CSRC: Derivative trading institutions should integrate derivative trading business into overall risk management.

The China Securities Regulatory Commission, based on summarizing practical experience, has drafted the "Derivatives Trading Supervision and Management Measures (Trial) (Draft for Solicitation of Opinions)" and is now seeking public opinions. The draft for solicitation of opinions stipulates that derivative trading institutions should incorporate derivative trading business into overall risk management, accurately identify, prudently assess, and timely respond to various risks such as credit risk, market risk, liquidity risk, and operational risk, strengthen the entire process management. Derivative trading institutions should strengthen position concentration management, and the scale of derivative business should be in line with their capital strength, operational management capability, risk control level, and so on. Original Text: Derivatives Trading Supervision and Management Measures (Trial) (Draft for Solicitation of Opinions) Chapter I General Provisions Article 1 In order to regulate derivative trading and related activities, improve market transparency, protect the legitimate rights and interests of all parties, promote derivative markets to serve the real economy, prevent and resolve financial risks, in accordance with the "People's Republic of China Securities and Futures Law" (hereinafter referred to as the "Securities and Futures Law") and other laws and administrative regulations, these measures are formulated. Article 2 The China Securities Regulatory Commission (hereinafter referred to as the CSRC) shall supervise the derivatives trading venues that are organized to conduct derivative trading and related activities in accordance with the law, and these measures shall apply. The CSRC shall supervise the derivative trading institutions that conduct derivative trading business and related activities in accordance with the law, and these measures shall apply. The derivative trading referred to in the preceding two paragraphs refers to the trading of swap contracts, forward contracts, non-standardized option contracts, and combinations thereof. Article 3 Supporting the steady development of the derivative market, playing the functions of risk management, resource allocation, and serving the real economy. Encourage the use of the derivatives market for risk management activities such as hedging, support the development of derivatives that meet the risk management needs of medium and long-term funds, and legally restrict excessive speculative activities. Article 4 Parties participating in derivative trading and related activities shall abide by the principles of fairness, voluntariness, compensation, and honesty and creditworthiness, and shall not engage in market manipulation, insider trading, trading with undisclosed information, illegal reduction of holdings, bribery and other illegal activities through derivative trading. Article 5 The CSRC follows the principle of prudent supervision to establish a sound derivative market monitoring and control system, and may implement countercyclical adjustment management for derivative trading. Derivatives industry associations, derivative trading venues, and derivative clearing institutions should take measures to maintain a reasonable leverage level and market size in the derivative market. Article 6 Derivatives industry associations, derivative trading venues, and derivative clearing institutions should take measures to enhance the standardization of derivative trading. Chapter II Derivative Trading and Settlement Article 7 The underlying asset of derivative contracts should have fair market pricing, good liquidity, and not easily subject to manipulation, except as otherwise specified by the CSRC. Derivative contract types should have economic value. The design of derivative contracts should be transparent, fair, and reasonable. Contract terms should be clear, concise, and easy to understand. Contracts shall not be contrary to public interest. Prudently develop structurally overly complex derivative contracts. Article 8 When derivative trading venues organize trading in new derivative contract types or adjust the range of contract types, they shall report to the CSRC. Article 9 Derivative trading conducted outside derivative trading venues shall comply with the management regulations of the derivatives industry association regarding the structure of derivative contracts and underlying assets. Article 10 For forward contracts, the trading parties shall pay the price and deliver the underlying asset at a future point in time as agreed; or settle in cash based on the price difference between the price of the underlying asset and the agreed benchmark price. However, unless otherwise agreed by the trading parties. For industrial customers seeking ownership of the underlying asset, based on business practices or economic rationality, and in the course of trading, the delivery of the underlying asset may be postponed to a future point in time, which does not fall under these measures. The buyer trader of non-standardized option contracts shall pay the option fee (premium) as agreed, and shall have the right to buy or sell the underlying asset at the agreed price, or settle in cash based on the price difference between the price of the underlying asset and the agreed benchmark price; the seller trader of non-standardized option contracts shall pay the margin as agreed, sell or buy the underlying asset at the agreed price, or settle in cash based on the agreement. However, unless otherwise agreed by the trading parties. For swap contracts, the trading parties shall exchange the earnings of the underlying asset as agreed but not the ownership of the underlying asset itself, or settle in cash based on the price difference between the price of the underlying asset and the agreed benchmark price. However, unless otherwise agreed by the trading parties. The trading parties of combination contracts of swap contracts, forward contracts, and non-standardized option contracts shall reach