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On Wednesday, April 20th, 2022, following the meeting held by the Standing Committee of the National People’s Congress, China passed a new Futures and Derivatives Law which is expected to further promote development of the country’s derivatives market by implementing stricter and more efficient control and risk management practices. The legislature will be officially effective starting from August 1st, 2022.
According to the China Futures Association, the cumulative trading volume of the national futures market in 2021 reached 581.20 trillion Chinese RMB. China is now the world's largest futures market for agricultural products, non-ferrous metals, metallurgical coal, and thermal coal.
The final draft which was submitted to the Standing Committee focuses on further improvement in derivatives trading supervision processes and clearly outlines rules for foreign institutions that operate in the derivatives market in China. The Law follows and absorbs principles established by the G20 on scrutinizing the supervision of the derivates market following the global financial crisis. The Law largely draws on the experience of other international mature markets and attempts to establish the basic system for derivatives transactions. The key focus areas include:
Prevention and resolution of market risks by having in place risk-control systems, e.g. position limits, no-debt settlement on the day, forced liquidation
Clarifying the legal status of the futures’ settlement institutions and central counterparty
Strengthening the supervision of futures trading venues
Having emergency measures in place for abnormal situations and market crashes
Increase the penalties and, subsequently, the cost of violations of the Law
The Law shall allow international market participants to have more confidence when operating in the Chinese derivatives market by providing a clear explanation on rules and institutional arrangements. Previously in 2018, China’s iron ore futures, crude oil futures and purified terephthalic acid futures were made available to overseas investors. A more active involvement of international investors is expected to promote RMB-denominated commodity futures prices and enabling them to become internationally recognized benchmarks.
The absence of an upper-level Law in the futures market has made cross-border supervision and cooperation complicated. The construction of an over-the-counter market in China's derivatives market has begun, and the implementation of the new Futures and Derivatives Law is expected to solve the abovementioned problems. However, please note that the full text of the Law is yet to be made available for the public.
At PHC Advisory we shall continue monitoring the most recent policy developments in China which are relevant for foreign investors. If you would like to know more about the most recent financial and tax policy developments in China, or about our services please contact us at info@phcadvisory.com.
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