Interpretation of the Opinions on the Innovative Development of W88优德中国官方网站

On May 9, 2014, the State Council released the Opinions on Promoting the Healthy Development W88优德中国官方网站 Capital Markets (“New Nine Directives”). The New Nine Directives, released for the purpose of enhancing the competitiveness W88优德中国官方网站 futures industry, establish a new direction for the development W88优德中国官方网站 futures and derivatives industry by means of lowering the thresholds for access to the futures business and promoting the innovative development W88优德中国官方网站 futures industry. 

To implement the New Nine Directives, the China Securities Regulatory Commission (“CSRC”) issued the Opinions on Further Promoting the Innovative Development of W88优德中国官方网站 (“Innovative Opinions”) on September 16, 2014. W88优德中国官方网站 proposed several measures with respect to scope of business, market access, two-way opening up, investor protection and risk prevention. The CSRC then held an online interview on October 29, 2014, to answer questions related to the content of W88优德中国官方网站 and two days later, on October 31, 2014, the CSRC formally published the Measures for the Supervision and Administration of Futures Companies (“New Measures”).

According to the CSRC, it is in the process of formulating other supporting rules and regulations to implement the innovation-stimulating measures proposed in W88优德中国官方网站.  We believe that the CSRC and the relevant industry associations will subsequently issue the necessary implementing rules.

Our interpretations of the key points and provisions of W88优德中国官方网站 and New Measures are summarized below.

I. Main Purpose

W88优德中国官方网站 emphasize the role of futures operation institutions in the real economy by setting forth as the primary of objective of W88优德中国官方网站 “vigorously raising the capability of futures operation institutions for the benefit of the real economy”.  W88优德中国官方网站 provide that futures and options products that satisfy the risk management needs of the real economy will be subsequently launched at appropriate times.  W88优德中国官方网站 further propose the establishment of a comprehensive derivatives services framework, which includes futures brokers, investment advisors, introducing brokers, asset managers and risk management service providers.

II. Main Innovative Measures

1. Market Access

In terms of market access, qualified market entities, such as privately owned enterprises and professionals, are encouraged to set up futures operation institutions.  Also, W88优德中国官方网站 will support the holding of equity and participation between futures companies and other financial institutions as a way to explore cross-operations in the financial industry. 

Further studies will be conducted on the reform of futures business licensing, which can then make it possible for eligible securities companies and other financial institutions to apply for futures business licenses.

It is noteworthy that W88优德中国官方网站 utilize the concept of “futures operation institution”, instead of the “futures company”, as is commonly used.  A “futures operation institution” is clearly defined as “a service provider of futures and derivatives” reflecting the regulatory authority’s expectation that diversified operating entities will be welcome to participate in the futures business. The CSRC clearly expresses its support for financial institutions, such as securities companies, funds, and commercial banks, to gradually engage in the futures and derivatives business.  At the same time, the CSRC seeks to foster and promote the development of new types of investment vehicles, such as private funds, OTC derivatives dealers, and risk management companies.

In addition, W88优德中国官方网站 clearly support the entry of futures companies into various exchanges (including securities exchanges, inter-bank markets, and inter-institutional markets) to conduct the derivatives and related businesses.  

2. Two-way Opening Up

The two-way opening up for the futures market is divided into two parts: “outbound” and “inbound”. 

As for the “outbound” component, W88优德中国官方网站 mention that the CSRC will (1) launch pilot programs allowing futures companies serving as agents of domestic entities to participate in overseas futures trading; and (2) support futures operation institutions (a) to establish or acquire overseas companies for the purpose of providing services to domestic clients with international operations, and (b) to cooperate with foreign institutions so as to expand the scope of services in the overseas market. 

On the “inbound” side, W88优德中国官方网站 mention that the CSRC will (1) encourage the investment of foreign capital in the equity of domestic futures operation institutions and participation of foreign capital in mergers and acquisitions of domestic futures companies; and (2) expand the participation scope of Qualified Foreign Institutional Investors (“QFII”) and Renminbi Qualified Foreign Institutional Investors (“RQFII”) in futures and derivatives transactions, and support overseas subsidiaries of futures operation institutions to engage in the QFII and RQFII businesses. 

We anticipate that the regulatory authority will launch pilot programs in the near future for qualified futures companies to engage in the overseas futures brokerage business.

3. Listing of Futures Companies

For the listing of futures companies, W88优德中国官方网站 encourage qualified futures companies to conduct equity and debt financing through capital markets.  The New Measures, promulgated subsequently, remove the previous legal barriers preventing natural persons from holding the equity of futures companies.  The CSRC expressly confirmed that, so long as futures companies can meet the requirements for initial public offerings, the CSRC will not set any additional preconditions for listing.