agreements in accordance with the provisions of the first three clauses. Article 11 When derivative trading institutions conduct derivative trading business, they shall not promote derivative contract through advertising, public persuasion, or indirect means, except as otherwise specified by the CSRC. Article 12 Derivative trading can be carried out using master agreements. The entities that issue master agreements template should submit the master agreement template to the CSRC for filing when publishing or modifying master agreements template. When using the master agreement method for derivative trading, derivative trading institutions shall sign trading confirmation with traders and agree on contract elements such as contract subject, nominal principal, trading direction, profit structure, profit and loss calculation, contract period, trading costs, margin, and so on. Derivative trading conducted on derivative trading venues shall comply with the trading rules established by the derivative trading venue. Article 13 Derivative trading shall guarantee performance through mechanisms such as margin collection in accordance with regulations. Forms of margin include cash, liquid securities such as bonds, stocks, fund units, standard warrants, and other forms specified by the CSRC. Derivatives industry associations, derivative trading venues, and derivative clearing institutions may specify non-cash margin discount rates, and adjust them dynamically in conjunction with market conditions. Derivative traders may provide performance safeguards for derivative trading through pledge or transfer of margin rights in accordance with the law. Article 14 Derivative trading institutions shall safely, clearly, and reasonably record and custody the margins deposited by traders, and should be able to quickly separate and transfer margins in case of risks. Margins shall be used first for the settlement of derivative trading. If derivative trading institutions reuse margins from counterparties, they should obtain consent from the counterparties and regularly report to the derivatives industry association on the use of margins. Article 15 Derivative contracts with high standardization, strong liquidity, and fair pricing data are eligible for centralized clearing by derivative clearing institutions as central counterparties. Derivative contracts eligible for centralized clearing shall be reported to the CSRC by the derivative clearing institutions. For derivative trading using centralized clearing, regulations on margins, default disposal, etc., shall be provided by the derivative clearing institutions or derivative trading venues. Article 16 When implementing position limit systems and large holder reporting systems for futures trading, futures trading venues may calculate the positions held directly or indirectly by traders in derivative contracts linked to the same or similar assets as futures based on the regulatory monitoring of counterparties. Article 17 Companies listed on stock exchanges or other nationwide securities trading venues are prohibited from engaging in derivative trading with the companys own shares as the underlying asset, except as otherwise specified by laws, administrative regulations, or the CSRC. Derivative trading institutions are prohibited from engaging in derivative trading with companies listed on stock exchanges or other nationwide securities trading venues if they hold more than five percent of the company's shares, are controlling shareholders, directors, supervisors, senior management, or shareholders with restricted or reduced holdings, except as otherwise specified by the CSRC. Chapter III Derivative Traders Article 18 Traders shall meet the professional trader standards stipulated by the CSRC. Derivatives industry associations and derivative trading venues may set differentiated trader standards based on factors such as the type of underlying asset of derivative contracts, but they must be not less than the professional trader standards stipulated by the CSRC. No entity or individual may directly or indirectly circumvent the trader standards. Those engaged in risk management activities such as hedging may be exempted from some or all of the standards as prescribed. Article 19 Traders should comprehensively evaluate their financial condition, risk management needs, and risk tolerance, and carefully decide whether to engage in derivative trading. Derivative trading institutions should strictly fulfill their suitability management obligations towards traders, fully understand the circumstances of traders in accordance with regulations, verify the true identity and trading purposes of traders, conduct risk tolerance assessments, disclose risks fully, and confirm if traders meet the trader standards stipulated in this regulation Article 18. Traders participating in derivative trading and accepting services should provide the truthful information as required by the derivative trading institution. Refusal to provide or provide information as required shall be informed of the consequences by the derivative trading institution and the service shall be denied in accordance with regulations. Article 20 Derivative trading shall implement real-name system for accounts. Traders engaged in derivative trading shall hold valid identity documents in their own names to apply for opening trading accounts. No entity or individual shall violate regulations by lending their trading accounts or borrowing others trading accounts for derivative trading. Derivative trading institutions shall open trading accounts for traders in accordance with regulations, record traders positions, ensure that account records are true, accurate, and complete. The derivative trading reporting system shall enhance system development to strengthen the identification of traders identities. Article 21 Companies listed on stock exchanges or traded on other nationwide securities trading venues may engage in derivative trading based on the need to manage production and operation risks and should meet information disclosure obligations as prescribed. Entities engaged in derivative