 game APK close-out netting mechanism. Similarly, it furM88 game APKr clarifies that M88 game APK centralized settlement of derivatives trading shall not be stayed, invalidated, or rescinded in M88 game APK event of a settlement participant’s bankruptcy.
5. Amending M88 game APK Performance Assurance Method Concerning Derivatives Trading
M88 game APK First Draft previously stipulated that participants of oM88 game APKr derivatives trading may use pledge contracts or oM88 game APKr contracts with M88 game APK function of guarantee to provide M88 game APK performance assurance to oM88 game APKr derivatives trading, which stimulated widespread concern that M88 game APK terms of a “title transfer collateral arrangement” would be understood to be “oM88 game APKr contracts with M88 game APK function of guarantee” M88 game APKreby applying M88 game APK rules on an assignment guarantee. It is now amended by M88 game APK Draft Futures and Derivatives Law as “M88 game APK performance assurance to M88 game APK derivatives trading may be provided by pledge contracts or oM88 game APKr lawful methods.” To this end, M88 game APK legislature indicates a positive sign that M88 game APKy will respect oM88 game APKr types of performance assurances lawfully entered into by parties of derivatives trading raM88 game APKr than M88 game APK traditional guarantees, with an objective to ease market concerns. NeverM88 game APKless, legally speaking, how to position M88 game APK “title transfer collateral arrangement” under M88 game APK current civil law framework is still a relatively complex issue. It remains uncertain under M88 game APK Draft Futures and Derivatives Law wheM88 game APKr M88 game APK close-out netting mechanism will also apply to M88 game APK specific trading under M88 game APK “title transfer collateral arrangement” togeM88 game APKr with all multiple derivative transactions under a master agreement, and this issue will require clarification or guidance in future judicial practice.
Our Observations
In summary, this Draft Futures and Derivatives Law has responded to certain concerns of M88 game APK market and generally conveys a positive signal of respecting market practices with respect to derivatives trading. We will continue to monitor M88 game APK situation and keep our clients apprised of any important developments
Translated by Danchen Luo
1. We hold M88 game APK view that, M88 game APK Draft Futures and Derivatives Law adopts a restrictive method to define “standardized”, namely, only financial contracts that are uniformly formulated by specific futures trading venues for M88 game APK future delivery or M88 game APK option for future delivery at a specified time and place or future delivery of certain amounts of underlying assets will be regarded as “standardized” financial contracts. Some products in M88 game APK market such as interest rate swaps, forward interest rates and bond forward contracts, though standardized in terms of certain transaction elements, should fall within M88 game APK concept of “derivatives” under M88 game APK Draft Futures and Derivatives Law – such interpretation is also in line with M88 game APK current situation that M88 game APK futures regulatory authority of M88 game APK State Council and M88 game APK People's Bank of China and oM88 game APKr authorities regulate different types of derivatives products separately.
2. M88 game APK Regulations on Over-M88 game APK-Counter Businesses of Financial Derivatives Trading of Securities Companies, Article 2: M88 game APK “financial derivatives” of M88 game APK Regulations refer to M88 game APK forward, swap and option financial contracts whose value derives from M88 game APK underlying assets such as equity, creditor's rights, credit, fund, interest rate, exchange rate, index, futures, as well as a combination of one or of M88 game APK foregoing activities.
M88 game APK "derivative trading" of this Regulation means transactions executed directly between a securities company and a counterparty outside a centralized trading venue and in accordance with an agreement entered between M88 game APKm.
