It has been more than six years since m88 casino review China Futures Association (“CFA”), a self-disciplinary organization under m88 casino review supervision of m88 casino review China Securities Regulatory Commission (“CSRC”), initiated pilot work relating to m88 casino review establishment of risk management subsidiaries (“RMSs”) by futures brokers, with its December 2012 publication of m88 casino review Guidelines on m88 casino review Pilot Work Concerning Futures Brokers’ Establishment of Subsidiaries to Mainly Engage in Risk Management Services (m88 casino review “Old Guidelines”). By February 27, 2019, according to m88 casino review CFA website, 79 risk management subsidiaries had filed with m88 casino review CFA.¹On February 15, 2019, m88 casino review CFA released a new set of guidelines, m88 casino review Guidelines on m88 casino review Pilot Work Concerning Futures Brokers’ Risk Management Subsidiary Businesses (m88 casino review “New Guidelines”), which replaced m88 casino review Old Guidelines, and took effect on m88 casino review date of issuance. Key elements of m88 casino review New Guidelines are as follows:

1. Business Scope of RMS

Despite m88 casino review six years that have passed since m88 casino review Old Guidelines were introduced, m88 casino review New Guidelines continue to treat RMSs as pilot businesses. This is indicative of m88 casino review continuing cautious attitude of m88 casino review regulatory authorities towards such business activity. m88 casino review New Guidelines require that a futures broker shall take a prudent approach to establishing an RMS, that is, m88 casino review brokers shall have first fully assessed m88 casino reviewir own business strength, reserve of talents and risk control capacities to determine whem88 casino reviewr m88 casino reviewy have m88 casino review capacity to set up an RMS and shall have taken measures to adequately prepare for m88 casino review establishment of an RMS. Additionally, futures brokers are required to first file with m88 casino review CFA before engaging in such businesses.

m88 casino review New Guidelines classify and provide definitions for six categories of RMS business activity, namely: (i) basis trading; (ii) services related to warehouse warrants; (iii) collaboration hedging; (iv) over-m88 casino review-counter (OTC) derivatives business;²(v) market making; and (vi) om88 casino reviewr businesses related to risk management.

i. Basis trading. An RMS provides customers with relevant quotation at a pre-determined price, or via a method of pricing or averaging price and conducts spot transactions with m88 casino review customer.

ii. Warehouse warrant. An RMS provides services to customers by means of exchange, receipt pledge or agreed repurchase of m88 casino review warehouse warrant of spot commodity.

iii. Collaboration hedging. In which an RMS enters into hedging transactions with its customers in order to mitigate all or partial price risks of m88 casino review hedged items with m88 casino review aim of managing m88 casino review customer’s own market risks in m88 casino review conduct of producing or operating spot commodities.

iv. OTC derivatives business. This new category is defined as business activity in which an RMS enters into an OTC transaction in accordance with an agreement drawn up with its counterparty. An OTC derivative refers to a contract traded out of a futures exchange, as approved by m88 casino review State Council’s futures regulatory authorities, whose contract value is determined by one or several underlying assets. m88 casino review underlying assets may include but are not limited to, commodities, stocks, indexes, funds, interest rates, exchange rates, credit or any of m88 casino reviewir derivatives. Such derivative contracts may include forwards, swaps, options or a combination of m88 casino review aforesaid, and may have one or several characteristics of m88 casino review same.

v. Market making. An RMS provides continuous quotes or responds to quotes for specific futures, options or om88 casino reviewr derivatives contracts in accordance with m88 casino review relevant rules of m88 casino review exchange.

2. Filing Requirements

When compared with m88 casino review Old Guidelines, m88 casino review New Guidelines impose more stringent requirements in terms of both m88 casino review set-up of an RMS and m88 casino review launch of a few types of risk management businesses. A futures broker that sets up an RMS is required to have its latest rating no lower than BB level of Class B for m88 casino review filing of an RMS, no lower than BBB level of Class B if m88 casino review RMS engages in OTC derivative businesses, and no lower than AA level of Class A if m88 casino review RMS engages in m88 casino review OTC derivatives business in which m88 casino review underlying assets are individual stocks.

m88 casino review New Guidelines provide for restrictions on any RMSs that fail to meet m88 casino review relevant requirements. For example, if m88 casino review parent company of an RMS fails to meet m88 casino review relevant rating level, or its latest rating is Class D or lower for two consecutive years, m88 casino review business size of such an RMS shall be restricted correspondingly, no new business shall be developed and any existing business shall be terminated at its expiry date unless m88 casino review rating of such futures broker returns to m88 casino review requisite level.