trading as stipulated above shall establish and implement internal control and risk control systems, undergo internal decision approval procedures in accordance with laws, administrative regulations, CSRC regulations, and bylaws. Chapter IV Derivative Trading Institutions Article 22 Securities companies, futures companies conducting derivative trading activities shall meet the following conditions: (1) Risk control indicators or risk management indicators comply with regulations; (2) Sound corporate governance structure, well-established internal control, compliance management, and risk management systems for derivative trading business; (3) Have qualified operational premises, comprehensive derivative trading facilities, security facilities, and IT systems; (4) Have professional staff matching the derivative trading business, with senior management personnel responsible for derivative business having more than 5 years of relevant work experience; (5) Not have been subject to significant administrative or criminal penalties for major violations in the past two years, not been subject to significant regulatory measures in the past year, and are not under investigation or in the process of rectification for suspected major violations by the CSRC; (6) Other conditions stipulated by the law, administrative regulations, and the CSRC. Article 23 The CSRC, according to the principle of prudent supervision, may implement hierarchical classification management for derivative trading institutions engaged in derivative trading business. Article 24 Derivative trading institutions should conduct operations prudently and diligently, and honestly abide by their commitments. Derivative trading institutions should establish and implement scientific and reasonable risk management, internal control, compliance management, compensation management systems that are in line with sustainable business operations. Derivative trading institutions should separate derivative trading business from proprietary trading business, not engage in mixed operations, and take effective isolation measures to prevent conflicts of interest. Article 25 Derivative trading institutions should incorporate derivative trading business into overall risk management, accurately identify, prudently assess, and timely respond to various risks such as credit risk, market risk, liquidity risk, operational risk, and strengthen the entire process management. Derivative trading institutions should enhance position concentration management, and the scale of derivative business conducted should be in line with their capital strength, operational management capability, risk control level, and so on. Article 26 Derivative trading institutions should conduct daily mark-to-market management for margins. Derivative trading institutions should establish a sound derivative pricing and valuation management system, regulate derivative trading pricing and valuation methods, models, and processes. Derivative trading venues, derivative clearing institutions, and derivative industry associations may establish derivative valuation standards. Article 27 Derivative trading institutions shall continuously monitor, analyze, and assess the compliance of traders' trading behaviors according to the laws and regulations set by the CSRC. Article 28 For derivatives trading outside of centralized clearing, derivative trading institutions should conduct timely trade confirmations, implement effective risk mitigation measures, and guard against counterparty risks. For derivatives trading outside of centralized clearing, derivative trading institutions should establish sound settlement systems, maintain sufficient high-quality liquid assets, and settle trades for traders as agreed upon. Article 29 Derivative trading institutions should provide significant risk and profit information, potential conflicts of interest information, valuation methods and models, and daily mark-to-market information related to derivative trading to non-derivative trading institution counterparties. Article 30 Derivative trading institutions should report information related to derivative trading business to the CSRC and derivative industry associations in accordance with the regulations. Article 31 The employees of derivative trading institutions shall be upright, honest, and have good moral character, possess professional competency required for derivative trading business, and adhere to the code of conduct for employees in the industry. Article 32 The derivative trading institutions and their employees shall not engage in behaviors that harm the legitimate rights of traders or disturb market order in the derivative trading processes, including but not limited to: (1) Providing false materials or information, defrauding or inducing trading; (2) Illegally providing financing or disguised financing services; (3) Lending or engaging in derivative trading business qualifications; (4) Using derivative trading for commercial bribery; (5) Disclosing traders' personal information or trading information, except as otherwise provided by law, administrative regulations, or this regulation; (6) Knowing or should have known that the counterparty is engaging in illegal activities or bribery through derivative trading, but proceed with the derivative trading, except when fulfilling due diligence obligations; (7) Other behaviors that harm the legitimate rights of traders or disturb market order. Article 33 Derivative trading institutions engaging in cross-border derivative trading shall strengthen compliance management and risk prevention, report relevant trading information to the derivative trading reporting system, submit relevant business information to the CSRC and derivative industry associations. Chapter V Derivative Market Infrastructure Article 34 With the approval of the CSRC, securities and futures trading venues may organize derivative trading activities. Derivative trading venues should strengthen risk control of derivative trading activities, monitor derivative trading, and take measures to prevent and resolve derivative trading risks. Article 