CFIC Introduction
The "Futures and Derivatives Law of the People's Republic of China" was recently promulgated. This is a law that is based on drawing on advanced international experience, closely integrating with China's national conditions, and integrating various opinions through the game between relevant parties, seeking common ground while reserving differences, and balancing the interests of all parties. The "Futures and Derivatives Law" can basically adapt to the development needs of the current market. Its promulgation and implementation are a major event in deepening the structural reform of the financial supply side and strengthening the socialist market economic system. It will contribute to the construction of a standardized, transparent, open, dynamic and A resilient capital market will have a huge promoting effect and will more effectively improve the ability of the futures and derivatives markets to serve the high-quality development of our country's economy.
Jiang Yang is a member of the 13th National Committee of the Chinese People's Political Consultative Conference and a member of the Economic Committee of the Chinese People's Political Consultative Conference. He once served as Vice Chairman of China Securities Regulatory Commission. Since 2001, he has served as the general manager of the Shanghai Futures Exchange for five years. Since 2006, he has been in charge of futures market work among the leading members of the China Securities Regulatory Commission for 10 years. He has promoted the revision of the "Futures Trading Management Regulations" twice and participated in it twice. Drafting of the Futures Law.
□ The three core key points of traders, central counterparty settlement system, and futures market monitoring center cover the main elements of futures market functions: the role of traders is closely related to market liquidity; the central counterparty settlement system is related to market credit and risk Prevention is closely related; the monitoring center system is closely related to ensuring the functioning of the market. The formulation of these three key issues is an indispensable institutional supply for the healthy and stable development of futures and derivatives markets.
□ The "Futures and Derivatives Law" uses the concept of "trader", which clearly conveys to the society that the liquidity created by traders is a prerequisite for the functioning of the futures market. Data from China’s futures market show that hedgers in the real economy have nearly tripled in more than 10 years. Among them, the contribution of traders, mainly speculators, is indispensable.
□ The "Futures and Derivatives Law" clearly stipulates that "futures settlement institutions serve as central counterparties and are the common counterparty of settlement participants, conduct net settlement, and provide centralized performance guarantee for futures transactions." This provides strong institutional support for the futures market from the supply side, is conducive to the construction of the credit system of the futures market, and is conducive to preventing market risks.
□ The "Futures and Derivatives Law" clarifies the legal status of the China Futures Market Monitoring Center; affirms the innovative results of China's futures market supervision exploration over the years; and institutionalizes the practical content of my country's futures market based on international experience and based on national conditions. Arrangement; eliminates the hidden dangers of international legal risks and litigation that futures monitoring agencies may encounter after the comprehensive internationalization of my country's futures market.
The Futures and Derivatives Law of the People's Republic of China (hereinafter referred to as the "Futures and Derivatives Law") was recently promulgated. This is a law that is based on drawing on advanced international experience, closely integrating with China's national conditions, and integrating various opinions through the game between relevant parties, seeking common ground while reserving differences, and balancing the interests of all parties. The "Futures and Derivatives Law" can basically adapt to the development needs of the current market. Its promulgation and implementation are a major event in deepening the structural reform of the financial supply side and strengthening the socialist market economic system. It will contribute to the construction of a standardized, transparent, open, dynamic and A resilient capital market will have a huge promoting effect and will more effectively improve the ability of the futures and derivatives markets to serve the high-quality development of our country's economy.
From the early 1990s, when the National People's Congress began to draft this law, it has taken more than 30 years and four drafts to finally come to fruition. Based on work practice, the author focuses on the expression of three key points: traders, central counterparty clearing system, and futures market monitoring center to talk about his feelings. These three aspects cover the main elements of the functioning of the futures market: the role of traders is closely related to market liquidity; the central counterparty settlement system is closely related to market credit and risk prevention; the monitoring center system is closely related to ensuring the functioning of the market. The legal expression of these three key issues is an indispensable institutional supply for the healthy and stable development of the futures and derivatives markets.
Clarify the concept of "trader", which is helpful to reflect the functional characteristics of the futures market
The function of the futures market is to discover prices and hedge. Trading is a zero-sum game. Its designers designed the transaction cost of the product to be lower than that of the securities market. Many of them are to encourage traders to trade frequently and use the sufficient liquidity generated by transactions to promote the functions of the futures market.
