Equity Derivatives in China

Overview

Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?

OTC equity derivatives transactions in the mainland Chinese onshore market include the following:

• margin loans, which are commonly entered into by shareholders to finance or leverage large shareholdings, including shares to be purchased in an acquisition;
• forwards, swaps or options, which are increasingly entered into by investors to acquire an economic interest in a company. As there is no off-exchange transfer of listed securities apart from very limited exceptions, such equity forwards, swaps and options are always cash-settled; and
• stock loans, which are (subject to restrictions) entered into by investors for the purposes of covering short positions over the shares.

It is uncommon for listed issuers to enter into derivatives transactions over their own shares.

In addition to the onshore market, it is also common for parties outside China to enter into transactions referencing China A-shares in an offshore market. Hong Kong is the principal overseas centre for such transactions. Traditionally, these offshore equity transactions have been predominantly ‘delta-one’ market access products, where the offshore investor obtains an economic exposure to the underlying equity and the offshore dealer hedges its exposure using its onshore qualified foreign institutional investor (QFII) or renminbi qualified foreign institutional investor (RQFII) investment quota. With the launch of the Shanghai-Hong Kong Stock Connect mutual market access programme in November 2014 and its subsequent expansion to cover the Shenzhen Stock Exchange (SZSE) in December 2016 (Stock Connect), there has been a wider range of transactions in the Hong Kong market (eg, margin loans), and it is expected that this trend will continue as offshore participants become more familiar with Stock Connect and the remaining restrictions are gradually relaxed. As well as issues under the laws and regulations of China, including with respect to short-selling, market misconduct and disclosure of interest, such offshore transactions may also trigger certain issues under Hong Kong laws and regulations. For a discussion of these issues, see the Hong Kong chapter of this book.

May market participants borrow shares and sell them short in the local market? If so, what rules govern short selling?

Yes. Market participants can borrow shares and sell them short in Chinese stock exchanges. Such trades are governed by margin trading rules issued by the China Securities Regulatory Commission (CSRC) and the Securities Law of the People’s Republic of China (the Securities Law). Currently, under these rules:

• only certain eligible A-shares designated by the exchange can be subject to such stock borrowing;
• the exchange may suspend stock borrowing activities in specific A-shares when the volume of margin trading activities in such A-shares exceeds the threshold determined by the exchange; and
• the term of a stock borrowing shall be no longer than six months. This term is extendable but each extended term shall be no longer than six months.

However, to participate in such activities, one party needs to be a securities dealer licensed in China and the other party must be licensed to carry on business in China (eg, it has a local presence in China or is a licensed QFII/RQFII) and qualified to participate in stock-borrowing business (it should be noted that as at 29 April 2019, none of the QFIIs/RQFIIs had been approved to participate in securities lending as a borrower).

In the offshore market, overseas institutions may also borrow shares issued and listed in China and sell them short through Stock Connect. In this case, the trading restrictions imposed by the Hong Kong Stock Exchange and the licensing requirements in Hong Kong, as well as the regulatory requirements under the Securities Law (eg, rules governing insider trading, market manipulation and interest disclosure), will apply.

Describe the primary laws and regulations surrounding OTC equity derivatives transactions between dealers. What regulatory authorities are primarily responsible for administering those rules?

OTC equity derivatives transactions in China are normally between a dealer and its client. (See question 5 for the rules governing OTC equity derivatives transactions between a dealer and its clients.) In addition, there are no rules specifically governing equity transactions between dealers.

Separately, for overseas dealers who are engaging in OTC equity derivatives transactions over Chinese shares through Stock Connect, see the Hong Kong chapter of this book. As described in question 2, relevant regulatory requirements under the Securities Law would equally apply to such transactions.

In addition to dealers, what types of entities may enter into OTC equity derivatives transactions?

As discussed, there are three types of OTC equity derivatives transactions in the Chinese market: (i) margin loans; (ii) forwards, swaps or options; and (iii) stock loans. These transactions are typically entered into between a dealer and its client. For types (i) and (iii), the regulators do not impose any restrictions on the type of entities who may be a client of the dealer. For type (ii), as required by the rules of the Securities Association of China (SAC), the clients that may enter into these transactions are institutional clients and qualified non-institutional clients as determined by the relevant dealer.

For the types of entities that may trade OTC derivatives transactions over Chinese shares in Hong Kong through Stock Connect, refer to the Hong Kong chapter of this book.