35 Derivative trading institutions engaged in hedging trading on securities and futures trading venues shall use dedicated hedging accounts, shall not directly conduct hedging trading based on trader's instructions, and comply with regulations set by the securities and futures trading venues. Securities and futures trading venues may provide necessary conveniences such as position limit exemptions for hedging trading activities of derivative trading institutions and carry out focused monitoring of hedging trading activities. Securities and futures trading venues may require derivative trading institutions to provide information on counterparties, trading contracts, trade details, trading purposes, and trading strategies related to hedging trading as needed. Article 36 Futures clearing institutions, securities registration clearing institutions may provide centralized or non-centralized clearing services for derivative trading in accordance with the law. Derivative clearing institutions shall strengthen risk control of derivative clearing activities, take measures to prevent and resolve derivative clearing risks. Article 37 The CSRC establishes a derivative trading reporting system to collect, store, analyze, and manage information related to derivative trading, conduct statistical analysis and risk monitoring, and establish stress testing mechanisms. The trading reporting system shall have a sound governance structure to ensure continuous operation. Article 38 The derivative trading reporting system shall develop derivative trading reporting rules and submit them to the CSRC for approval. The trading reporting system shall develop formats and standards for derivative trading reports and report to the CSRC. Derivative trading institutions, traders, etc., shall report derivative trading information in a timely manner to the derivative trading reporting system according to the rules, format, and standards of derivative trading reports, ensuring that the information reported is true, accurate, and complete. Article 39 The derivative trading reporting system shall publish information related to derivative trading in accordance with regulations to enhance the transparency of the derivative market. Derivative trading institutions, traders, etc., have the right to query relevant trading information in the derivative trading reporting system according to the rules of the derivative trading reporting system. Article 40 The derivative trading reporting system shall establish a mechanism for business data sharing and cross-market monitoring and control with derivative trading venues, derivative clearing institutions, securities and futures clearing institutions, derivative trading venues, derivative clearing institutions, derivative industry associations, and related securities and futures derivative data institutions. Article 41 Derivative market infrastructure, derivative trading institutions shall properly retain information and data related to derivative trading, including data, records, documents, and original materials related to trading, settlement, and delivery activities. The storage period of information and data by derivative market infrastructure and derivative trading institutions shall not be less than twenty years. The CSRC may require derivative market infrastructure, derivative trading institutions, and traders to provide information and data related to derivative trading, including records of trading activities related to the underlying asset of derivative contracts conducted in other markets, and the above entities shall cooperate accordingly. Chapter VI Supervision, Management, and Legal Liability Article 42 The CSRC and its agencies shall perform their duties in accordance with the law, conduct supervision inspections or investigations of derivative market infrastructure and derivative trading institutions, and the inspected or investigated entities shall cooperate. Derivative industry associations, derivative trading venues, and derivative clearing institutions shall conduct self-discipline management in accordance with their bylaws and business rules for derivative trading and related activities. Article 43 If activities related to derivative trading and derivatives-related activities violate these measures, the CSRC or its agencies may take measures such as ordering corrections, regulatory talks, issuing warning letters, and, if administrative penalties are required by law, shall impose them in accordance with the "Securities and Futures Law" and other laws and administrative regulations; in cases where laws and administrative regulations do not stipulate penalties, the CSRC shall impose penalties according to its duties based on this regulation. Article 44 Derivative trading venues violating the provisions of Article 8 of these measures shall be ordered by the CSRC or its agencies to correct, receive a warning, and be fined up to ten thousand RMB; in cases involving financial security and having harmful consequences, a fine up to twenty thousand RMB shall be imposed. Warning shall be given to the directly responsible supervisory personnel and other directly responsible individuals and a fine of up to five thousand RMB shall be imposed. Article 45 Derivative trading institutions violating the provisions of Article 7, paragraphs one and two, of these measures, Article 11, Article 12, paragraph three, Article 14, Article 17, paragraph two, Article 19, Article 20, paragraph three, Article 24, Article 25, Article 26, paragraphs one and two, Article 27, Article 28, Article 29, Article 30, Article 32, Article 33, Article 35, paragraph one of these measures shall be ordered by the CSRC or its agencies to correct, receive a warning, and be fined up to ten thousand RMB; in cases involving financial security and having harmful consequences, a fine up to twenty thousand RMB shall be imposed. Warning shall be given to the directly responsible supervisory personnel and other directly responsible individuals and a fine of up to five thousand RMB shall be imposed. Article 46 Employees of derivative trading institutions violating the provisions