The "Futures and Derivatives Law" has set up a separate chapter for futures traders. The first article is "Futures traders refer to the This law refers to natural persons, legal persons and unincorporated organizations that engage in futures trading and bear the consequences of the transaction." This expression is different from the way that my country’s current financial laws and regulations generally use “investor” to describe transaction entities. For example, the "Securities Law of the People's Republic of China" (hereinafter referred to as the "Securities Law") refers to market trading entities as "investors"; the "Futures Trading Management Regulations" use "investors", "customers" and "participants" interchangeably. Transaction entity.
The author's understanding of this is that the trading entities in the futures market are called "traders" because the functions of the futures market are different from those of the securities market. Traditionally, the functions of the futures market are price discovery and risk management; the functions of the securities market are investment, financing, and resource allocation. The existence of the futures market function is closely related to the liquidity of transactions. Just like the securities market "without investors, there is no investment and financing function." Without liquidity providers, the price discovery and hedging functions of the futures market are like water without a source. , a tree without roots.
The "Futures and Derivatives Law" unifies the trading entities in the futures market as "traders", instead of using the customary concepts of "investors", "customers" and "participants", and grasps the liquidity provided by traders. It is this characteristic that determines the life and death of the futures market.
Theoretically, the liquidity created by traders is the prerequisite for the futures market to function. Speculators are the main traders in the futures market and are the main contributors to liquidity. Speculators drive price discovery and provide risk management opportunities. Leo Melamed, honorary chairman of the Chicago Mercantile Exchange, mentioned in his book "Escape to Futures" that "a futures contract is a risk management tool, like an insurance policy. Speculators provide Liquidity lubricates the competitive market machine that brings together buyers and sellers. Without speculators, hedgers will lack objects to transfer the risks they face. "Liquidity arises from the trading behavior of trading entities. , the high leverage of the futures market attracts many speculators to become frequent traders. Speculators provide a steady stream of liquidity transactions, contributing to the possibility of price discovery and hedging. This kind of liquidity is essentially different from the liquidity required for investment activities in the securities market. Relying on the liquidity provided by speculators to realize price discovery and complete hedging is the social significance of the futures market. The liquidity of the securities market is to solve the market advance and retreat problems of investors, so as to better attract investors in the issuance market, thereby enhancing investors' confidence in the market.
Although some traders in the futures market have realized risk management or speculative spread gains from transactions, neither of them can be called investors. The concept of "investor" cannot cover the trading entities in the futures market; the concept of "customer" cannot include self-operated members of the exchange and other entities that directly enter the market compared to the intermediary services provided by futures companies. At the same time, traders describe entities that are participating in transactions, and futures companies have many customers who are not trading and are potential traders. They cannot provide liquidity and cannot be called traders; the concept of "participant" is too broad. It includes intermediary service institutions such as margin depository banks, accounting firms, law firms, and delivery warehouses that do not participate in futures trading but serve the futures market. These institutions do not directly conduct transactions or provide liquidity, but only generate liquidity. provide support. Therefore, the Futures and Derivatives Law uses the concept of “trader” to convey to society very clearly that the liquidity created by traders is a prerequisite for the functioning of the futures market.The "Futures and Derivatives Law" clearly stipulates in its first chapter, General Provisions, that the legitimate rights and interests of all parties must be "protected" in transactions.
In addition, this law also makes special institutional arrangements for the rights and obligations of traders in other parts. This expression is meaningfully distinguished from the concept of "investor" in the Securities Law at the institutional level. This distinction helps guide people to correctly view the different characteristics of the two markets and the perspective from which they observe the problem. The "Securities Law" refers to transaction entities as "investors" because the function of the securities market is investment financing. The function of the futures market is to discover prices and hedging, and trading is a zero-sum game. Its designers designed the transaction costs of the products to be much lower than those of the securities market, in order to encourage traders to trade frequently and take advantage of the sufficient liquidity generated by transactions. to promote the functioning of the futures market. Trading is a characteristic of the futures market, unlike the securities market, which divides the market into two parts: issuance and trading. There is no issuance market in the futures market. Futures products are designed by the exchange and then directly listed and traded on the market. The trading market is the only market for futures markets. The Futures and Derivatives Law clearly stipulates the equal status of all parties in the market and makes balanced arrangements for the status of all market participants. It is clearly stipulated that "the business rules of futures exchanges should reflect the principle of fair protection of the legitimate rights and interests of members, traders and other relevant market parties", which reflects the functional characteristics of the futures market.