Describe the primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer? What regulatory authorities are primarily responsible for administering those rules?

The Securities Law is the fundamental law governing the issuing and trading of securities in China. In addition to the Securities Law:

• margin loans and stock loans are subject to margin trading rules and stock borrowing rules issued by the CSRC. See question 2 for the requirements under these margin trading rules; and
• OTC equity forwards, swaps and options are subject to self-regulating rules published by the SAC. These self-regulating rules prescribe:
• that dealers may trade only with eligible investors;
• the risk disclosures to be made and client due diligence investigations to be conducted by dealers;
• the documentation requirements for OTC equity transactions; and
• the filing requirement for the dealer’s OTC equity business.

Do securities registration issues arise if the issuer of the underlying shares or an affiliate of the issuer sells the issuer’s shares via an OTC equity derivative?

There is no securities registration requirement in China for the purposes of OTC equity derivatives. Furthermore, as discussed, an issuer of listed shares would normally not trade in OTC derivatives transactions over its own shares.

May issuers repurchase their shares directly or via a derivative?

Pursuant to the Company Law of the People’s Republic of China (the Company Law), an issuer may repurchase its own shares for the following limited purposes only:

• reducing registered capital;
• merging with another company that holds its shares;
• distributing shares to employees as an incentive;
• repurchasing a shareholder’s shares at the request of a shareholder who objects to a resolution of a shareholders’ general meeting on merger or division of the issuer company;
• using the repurchased shares to convert the convertible corporate bonds of the listed company; and
• as necessary for a listed company to maintain its company value and protect its shareholders’ equity.

In addition, after repurchasing its own shares, the issuer is required to cancel the relevant shares or transfer them to the relevant shareholders or employees (as applicable) within the requisite periods. In other words, the issuer is prohibited from holding its own shares after the repurchase.

Furthermore, as described in question 6, an issuer of listed shares typically does not trade in OTC derivatives transactions over its own shares.

When an issuer repurchases its own shares for any of the purposes listed above, it is unlikely that issues such as market manipulation, shareholder assistance or insider dealing would arise. Nevertheless, the issuer is still required to make relevant disclosure in accordance with the Securities Law.

What types of risks do dealers face in the event of a bankruptcy or insolvency of the counterparty? Do any special bankruptcy or insolvency rules apply if the counterparty is the issuer or an affiliate of the issuer?

Under the Enterprise Bankruptcy Law of the People’s Republic of China (the Bankruptcy Law), on the commencement of a bankruptcy proceeding in respect of the counterparty of the dealer (referred to as the debtor), an automatic stay becomes effective with the following consequences:

• any subsequent repayment by the debtor outside the bankruptcy proceedings shall be invalid;
• the court shall appoint an administrator who shall take custody of and manage all the assets of the debtor; and
• other civil litigation or arbitration proceedings against the debtor’s assets shall be subject to stay.

In addition, pursuant to article 18 of the Bankruptcy Law, on commencement of the bankruptcy proceeding, the administrator may decide whether to terminate or affirm any contract that has been entered into before the bankruptcy proceeding but which has not yet been fully performed by the parties. This is the moratorium power of the administrator. However, the administrator is required to exercise such moratorium power within a specific period and, once the administrator decides to continue with the contract, the other party (ie, dealer) may require the administrator to post collateral to secure the dealer’s claim under the relevant contract.

Nevertheless, unlike certain jurisdictions where the bankruptcy proceeding is taken to commence upon the filing of the bankruptcy petition, bankruptcy proceedings in China commence only on the court’s acceptance of the bankruptcy petition (rather than presentation of the petition itself). Accordingly, there may still be time for the dealer to terminate the contracts after presentation of the bankruptcy petition but before the acceptance of the petition by the court (when the administrator’s moratorium power becomes effective).

Furthermore, subject to specific facts (eg, whether there was fraud, undervalued transaction or preferred repayment involved), a contract entered into or a payment made within certain suspect periods prior to the bankruptcy proceedings may be subject to clawback in a bankruptcy proceeding.

What types of reporting obligations does an issuer or a shareholder face when entering into an OTC equity derivatives transaction on the issuer’s shares?

It is uncommon in China for an issuer to enter into an OTC equity derivatives transaction over its own shares.