4. Online Account Opening for Futures Trading

W88优德中国官方网站 express support for futures operation institutions to make use of internet technology for the innovation of futures products as well as business and transaction methods. The CSRC holds a cautious attitude towards the opening of online accounts for futures trading, however, requiring that any exploration of online account opening be preceded by the strict implementation, when opening such accounts, of a real-name requirement, full risk disclosure and verification of clients’ eligibility.  The CSRC is coordinating with the China Futures Margin Monitoring Center and the China Futures Association (“CFA”) to formulate unified regulations with regard to opening online accounts for futures trading.

5. Asset Management Business of Futures Company

At present, the asset management business of futures companies is limited to single-client (one-to-one) asset management schemes, while multiple-client (one-to-more) schemes are restricted.  The CSRC mentioned in the online interview that they are working through the laws and policies related to the asset management business so as to give the green light, as soon as possible, to one-to-more asset management schemes.  Furthermore, the CSRC will probably take the next step and permit futures asset management schemes to invest in spot markets, e.g. warehouse receipts of bulk commodities. 

6. Trading Specialist System

W88优德中国官方网站 initiate the concept of a “trading specialist” and the establishment of a trading specialist system for the purpose of hedging and risk management.  The CSRC holds the view that some securities companies, industry enterprises and risk management subsidiaries of futures companies have preliminarily acquired the same features as trading specialists.  The CSRC will support banks, securities companies, insurance companies, and other financial institutions and industry clients to become trading specialists provided that risk isolation and the prevention of conflicts of interest can be achieved. 

7. OTC Derivative Business

W88优德中国官方网站 encourage futures operation institutions to conduct OTC trading of options, forwards and swaps.  W88优德中国官方网站 further propose improving the master agreement and relevant supporting rules generally applicable to the securities and futures market for OTC derivatives trading.  Also, exchanges and other qualified institutions will receive support to provide transfer and clearing services for OTC derivatives trading.

8. Risk Management Subsidiaries’ Businesses 

Following the pilot program for risk management subsidiaries of futures companies launched in 2012, the CFA has started a new round of record-filing for risk management subsidiaries. W88优德中国官方网站 express support for futures operation institutions to provide personalized services to clients in terms of pricing of bulk commodities and risk management so as to expand the scope of services of risk management subsidiaries under the pilot program. W88优德中国官方网站 also support the engagement of qualified risk management subsidiaries in the options and derivatives market-making business and participation in the overseas derivatives market through lawful channels. 

9. Security of Information Technology 

W88优德中国官方网站 propose allowing futures operation institutions to exercise their own discretion in choosing technology management methods based on the principles of security and risk control.  Small and medium-sized futures operation institutions may be allowed to outsource their information technology management to third-party service providers.  The incorporation of software developers, market information providers and technology service providers into the self-regulated futures system will be further explored. 

III. Major Changes Prescribed in New Measures

The CSRC formally issued the New Measures as one of the steps to implementing W88优德中国官方网站.  In the New Measures, the following adjustments have been made in order to lower the thresholds for market access and expand the business scope of futures companies. 

1. Requirements on Shareholders 

Other major changes in the New Measures are: (i) natural persons are now allowed to hold the equity of futures companies; (ii) the deletion of certain requirements for shareholders of futures companies regarding the shareholders’ duration of operations and gross value of external equity investments (must not be higher than value of net assets), and (iii) the foreign shareholding limit in futures companies (directly and/or indirectly) may not exceed the commitment made by the Chinese government for opening up the market to overseas investors as well as investors from Hong Kong and Macau. 

2. Business Scope

The New Measures categorize the businesses of futures companies into the: (1) commodities futures brokerage business (allowed upon incorporation); (2) financial futures brokerage, overseas futures brokerage and futures investment consulting services (requires administrative approval); (3) asset management business (requires registration and filing); and (4) other businesses permitted by the CSRC.

The New Measures removed the requirement for the approval of asset management businesses, in order to keep in pace with the Interim Measures for the Supervision and Administration of Private Investment Fund previously issued by the CSRC. In addition, the other business activities permitted by the CSRC for futures companies will leave space for the reform W88优德中国官方网站 futures licensing system and permission for cross-operations in the financial industry.

Article 60 W88优德中国官方网站 New Measures clearly stipulates that futures companies may entrust or be entrusted by other institutions to act as introducing brokers.  However, it remains to be seen whether and when the CSRC or the CFA will formulate detailed regulations governing futures introducing brokers.

In addition, detailed conditions for futures companies engaging in the overseas futures brokerage business are not prescribed in the New Measures and remain to be formulated separately by the CSRC.