From a practical perspective, the liquidity created by traders promotes the functioning of the futures market. The "Futures and Derivatives Law" states that traders are treated equally, which is an arrangement made based on the experience and lessons of the domestic futures market for 30 years and drawing on international practices, showing respect for the characteristics of the futures market. The liquidity created by traders can generate continuous, open, transparent, rapid and timely forward price information in the futures market, helping various enterprises to refer to their production and operation activities when making decisions; the liquidity created by traders enables economic entities to Able to easily and freely enter the futures market to achieve hedging and risk management. According to statistics from the China Futures Market Monitoring Center, as of March 31, 2022, the total amount of funds in my country's futures market has exceeded 1.36 trillion yuan, an increase of nearly 55% from the end of 2020. In 2021, the cumulative trading volume and turnover of on-site futures options reached 7.5 billion hands and 581 trillion yuan respectively, a year-on-year increase of 22.13% and 32.84% respectively. From the perspective of market breadth and diversification, there are currently 94 types of futures and options on exchanges in my country. More and more companies are implementing risk management by hedging through the liquidity provided by speculators, the majority of traders. The average position of futures market contracts (average daily positions/average daily transactions) has increased from 25% in 2007 to 90.41% in 2021. As of the end of 2021, the equity, trading volume, and positions of industrial and institutional customers in the futures market accounted for 72.17%, 40.73%, and 63.44% respectively. In mature markets such as the United States, industrial hedging demand accounts for 40% to 60% of positions. Data from China’s futures market show that the hedging needs of my country’s real economy have been well met. The number of hedgers in the real economy has nearly tripled in more than 10 years. Among them, the contribution of traders, mainly speculators, is indispensable.
Clarify the central counterparty system, which is conducive to strengthening market credit and preventing risks.
In order to enable high-risk transactions such as futures to proceed normally, futures exchanges use themselves as central counterparties to offset the risks of futures trading counterparties. Thus establishing a market credit mechanism. This institutional mechanism resolves distrust among counterparties. By providing credit support to both parties to the transaction, the exchange becomes the common counterparty for all traders in the market.
The biggest risk in the futures market lies in the settlement process. A healthy market requires institutional arrangements for risk prevention and control, and the central counterparty system is an important guarantee for solving this problem. Futures markets in developed countries have central counterparty institutional arrangements at the legal level. my country's "Futures and Derivatives Law" clearly stipulates that "futures settlement institutions serve as central counterparties and are the common counterparty of settlement participants, conduct net settlement, and provide centralized performance guarantees for futures transactions."This provides strong institutional support for the futures market from the supply side, is conducive to the construction of the credit system of the futures market, and is conducive to preventing market risks.
From a theoretical point of view, the central counterparty system has its logic and rationality. The futures market is a "zero-sum game" transaction of "using small to gain big". Low margin, high leverage, funds and goods are not delivered immediately, and whether the transaction can be finally performed depends mainly on the credit of the counterparty. A comprehensive and detailed investigation of its credit status is time-consuming, laborious, and costly, which exposes traders to long-term risks. counterparty default risk. In order to enable such high-risk transactions to proceed normally, futures exchanges (clearing houses) use themselves as central counterparties to offset the risks of futures trading counterparties, thereby establishing a market credit mechanism. This institutional mechanism resolves distrust among counterparties. The exchange (clearing house) becomes the common counterparty for all traders in the market by providing credit support to both parties to the transaction.
