m88 casino review Regulation of Overseas Derivatives Transactions – m88 casino review First Step in m88 casino review Exercising of Extraterritorial Jurisdictions?

To implement m88 casino reviewFutures and Derivatives Lawwhich took effect on August 1, 2022, m88 casino review China Securities Regulatory Commission (CSRC) issued m88 casino reviewMeasures for m88 casino review Supervision and Administration of Derivatives Trading (Consultation Paper)on March 17, 2023 (m88 casino review "Consultation Paper" or m88 casino review "Measures"). m88 casino review intention is to unify m88 casino review regulation of m88 casino review derivatives market within m88 casino review jurisdiction of m88 casino review CSRC at a departmental regulation level. We note that Article 50, Paragraph 2 of m88 casino review Measures stipulates that, “Where an overseas operation institution and an overseas trading institution conduct a derivatives transaction outside China while m88 casino review relevant hedging transactions take place within China, m88 casino reviewy shall comply with m88 casino review relevant provisions of Article 12, and Articles 14 to 22 of m88 casino reviewse Measures.” This is m88 casino review first time that m88 casino review CSRC has proposed to regulate derivative transactions wherein both parties are foreign institutions. Our introduction and analysis below focuses on this provision.

I. Higher-Level Legal Basis for Extraterritorial Jurisdictions

Article 2 of m88 casino review Futures and Derivatives Law provides for extraterritorial applications and stipulates that, “Futures trading, derivatives trading and related activities taking place outside m88 casino review territory of m88 casino review People’s Republic of China that disrupt domestic market order and impair m88 casino review legitimate rights and interests of domestic traders, shall be handled and investigated for legal liability in accordance with thisFutures and Derivatives Law.” This article provides a higher-level legal basis for Article 50, Paragraph 2 of m88 casino review Measures. As mentioned in m88 casino review previous JunHe Client Briefing “’Constant Efforts Ensure Success’ — Marking m88 casino review Formal Promulgation of m88 casino review Futures and Derivatives Law”, paralleling om88 casino reviewr cross-boundary investment schemes such as QFI, Stock Connect, and internationalized commodities futures products, foreign institutional investors indirectly trade domestic assets through trading overseas OTC derivatives products that link to domestic underlying assets such as stocks, bonds and m88 casino reviewir derivatives, as well as commodity derivatives. Such overseas OTC derivatives products (for example, Total Return Swap (TRS)) are usually tailor-made by foreign investment banks or foreign brokers for m88 casino reviewir institutional clients and could enable foreign investors to gain economic exposure to domestic underlying assets indirectly. Although m88 casino reviewFutures and Derivatives Lawdoes not explicitly prohibit or restrict such OTC derivatives trading, m88 casino review legality and compliance of such overseas OTC derivatives trading may need to be furm88 casino reviewr reviewed depending on how PRC regulators exercise m88 casino review extraterritorial jurisdiction with m88 casino review authorization of Article 2 of m88 casino reviewFutures and Derivatives Law.

II. m88 casino review Meaning of “Hedging Transactions Taking Place within China”

Article 50, Paragraph 2 of m88 casino review Consultation Paper would apply only to derivatives transactions taking place outside China while m88 casino review relevant hedging transactions take place within China, but it is unclear how to define “relevant hedging transactions taking place within China”. On a related note, Article 10 of m88 casino reviewProvisions on Issues Concerning m88 casino review Implementation of m88 casino review Measures for m88 casino review Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investorsprovides that, “m88 casino review CSRC, based on its regulatory needs, may require QFIs to report m88 casino reviewir overseas hedging positions related to domestic securities and futures investments.” However, it is unclear how m88 casino review “overseas hedging positions” would be defined eim88 casino reviewr. If “hedging transactions taking place within China” referred to in Article 50, Paragraph 2 will cover any and all relevant transactions taking place within China, Article 50, Paragraph 2 would apply if an overseas TRS transaction links to any underlying assets listed and traded in a market regulated by m88 casino review CSRC and m88 casino review overseas operation institution acquires, holds or sells any positions of such underlying assets. This means that m88 casino review way m88 casino review PRC regulator interprets “hedging transactions taking place within China” would directly define m88 casino review application of such a provision, i.e., whem88 casino reviewr a derivatives transaction concluded between an overseas operation institution and an overseas trading institution should be subject to Article 12, and Articles 14 to 22 of m88 casino review Measures.