A major shareholder of the issuer (holding 5 per cent or more shares in total issued shares of the issuer) or actual controller of the issuer has a legal obligation to disclose when there is a ‘major change’ to its shareholding in the issuer (such as disposal or acquisition of 5 per cent or more of voting shares in the issuer), or when it intends to dispose its shareholding (there is no ‘minimum disposal size’ exemption for such disclosure requirement, but disposal of shares originally acquired by the major shareholder through secondary trading are exempted from disclosure unless the size of disposal reaches 5 per cent or more of the total issued shares). Nevertheless, a cash-settled OTC equity derivatives transaction, where there is no transfer of voting power of the underlying shares, will not be regarded as a change to the shareholding under Chinese law.

Depending on theindustry into which an issuer falls, there might be more stringent filing or approval requirements that apply on an industry-specific basis. For instance, if the issuer is a Chinese bank, a shareholder of such issuer is required make a filing with China Banking and Insurance Regulatory Commission (CBIRC) upon its shareholding in the issuer reaches 1 per cent in total issued shares of such issuer. Similar to the disclosure requirement in the paragraph above, a cash-settled OTC equity derivatives transaction, where there is no transfer of voting power of the underlying shares, will not be regarded as a change to the shareholding under Chinese law and therefore should not by itself trigger the filing or approval requirement.

Are counterparties restricted from entering into OTC equity derivatives transactions during certain periods? What other rules apply to OTC equity derivatives transactions that address insider trading?

The Securities Law and CSRC rules prohibit insiders and people who have material inside information from trading in or procuring others to trade in relevant securities. However, CSRC rules also provide that certain legitimate transactions would not constitute insider trading under the Securities Law. These legitimate transactions include repurchases by the issuer for any of the permitted reasons listed in question 7; transactions that did not have any connection with the inside information; and transactions under which the relevant party reasonably believed that such inside information had become public at the time of its trading.

In addition, persons who have access to non-public information because of their professional position are also prohibited by the Securities Law to trade in or procure others to trade in relevant securities with such non-public information. These include employees of financial intermediaries and financial market infrastructures (such as exchanges, brokers and fund management companies), regulators and trade associations. Non-public information is not inside information.

Furthermore, directors, supervisors and senior management personnel of an issuer are prohibited from trading in the relevant securities during the blackout periods. The blackout periods include the 30 calendar-day period prior to the publication of a periodic financial report, the 10 calendar-day period prior to the publication of a preliminary performance announcement and the period from the occurrence of a material event or the beginning of a decision-making process that may have material effects on the price of the relevant securities until two days after the announcement of such event or decision. Note that there is no prohibition against the issuer engaging in a share buy-back during a blackout period.

Nevertheless, it seems that the restrictions above apply to physical trading in the relevant securities or equity futures listed on the Chinese market only. There have not been any clarifications from the Supreme People’s Court of China or CSRC as to whether and how such restrictions would be applied to cash-settled OTC equity derivatives.

What additional legal issues arise if a counterparty to an OTC equity derivatives transaction is the issuer of the underlying shares or an affiliate of the issuer?

An issuer of listed shares typically does not trade in OTC derivatives transactions over its own shares.

If a counterparty to an OTC equity derivatives transaction is a director, supervisor, member of senior management or major shareholder (holding 5 per cent or more of the total issued shares) of the issuer, then the counterparty must disgorge to the issuer any profits derived from any purchase and sale of any shares of the issuer if the pair of purchase and sale transactions occurred within a period of less than six months, subject to limited exceptions. This is known as the short swing rule. A director, supervisor, member of senior management or major shareholder (holding 5 per cent or more of the total issued shares) of the listed company is prohibited to enter into margin loans and stock loans over the shares of the company.

What types of taxation issues arise in issuer OTC equity derivatives transactions and third-party OTC equity derivatives transactions?

There is no specific tax applicable to OTC equity derivatives transactions. In addition, so long as the relevant OTC equity derivatives transactions do not involve physical delivery of shares, no stamp duty or capital gains tax will be imposed. However, if there are any cross-border payments made by onshore issuers to offshore parties, if regarded as ‘income derived from within mainland China’, they may be subject to withholding tax.

Describe the liability regime related to OTC equity derivatives transactions. What transaction participants are subject to liability?