Historically, from the establishment of an exchange (clearing house) that relied solely on the credit of exchange members to the use of the exchange (clearing house)'s own credit to ensure contract performance, people gradually discovered that the exchange acted as the seller for all buyers. With all sellers and buyers, directly assuming contract obligations as parties to the contract can provide the most powerful guarantee for the safety of market transactions. After the establishment of the central counterparty system, traders no longer have to worry about not getting the goods after paying, or not getting the money after delivering the goods, thus promoting the development, growth and functioning of the futures market. Therefore, over 100 years after its birth, the central counterparty system has been gradually adopted by many futures markets in the world. In the futures markets of developed countries, central counterparties have a clear legal status. As the central counterparty, the futures exchange (or clearing institution) assumes the guarantee performance function of the transaction. The core contents included in the central counterparty system, such as contract renewal, secured transactions, and multilateral netting, involve changes in legal relationships between multiple civil entities. The legal relationship between these entities, as well as the rights and obligations of the central counterparty clearing house, must be clearly defined in law, otherwise the exchange (clearing house) will face huge legal risks.
From a practical point of view, it is necessary and urgent to clarify the central counterparty system in the law. Through long-term practice in the futures market, the international community has summarized a set of relatively mature standards for central counterparties. In the relevant rules issued by the International Organization of Securities Commissions and the Committee on International Payment and Settlement Systems, principles and regulations are put forward for the implementation of the central counterparty system by each member country. Our country is a member of the International Organization of Securities Commissions and should establish a central counterparty system at the legal level. The central counterparty system originated in the United States at the end of the 19th century and is the first credit system in the U.S. futures market. In the early 1990s, when my country introduced the futures market, the rules of various futures exchanges were not unified, and there were various transaction settlement systems, some with central counterparty systems and some without. This creates problems for exchanges in dealing with market risks. There are no laws or regulations at the National People's Congress level or at the government level that stipulate superior laws as exchange rules. Without the protection of higher-level laws, futures exchanges are not confident when using the central counterparty system to resolve risks. For example, although the settlement rules of the Shanghai Futures Exchange clearly specify the central counterparty system, the lack of unified regulations in higher-level laws has caused many obstacles and troubles for the exchange to resolve risks. In 2004, the Shanghai Futures Exchange used the central counterparty system to resolve the rubber futures risks at that time in accordance with the settlement rules. However, due to the different understandings of the relevant parties at the time, some people raised questions about the way Shanghai Futures Exchange handles risks, which led to constant complaints from some traders, which to a certain extent interfered with the risk resolution process and the healthy and stable development of the market. In order to change this situation, when the "Futures Trading Management Regulations" were revised for the first time in 2007, although some people suggested that the central counterparty system be included in the regulations, they were ultimately abandoned due to different opinions from all parties. When the international financial crisis occurred in 2008, the overseas futures market played a very good role in enhancing market confidence and preventing and defusing risks through the central counterparty system.For example, Lehman Brothers' positions in the futures market were protected by the central counterparty mechanism and there were no defaults, and members on the floor were safe. However, trading in the over-the-counter derivatives market without the protection of a central counterparty system completely collapsed, eventually leading to the bankruptcy of Lehman Brothers. In 2009, at the G20 Pittsburgh Summit, the central counterparty system was unanimously affirmed. In 2012, when my country's "Futures Trading Management Regulations" were revised for the second time, many people once again proposed joining the central counterparty system, but opinions were still inconsistent. At our insistence, although the revised "Futures Trading Management Regulations" did not include the central counterparty system in the main text, it was stated in the revision instructions, which can be regarded as providing a higher level law for the exchange's central counterparty system. in accordance with. However, since the "Futures Trading Management Regulations" are administrative regulations and the legal level is not high, exchanges are still timid in handling risks. In 2007 and 2012, international financial organizations such as the International Organization of Securities Commissions conducted risk assessments on China's futures market twice. They both believed that the lack of a central counterparty system at the legal level was a hidden risk in China's futures market, and recommended that China establish a legal system as soon as possible. Make provisions. This time, the central counterparty system has been written into the Futures and Derivatives Law, which will provide great legal support for the healthy and stable development of the futures market.
Clarifying the status of market monitoring and surveillance agencies will help improve the quality of supervision.
The focus of futures market supervision is to combat market manipulation, prevent price distortions, and eliminate insider trading and market fraud. To achieve these regulatory goals, having handy regulatory tools is an important condition.