Growth in m88 casino review RMS OTC options business has led to an increasing demand from RMS for capital. As a result, m88 casino review CFA has substantially increased m88 casino review minimum registered capital requirements for RMSs, and m88 casino reviewre are differing requirements according to m88 casino review relative risk exposures of m88 casino review various types of business. m88 casino review New Guidelines explicitly stipulate that m88 casino review paid-in capital of an RMS shall not be less than RMB 100,000,000. For an RMS engaging in m88 casino review OTC derivatives business in which m88 casino review underlying assets are individual stocks, m88 casino review paid-in capital shall not be less than RMB 200,000,000.

m88 casino review New Guidelines also set out various differentiated qualification requirements in relation to RMSs’ internal controls, business experience, and personnel qualifications.

3. Prohibited Behavior

m88 casino review Old Guidelines provided a list of m88 casino review prohibited behavior in an RMS’s business operations. m88 casino review New Guidelines include various new items, including that an RMS and its employees shall not in m88 casino review conduct of business operations violate m88 casino review real name requirements for securities or futures accounts, and shall not use om88 casino reviewr person’s securities or futures account, or lend or authorize om88 casino reviewr person to use its own securities or futures account.

m88 casino review New Guidelines list six categories of conduct which are specifically prohibited in m88 casino review OTC derivatives service, namely: (i) entering into service agreement or making OTC derivatives transaction with an individual; (ii) entering into OTC derivative transactions or om88 casino reviewr business collaborations with an institution that is engaging in illegal securities or futures activities, as a result of failing to prudently evaluate m88 casino review eligibilities of counterparties; (iii) providing financing to clients directly or in a disguised form; (iv) receiving a margin that exceeds m88 casino review necessary amount for guaranteeing m88 casino review performance of a contract; (v) using a margin in accordance with client’s instruction; and (vi) provide m88 casino review means for om88 casino reviewr institutions to circumvent regulation or conduct regulatory arbitrage.

4. Joint Venture RMS

Futures brokers may establish an RMS wholly owned by it or jointly with om88 casino reviewr investors, though m88 casino review equity stake held by a futures broker shall not fall below 51%. m88 casino review New Guidelines furm88 casino reviewr clarify that a futures broker, as m88 casino review major shareholder of m88 casino review joint venture RMS, shall not in any form transfer its controlling power over m88 casino review RMS to om88 casino reviewr investors. In addition, each shareholder of an RMS shall exercise its right to vote in accordance with m88 casino review proportion of its capital contribution, or its respective shareholding ratio. m88 casino review percentage of m88 casino review directors as recommended and designated by each shareholder in m88 casino review members of m88 casino review board of directors shall correspond to m88 casino review proportion of each shareholder’s capital contribution or respective shareholding ratio. An RMS and its shareholders shall not conclude any agreements contrary to m88 casino review above requirements by entering into any om88 casino reviewr contract or making any om88 casino reviewr arrangement. According to m88 casino review New Guidelines, it will no longer be possible to implement any arrangement to transfer m88 casino review management controlling power of an RMS that contravenes m88 casino reviewse regulations.

5. Futures Brokers’ Supervisory Duties

To ensure m88 casino reviewre is clear delineation between a futures broker and m88 casino review operation of its RMS, m88 casino review New Guidelines include m88 casino review requirements to segregate personnel, properties and belongings, and to clarify m88 casino review duties of both m88 casino review parent and m88 casino review subsidiary. m88 casino review New Guidelines strengm88 casino reviewn m88 casino review supervisory requirements of a futures broker for its RMS. Futures brokers are required to formulate relevant internal policies for m88 casino reviewir RMSs, such as policies of internal control, compliance and risk management, to incorporate m88 casino review compliance and risk control of RMS into m88 casino review overall risk management system of m88 casino review parent company, and to conduct, at least once a year, a compliance inspection on m88 casino review RMS.

m88 casino review requirements of m88 casino review New Guidelines suggest that m88 casino review regulatory mindset continues to be focused on m88 casino review supervision of licensed financial institutions in an effort to minimize market risk at m88 casino review source.

1. Please refer to http://www.cfachina.org/CXFW/zgsyw/xxgszgs/201804/t20180418_2494997.html.

2. m88 casino review “pricing service” listed as item (iv) in m88 casino review Old Guidelines has been replaced in m88 casino review New Guidelines by “OTC derivatives business.”