Apart from liability for breach of contract, the primary source of liability in connection with OTC equity derivatives transactions are the market misconduct prohibitions under the Securities Law. A party to such a transaction may be liable for claims that the transaction has been entered into on the basis of non-public information or with the intention of manipulating the price of the underlying shares or engaging in other market misconduct.

What stock exchange filings must be made in connection with OTC equity derivatives transactions?

Apart from disclosure of interest requirements as described in question 9, there are no other stock exchange filing requirements in connection with OTC equity derivatives transactions.

What types of documents are typical in an OTC equity derivatives transaction?

Cross-border or offshore OTC equity derivatives transactions are normally documented using the architecture of the International Swaps and Derivatives Association (ISDA) standard forms, including an ISDA Master Agreement and one or more trade confirmations subject to that agreement. The ISDA Master Agreement governs the basic relationship between counterparties and provides the basic contractual framework for each transaction thereunder. Often, instead of executing an actual ISDA Master Agreement, the parties will enter into ‘long form’ confirmation by deeming their confirmation to be subject to an agreement in the form of the ISDA Master Agreement. If the parties to a transaction expect to enter into more than one transaction of a particular type, the confirmation may take the form of a master confirmation that governs the general framework for the type of transaction, with supplemental confirmations entered into for each specific transaction.

OTC forwards, swaps and options in an onshore market are normally documented under the Derivatives Master Agreement for the Chinese Securities and Futures Market, which was jointly published by the SAC, the Futures Association of China and the Asset Management Association of China. This Master Agreement has a similar architecture to the ISDA standard form.

Margin loans and stock loans in the onshore market are normally documented under the relevant dealer’s own template margin finance contract. However, such margin finance contracts are required to incorporate mandatory model clauses published by the SAC. These clauses prescribe for the most important aspects of a margin loan or stock loan such as representations, declaration of trust, maximum loan or borrowing term, margin ratio and loan-to-collateral ratio.

For what types of OTC equity derivatives transactions are legal opinions typically given?

Legal opinions are typically given with respect to the capacity and authority of a counterparty to enter into the derivatives transaction, the enforceability of the transaction and specific regulatory issues (such as the application of the market misconduct prohibitions). In addition, it is also common for an offshore party to procure a close-out netting opinion or a collateral opinion with respect to the Chinese party, or both.

May an issuer lend its shares or enter into a repurchase transaction with respect to its shares to support hedging activities by third parties in the issuer’s shares?

No. As described in question 7, an issuer can enter into a share repurchase for limited purposes only.

What securities registration or other issues arise if a borrower pledges restricted or controlling shareholdings to secure a margin loan or a collar loan?

The Company Law provides certain limitations on transfer of shares by shareholders holding relevant shares acquired prior to the initial public offering as well as the sponsors, directors, supervisors and senior management personnel of the issuer during certain restricted periods.

However, during the restricted period, the relevant shareholder can still create a pledge over its shares (subject to the disclosure requirements applicable to creation of the pledge), but the pledgee would not be able to enforce its pledge until the end of the restricted period.

An additional point to note is the potential liability of the pledgee if, at the time of its sale of the pledged shares, it has material non-public information in relation to the issuer and as a consequence the sale contravenes the insider-dealing prohibition.

In addition, it is prohibited for anyone to acquire equity (either listed or unlisted) in a financial institution using borrowed money or money entrusted by others. Therefore, the proceeds from a margin loan or a collar loan should not be used to acquire equity in financial institutions or companies in other restricted industries that have similar requirements.

If a borrower in a margin loan files for bankruptcy protection, can the lender seize and sell the pledged shares without interference from the bankruptcy court or any other creditors of the borrower? If not, what techniques are used to reduce the lender’s risk that the borrower will file for bankruptcy or to prevent the bankruptcy court from staying enforcement of the lender’s remedies?

As the ownership of pledged shares remain with the pledgor-borrower, these shares are part of the ‘debtor’s property’ under the Bankruptcy Law, and the pledgee-creditor cannot direct the sale of the pledged shares unless the bankruptcy administrator gives its consent to the disposal of a debtor’s property. The pledge remains valid under Chinese law, and the pledgee has priority over the proceeds realised from the sale of pledged shares. However, the pledgee has no self-help power, and the disposal or sale of pledged shares can be effected only with the consent of a bankruptcy administrator. Without the administrator’s consent, the securities registration authority, China Securities Depository and Clearing Corporation Limited (CSDC), is legally prohibited from recording any transfer of shares out of the securities account of the pledgor.

