China Passes the PRC Futures and Derivatives Law
China's NPC (National People's Congress) on Wednesday (20 April) has approved and passed the PRC Futures and Derivatives Law that will bring greater transparency and regulatory certainty to the country's futures and derivatives markets.
The first draft of the Futures Law was published for consultation in April 2021, to improve the functioning of China's futures market, promote a more market-based allocation of resources, safeguard against financial risk, and bring the regulatory framework more into line with international norms.
The draft had provisions on close-out netting and performance guarantees, issues which foreign financial institutions have long sought clarity on in terms of legal certainty and judicial recognition. Participants caan only enjoy close-out netting protections during bankruptcy proceedings if a master agreement has been filed with Chinese regulators.
The law also sought to regulate how futures market participants operate, enhance supervision of the market, and raise the size of the penalties for violations such as market manipulation and insider trading.
In October 2021, a second draft of the law was issued for consultation. It was renamed the Futures and Derivatives Law to allow it to cover derivatives beyond futures contracts.
The changes included a revised definition of derivatives to include options, forwards, swaps and any combination of these products. The list of underliers from the original draft was also removed, so that the law covered any OTC derivatives regardless of the underlier.
The final version of the law which was passed this week further improves derivatives trading supervision. It also specifies rules for foreign institutions operating in China, requiring regulatory approval for them to engage in futures marketing, promotion and solicitation activities in the country.
The law says Market participants in China may not provide documents or materials related to their futures business activities to overseas regulatory agencies without authorisation from Chinese regulators.
Likewise, when Chinese regulators provide assistance to overseas authorities, they shall not disclose state secrets or information that coulr damage national interests or public interests.
The law says Chinese regulators will abide by the principle of reciprocity when dealing with foreign regulators.
The Futures and Derivatives Law will be implemented from 1 August.
Resource: Regulation Asia
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