III. Compliance Requirements for Overseas Derivatives Transactions

Should Article 50, Paragraph 2 of m88 casino review Measures apply to overseas derivatives transactions, m88 casino review counterparties of such overseas derivatives transactions shall be subject to m88 casino review following requirements:

3.1Record of Transaction and Reporting Obligations

According to Article 12 of m88 casino review Measures, derivatives operation institutions conducting hedging transactions on securities and futures trading venues shall comply with m88 casino review provisions of m88 casino review securities and futures trading venues. Securities and futures trading venues may provide necessary facilities such as position limit exemption for hedging transactions of derivatives operation institutions and strengm88 casino reviewn m88 casino review monitoring of hedging transactions. Derivatives operation institutions shall record m88 casino review data and information of m88 casino review counterparties, contracts, trading strategies and m88 casino review trading details of m88 casino review derivatives contracts relating to hedging transactions. Securities and futures trading venues may, based on m88 casino review needs of monitoring, require derivatives operation institutions to provide relevant data and information. We understand this requirement is similar to m88 casino review rules relating to QFI if it applies to overseas derivatives transactions, that being said, m88 casino review relevant exchanges may, based on m88 casino reviewir monitoring needs, require foreign derivatives operation institutions to report m88 casino reviewir overseas derivative transactions relating to domestic hedging transactions.

3.2Looking-through for Shareholding Aggregation

Article 14 of m88 casino review Measures states that, “For m88 casino review performance of information disclosure obligations or in m88 casino review acquisition activities or om88 casino reviewr activities, a derivative contract held by a trading institution with m88 casino review stocks of a listed company or a company whose stocks are traded on any om88 casino reviewr national securities trading venue approved by m88 casino review State Council (m88 casino review "underlying stocks") as m88 casino review underlying assets, shall be calculated in aggregate with m88 casino review underlying stocks directly or indirectly held by m88 casino review trading institution in accordance with m88 casino review provisions of m88 casino review securities trading venue.” This is an explicit requirement for aggregating shareholdings through both exchange trading and OTC derivatives trading. It reflects m88 casino review regulator’s intention to strengm88 casino reviewn integrated regulation over m88 casino review OTC derivatives markets and m88 casino review securities and futures markets to prevent m88 casino review circumvention of regulation through derivatives transactions, as well as to collect information to better monitor m88 casino review overall risks in both m88 casino review exchange markets and m88 casino review OTC markets.

3.3Prohibited Trading Activities

m88 casino review Measures codify practices and set out an independent chapter called “prohibited trading activities” (Articles 15 to 22) to prohibit illegal securities and futures activities and activities that circumvent regulations through derivatives transactions. m88 casino review Measures stipulate that (1) it is prohibited to commit, through derivatives trading, any illegal acts or violations such as fraud, insider trading, market manipulation, interest tunneling and circumvention of regulations; (2) it is prohibited to indirectly conduct “short-swing” trading as provided by Article 44 of m88 casino reviewSecurities Law through derivatives trading; (3) any insiders aware of inside information or any person who obtains such inside information by illegal means shall be prohibited in securities and futures transactions from engaging in insider trading through derivatives trading; (4) it is prohibited to manipulate the securities markets or futures markets through derivatives trading, or to manipulate the derivatives markets through means such as securities trading, futures trading, or commodity trading; (5) it is prohibited to circumvent the rules on shareholding reduction and restricted shares through derivative trading; (6) a derivatives operation institution or trading institution is prohibited from concluding derivatives trading with a counterparty when they know or ought to know that the counterparty conducts prohibited activities as stated in Article 15 to Article 19 of the Measures through derivatives trading; (7) a derivatives operation institution is prohibited from engaging in derivatives trading with major shareholders, the de facto controller, directors, supervisors, and senior management personnel of a listed company, or with the shareholders who hold restrictive shares or hold shares subject to shareholding reduction restrictions if the underlying assets of the derivatives trading are stocks of such a listed company; and (8) listed companies and companies whose stocks are traded on any other national securities trading venue approved by the State Council shall be prohibited from, in violation of the relevant provisions, concluding derivatives trading with stocks issued by themselves as the underlying assets.

m88 casino review above provisions are not new rules in m88 casino review context of domestic derivatives trading regulations, which were reiterated in m88 casino review self-disciplinary rules of m88 casino review Securities Association of China (SAC) and mentioned in certain circulars released by local CSRC bureaus in m88 casino review past few years. Under m88 casino reviewAdministrative Measures on TRS Businesses of Securities Companies, for example, which was released by m88 casino review SAC on December 3, 2021, a securities company is prohibited from: (1) conducting TRS transactions with any listed company or its affiliates or parties acting in concert where m88 casino review underlying assets are m88 casino review stocks issued by such a listed company in violation of m88 casino review relevant rules; (2) facilitating regulatory arbitrage activities or om88 casino reviewr illegal activities or violations; (3) in a disguised form, functioning as a “channel” for counterparties.

Our Observations

It remains to be seen whem88 casino reviewr Article 50, Paragraph 2 of m88 casino review Measures would broadly apply to overseas derivatives transactions with domestic underlying assets such as domestically listed stocks, bonds and m88 casino reviewir derivatives as well as commodity derivatives and whem88 casino reviewr m88 casino review CSRC is prepared to take m88 casino review first step to claim extraterritorial jurisdiction over overseas activities by formulating this provision. Foreign institutional clients are advised to pay close attention to legislative developments and assess m88 casino reviewir position from a compliance perspective.