Review Begins of First Law Governing China’s Booming Derivatives Trading
What’s new: Chinese lawmakers started to review a draft of the country’s first Futures Law that aims to better regulate the domestic derivatives market and should bring trading and clearing rules more in line with international norms as policymakers step up efforts to attract foreign investors.
The draft was submitted (link in Chinese) on Monday for a first reading to the Standing Committee of the National People’s Congress, the national legislature’s top decision-making body. It stipulates trading, settlement and delivery rules for futures and bans illicit acts such as insider trading, market manipulation, and fabricating and spreading false or misleading information.
The draft also stipulates rules for the trading of other derivatives, such as net settlement and performance guarantees.
The background: A derivative is a contract with a value that is based on fluctuations in the underlying asset, such as stocks, bonds, commodities, currencies, interest rates and market indexes. Common derivatives include futures contracts, forwards, options and swaps. Businesses and investors use them as a tool to mitigate risk.
China has been cautious about developing its derivatives market and about allowing foreign investors to participate, but opening-up has gathered pace over the past two years. The government scrapped restrictions on foreign shareholdings in futures companies from Jan. 1, 2020 and has pledged to boost the derivatives market and offer more products in response to demands from foreign institutional investors. As a result, the government needs to put in place a regulatory framework.
The law was originally designed to target futures but after the collapse of Bank of China Ltd.’s (601988.SH) crude oil derivative investment product last year, which left investors nursing $1.4 billion of losses, regulators decided to add rules for other derivatives into the law with the aim of preventing a recurrence of such incidents, sources with knowledge of the matter told Caixin.
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