What is the structure of the market for listed equity options?

In the listed equity options market, all orders must be executed on an exchange and cleared through a central clearing counterparty. There is no OTC trading in listed equity options.

Currently, the Shanghai Stock Exchange (SSE) is the only exchange in China providing a trading platform for listed equity options, while the SZSE has submitted the draft of trading rules for listed equity options at the end of 2018 for regulators’ review, which indicates that the SZSE may become the second trading platform for listed equity options in the near future (note that the China Financial Futures Exchange provides a trading platform for listed equity index futures).

Trades executed on the SSE are centrally cleared by the CSDC. The CSDC is also the central clearing counterparty for all the listed shares in China.

Listed options are traded by registered broker-dealers that are members of SSE, as principal or as agent for clients. Some brokers can also act as market makers and post bids and offers on the SSE in accordance with SSE rules.

There is no listed equity option for individual shares in the Chinese market yet. The only form of listed equity options is the listed equity index option.

Describe the rules governing the trading of listed equity options.

Trading of listed equity options is governed by the following laws, regulations and rules:

• the Securities Law;
• the Administrative Measures for Futures Trading;
• the Administrative Measures for Stock Option Trading Pilot; and
• the Trading Rules of Shanghai Stock Exchange for Stock Option Trading Pilot.

Types of transaction

What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?

All listed equity options must be centrally cleared. There are currently no requirements for OTC equity derivatives transactions to be centrally cleared.

What categories of equity derivatives must be exchange-traded and what rules govern trading?

Listed equity options must be traded on an options exchange. There are currently no requirements for OTC equity derivatives transactions to be exchange-traded.

Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.

In the case of listed equity options, the CSDC will collect collateral from its clearing member (typically the broker) while the broker will collect collateral from the relevant investor. If the clearing member is not the same entity as the broker, the clearing member will also collect collateral from the broker. Options buyers generally do not post margin, but they are required to pay a premium. The level of collateral collected by the clearing member to the broker and by the broker to the investor shall be no lower than the level of collateral collected by the CSDC from the clearing member. There are two types of required margins: initial margin and variation margin. Eligible collateral can either be cash or securities recognised jointly by the SSE and CSDC.

In the case of stock loans and margin loans, the dealers are required to collect collateral from their clients. The value of the collateral posted by a client to the relevant dealer is required by the exchange rules to be no lower than 50 per cent of the total value of the subject shares. Eligible collateral can either be cash or securities recognised by the SSE.

Presently, onshore OTC equity options, swaps and forwards referencing China-listed shares are not centrally cleared. Parties to uncleared OTC equity derivatives typically document their collateral arrangements using a bilateral agreement. If the relevant transaction is a cross-border or offshore transaction documented under the ISDA Master Agreement, the parties are likely to use the Credit Support Annex (CSA), published by ISDA, that supplements the ISDA Master Agreement, to document their collateral arrangement. As there are no equivalents to the CSA under the Financial Derivatives Master Agreement, bespoke security interest arrangements are likely to be used for onshore OTC equity options, swaps and forwards.

Must counterparties exchange collateral for some categories of equity derivatives transactions?

In the case of stock loans and margin loans, as it is the dealers who are providing financing to their clients, only the clients are required to post collateral to the dealers.

In the case of listed equity options, options buyers generally do not post collateral, but they are required to pay a premium. Option writers are required to post collateral in accordance with the rules of the SSE and the CSDC as described in question 24.

There are currently no requirements for uncleared OTC equity derivatives transactions to be subject to an exchange of collateral.

Liability and enforcement

What is the territorial scope of the laws and regulations governing listed, cleared and uncleared equity derivatives transactions?

Pursuant to article 2 of the Securities Law, the Securities Law and all the securities regulations and rules made thereunder apply to the issuance and trading of securities within the territory of mainland China. Accordingly, the following transactions fall outside the application of the Securities Law: offshore cash-settled OTC equity transactions referencing China-listed shares where neither of the parties is a Chinese entity or individual; and cross-border cash-settled OTC equity transactions referencing China-listed shares where one party is an offshore party and the other party is a Chinese party, and the Chinese party is not a regulated entity incorporated or licensed under the Securities Law (eg, a broker). Nevertheless, the capacity of a Chinese party to enter into derivatives transactions may be subject to other laws and regulations of China and not the Securities Law.