The main functions of the futures market are price discovery and hedging, and the main goal of supervision is to focus on the realization of the guarantee function. The supervision of the futures market focuses on combating market manipulation, preventing price distortions, and eliminating insider trading and market fraud. To achieve these regulatory goals, having handy regulatory tools is an important condition. In this regard, the Futures Market Monitoring Center, which has existed in my country for more than 10 years, is a very good regulatory tool and has played a huge role in preventing futures market risks and improving regulatory quality over the years.
This system and institution are clarified in the Futures and Derivatives Law. In the chapter on supervision and management, it is stipulated that "the futures regulatory agency of the State Council shall establish and improve the futures market monitoring and control system, and strengthen the supervision of margin security deposits through specialized agencies." This clause affirms the innovative achievements of China's futures market supervision exploration over the years, institutionalizes the practical content of my country's futures market based on international experience and based on national conditions, and eliminates the need for futures monitoring and control agencies after the comprehensive internationalization of my country's futures market. Possible international legal risks and hidden dangers in litigation.
In 2006, with the consent of the State Council, the China Securities Regulatory Commission approved the establishment of this monitoring and control agency. At the beginning, the agency's main task was to monitor and monitor the security of customer deposits. The "Futures Trading Management Regulations" revised in 2007 include the content of "futures margin security deposit and monitoring agency". The China Securities Regulatory Commission authorizes this agency to collect transaction data from futures companies, futures exchanges, and margin depository banks, and conduct daily three-party verification in order to promptly discover and stop futures companies from misappropriating customer margins. The establishment of this system has effectively eliminated the persistent problem of my country's futures companies misappropriating customer deposits for a long time. In 2008, the China Securities Regulatory Commission expanded the scope of its authorization, requiring the agency to monitor and monitor the entire market transaction operation in addition to margin monitoring.
Over the years, the Futures Market Monitoring Center has used information technology to collect market-wide funds, transaction settlement, intermediary agency finance, business, exchange over-the-counter transactions and other data through all aspects of trading, building a cross-market, cross-institution, cross- A "big data" platform for on-exchange and off-exchange derivatives trading. It plays an irreplaceable role in protecting the safety of traders' funds, timely discovering market risk hazards, catching signs of market manipulation in advance, and issuing risk warning reports, etc., and allows regulatory agencies to take targeted measures and resolve market risks in a timely manner.In the process of dealing with several imported risks such as the international financial crisis in 2008, the turmoil in the international crude oil market in 2020, and the "nickel futures" of the London Metal Exchange in 2022, this institution protected the security of market funds and prevented settlement risks for the exchange and the China Securities Regulatory Commission. , providing strong data analysis support to combat market manipulation, effectively preventing the impact of international futures market risks on the country, and ensuring the stable and healthy development of China's futures market. As the internationalization of my country's futures market accelerates, this institution plays an increasingly important role in supervision. It plays an important role in protecting the safety of customer funds, preventing market manipulation, and cracking down on market violations, and realizes the "visibility" of the futures market. The supervisory work goals of "seeing, speaking clearly, and controlling". It is the "electronic eye" and "CT machine" of the futures market, and regulatory agencies are inseparable from it. This institution has become an important starting point for regulatory agencies to strengthen supervision and prevent risks, and is a major feature of my country's futures market regulatory system.
At the same time, this institution has attracted attention and great interest among international peers in terms of ensuring margin security and market monitoring and "penetrating" supervision, and has been recognized. The International Organization of Securities Commissions has recommended China’s approach to its member states at many international conferences. Our country has also introduced relevant experience at international organization conferences many times, and has won recognition and appreciation from international peers. The "Futures and Derivatives Law" complies with the requirements of the times and clarifies the legal status of the China Futures Market Monitoring Center. It is a major affirmation and support for the innovation of financial regulatory tools.
Source of this article: Shanghai Securities News
WeChat editor: Guan Qiao
Shanghai Securities News, sponsored by Xinhua News Agency, is a statutory disclosure media for securities market information issued by the China Securities Regulatory Commission. Founded in 1991, it is the first to provide authoritative financial and securities professional information in New China. The national financial daily has now formed an all-media financial media matrix covering newspapers, websites, clients, videos, WeChat, Weibo and other platforms.
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