For many years FIA has advocated for the passing of a futures law in China as a vital step in the development and growth of China’s markets. These markets already rank among the largest in the world in terms of trading volume, but they lack certain legal provisions that are critical for deeper institutional participation. We also have consistently advocated for the enforceability of close-out netting as a key building block for the development of a liquid market for interest rate swaps and other OTC derivatives, which in turn is crucial for the development of a liquid futures market.
On 29 April, the National People's Congress, China's top legislature, published the text of a futures law for public consultation. This draft law has also been introduced to the NPC Standing Committee for review.
This is a milestone development. For the first time, China has put forward legislation specifically to regulate the futures markets. In December we hosted Dr. Fang Xinghai, the vice-chairman of the China Securities Regulatory Commission, at our FIA Asia conference. As he said to me during our discussion, the next step for the Chinese futures market is to attract more institutional investors. The enactment of a futures law will go a long way towards achieving that aim, and FIA looks forward to working with the Chinese authorities to further develop and enhance China’s markets.
The draft futures law aims to provide a comprehensive legal and regulatory framework for the operation of the futures market in China. It sets out rules for trading, clearing, settlement and delivery systems, and it establishes a protection system for the rights and interests of futures traders. Notably, the draft futures law seeks to confer settlement finality on futures contracts to ensure the functioning of a robust clearing system. It also explicitly provides for the timely enforcement and liquidation of futures margin. This appears to mean that futures exchanges would not be subject to the stay rules under Chinese bankruptcy law that would prevent the liquidation of any non-cash margin during certain stages of bankruptcy proceedings. In addition, the draft law codifies the role of futures exchanges as the central counterparties for the futures market. The draft law also establishes requirements for offshore futures exchanges providing direct trading access to onshore persons to either register with or obtain exemptions from the Chinese regulators.
The draft futures law also recognizes the concept of a single agreement for OTC derivatives trades and the enforceability of close-out netting in the event of a counterparty’s bankruptcy. This is the first time that close-out netting has been recognized at the legislative level in China, and it will go a long way to providing the legal certainty that the OTC market needs to flourish.
As a member of the CSRC’s international advisory council, I have witnessed at first hand the determination of China’s markets regulators to provide a sound framework for the further growth and evolution of China’s derivatives markets. Vice-Chairman Fang and his colleagues recognize the valuable role these markets can play in providing price discovery and risk management for the real economy, and I look forward to working with them during the consultation process on this important new legislation.