The China Securities Regulatory Commission is soliciting public comment on proposed rules that, if adopted, will permit certain foreign nationals and brokerage firms to trade particularly designated futures contracts listed on China’s futures exchanges.
Under CSRC’s proposal, overseas customers would be permitted to access approved futures either through Chinese or overseas brokers, or trade directly through exchange facilities, subject to exchange approval. Only local brokers could directly clear approved products for foreign nationals, or qualified overseas brokers that establish or control entities in pilot free trade zones in China (one is located in Shanghai).
CSRC, the relevant exchange, the China Futures Association and the China Futures Margin Monitoring Center would all play roles in monitoring aspects of trading by overseas customers and brokers. (Click here to see an interview I gave to John Lothian News in November 2012 regarding the China Futures Margin Monitoring Center.)
Among other things, qualified overseas customers would have to satisfy eligibility requirements established by CSRC and the relevant exchange. Authorized foreign brokerage firms would have to be subject to oversight by a regulator with a memorandum of understanding with CSRC governing cooperation. Relevant futures exchanges, domestic futures companies and overseas brokers would have to establish and administer a suitability system in connection with trading by foreign nationals. CSRC contemplates a large trader reporting type regime in connection with futures positions, and would require overseas traders and brokers to submit to regular or random on-site inspections.
CSRC published its guidelines on December 31, 2014, and comments are due by January 31, 2015. Media reports have indicated that the crude oil contract trades on the Shanghai Futures Exchange is likely to be the first beneficiary of the new rules (click here for a sample media report).
Currently, only a stock index futures contract listed on the China Financial Futures Exchange is available for hedging purposes to a limited group of foreigners – so-called “qualified foreign institutional investors” – under very limited conditions. In addition, the International Board of the Shanghai Pilot Free Trade Zone was launched by the Shanghai Gold Exchange in September 2014. It trades both spot and forward gold and is accessible to qualified international investors.
Helpful to Getting the Business Done: The potential opening of China’s futures markets to foreign traders and brokers is an important development that should be studied and assessed as a real business opportunity. A good starting point is reviewing and potentially commenting on CSRC’s proposed interim measures. In China, relationships or “guanxi” are exceptionally important, and building relationships with regulators is important for foreigners to conduct business there. Responding in a helpful way to CSRC’s request for feedback can be a valuable first step in establishing a good relationship – provided comments are constructive and educational and not strident or didactic. Moreover, all comments by foreigners should be written in Chinese. Doing business in China requires patience and recognition that there are different ways to conduct business – not all in accordance with American standards and custom.