What registration or authorisation requirements apply to market participants that deal or invest in equity derivatives, and what are the implications of registration?

OTC equity derivatives transactions in China are normally between a dealer and its client. Based on the self-regulatory authorisation conferred on SAC by the CSRC, a dealer must make a filing with SAC in order to carry out OTC equity derivatives business, and SAC has prescribed for prudential criteria applicable to such dealers. Without filing with SAC, the relevant dealer entity should not enter into OTC equity derivative transactions with clients, and there is a legal risk that such transactions are invalid under Chinese law. There is no registration or filing requirement for clients.

What reporting requirements apply to market participants that deal or invest in equity derivatives?

SAC rules mandate securities companies to submit a monthly report of their equity derivatives trade information to China Securities Internet System Co Ltd (InterOTC), which publishes aggregate statistics in a monthly report on its website. Other dealers who are not securities companies are not subject to mandatory reporting requirements and they may report to InterOTC on a voluntary basis. Clients are not subject to such general reporting requirements. Nevertheless, where a client is subject to a regulatory reporting requirement by its own regulatory authority (ie, banking regulator or state-owned assets regulator), the client shall comply with the applicable reporting requirements. We understand that those reports are more entity prudential regulation in nature and do not serve a trade repository function.

CSRC and stock exchange rules mandate securities companies to submit daily reports to the stock exchange of their margin loan and stock loan information, and the stock exchanges publish aggregate statistics before the opening of the next exchange trading day. Clients are not subject to these general reporting requirements.

What legal issues arise in the design and issuance of structured products linked to an unaffiliated third party’s shares or to a basket or index of third-party shares? What additional disclosure and other legal issues arise if the structured product is linked to a proprietary index?

Depending on the issuer of such equity-linked structured products, the applicable regime would be different. If the issuer of the structured products is a bank, such structured products would likely take the form of a wealth-management product or structured deposit; and the sale of structured products by a bank to its clients will be regulated by the CBIRC. If the issuer of the structured products is a securities broker, these structured products would likely take the form of OTC equity derivatives transactions, which are subject to the self-regulating rules of SAC and the jurisdiction of the CSRC.

The relevant structured product would be subject to the same disclosure requirements as other shareholders if it is physically holding the underlying shares. The issuer or manager of the structured product needs to ensure that these structured product would not be considered as ‘acting in concert’ with the issuer or manager itself or any other products issued or managed by the same entity; otherwise shareholdings of entities or products who are ‘acting in concert’ need to be aggregated for the purpose of determining their disclosure obligations.

Describe the liability regime related to the issuance of structured products.

There are no structured product securities in China. The only structured products are structured deposits offered by commercial banks that are not ‘equity derivative transactions’ for the purposes of this chapter (see question 1).

What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is convertible for shares of the same issuer?

A listed issuer can issue only convertible security through public issuance with the publication of a prospectus.

The public issuance of convertible securities requires prior approval from the CSRC, and the issuer needs to meet conditions prescribed in the Securities Law or as provided for by the CSRC.

Optional convertible security is the only form of convertible security under Chinese law; it gives an investor the right to convert the security into the underlying equity. The maximum term for convertible security is six years and the minimum term is one year. Conversion for a convertible security can be settled only in cash.

The issuer shall convene a securities holders’ meeting on the occurrence of any of the following events:

• the issuer proposes to amend the prospectus;
• the issuer is unable to pay any interest or principal due under the convertible securities on time;
• the issuer undergoes a capital reduction, merger, division, dissolution or has applied for bankruptcy;
• there is a significant change in the guarantor or collateral; or
• any other matters that have an impact on the major rights and interests of security holders.

The issuer can also issue convertible securities where each of the debt instruments and the share option element in a convertible security can be traded and listed separately.

What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is exchangeable for shares of a third party? Does it matter whether the third party is an affiliate of the issuer?

Shareholders of listed company can issue exchangeable security subject to CSRC approval. Whereas the issuer of the exchangeable security has control over the listed company, it shall not directly transfer its power of control over the listed company by way of issuing exchangeable security.

Update and trends

Are there any current developments or emerging trends that should be noted?

The draft securities law (the third draft for consultation) was published in April 2019. This new securities law, once it becomes effective, will replace the existing Securities Law and is likely to have an impact on the analysis herein. It is unclear when the final version of the new securities law will be published or become effective.