lv hongbing vice chairman of all china lawyers association ... · engaged in securities trading who...

LV HONGBING

Vice chairman of All China Lawyers Association

Chief Managing Partner of Grandall Law Firm

Chinese futures legislation is on fast track

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Several Issues on Chinese Futures Legislation

• The Futures Law is the legal draft that shall be facilitated and submitted for review and examination asap as confirmed in the legislation planning of the Standing Committee of the 12th National

People’s Congress, and is the secondary item confirmed in the 2014 legislation planning of the Legal Working Committee of the Standing Committee of the National People’s Congress.

• Vice Chairman Jiang Yang: the legislation of futures law shall be quickened to

provide solid legal protection for the innovation and development of the market.

• Chairman Xiao Gang : the revision to the securities law and enactment of the futures

law are boot up, which is a great event in the whole system.

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• Director General Yang Maijun

• Conditions for enactment of Futures Law are ready

• President Zhang Shenfeng

• A multi-level capital market shall contain a risk management market, therefore the futures market related law shall be enacted as soon as

possible

Status Quo

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A “regulation”, two “judicial interpretations”, several “rules and normative documents” and related “self-disciplinary rules”

Legislation planning

High Rise

Understand the development trends of international derivative market, gain experience from other countries, especially the experience and lessons since the

financial crisis. The legislation shall benefit the standardization of the exchange market and OTC market, and take experience in practice in China to form a

Futures Law with Chinese features.

Overall

coverage

Openness

Standardize overall the rights and obligations of the subjects of exchange, clearing institutions, futures companies, futures consultation institutions, investors,

governmental supervisory authorities and self-disciplinary supervision institutions.

Reflect the foresights. The enhancement of Chinese price-set power in international market shall follow the market forces, therefore, the

legislation shall consider the trends of “going-out" of Chinese futures industry and “bringing-in” of international futures industry, preserve

space for future development of market and benefit for the construction of pricing center.

Organization forms of futures exchanges

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• Membership Shanghai Futures Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange

• Corporation： China Financial Futures Exchange

• Administrative Regulations on Futures Trading: “Not for profit purpose”

self-regulation shall be applied subject to provisions of articles of association”

• Administrative Measures for Futures Exchanges: “not for profit purpose”

”legal persons subject to self-regulation pursuant to articles of association and trading rules

Status quo

Requirements

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• Corporation is an organizational form of enterprises , the essential attribute of which is to make profits, while the corporate exchange is

not for profit purpose, therefore there exists paradox from point view of law.

• The self-regulation pursuant to articles of association is right for membership exchanges, but for corporate exchanges, pursuant to the

Company Law, the articles of association have no legal binding force on the non-shareholder members of exchanges or other market

participants, the self-regulation of corporate exchanges shall be based mainly on the market agreements with the members or other

participants and the business rules of the exchanges, but not the articles of association.

• Article 102 of the Securities Law stipulates that “stock exchange refers to any legal person that provides a centralized venue and

facilities for the trading of securities, organizes and supervises the trading of securities, and implements a system of self-regulation. By

such generic wording, the Securities Law preserves space for the exchanges in these two forms in term of legal system.

Problem

Experience

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• The enactment of Futures Law, from point view of self-disciplinary management of futures exchanges, means the legal confirmation of

the legal status of self-disciplinary management of and the formal authorization of self-disciplinary management of futures

exchanges ,which enables the exchanges to be more authoritative before the members and other market participants and to produce more

significant effect of self-disciplinary management . The law permits the establishment of self-disciplinary management subjects of

futures exchanges and further defines that the futures exchanges have the power to take self-disciplinary penalty measures for any

violation of law and rule, the core of which is the recognition of the power of the exchanges to take self-disciplinary management and

penalty measures.

• Article 118 and 121 of Chinese Securities Law stipulate respectively that: “A stock exchange shall, in accordance with the relevant

securities laws and administrative regulations, formulate rules on listing, trading, membership and any other relevant rules, and shall

submit them to the securities regulatory authority under the State Council for approval.” “Any member of staff of any stock exchange

engaged in securities trading who violates any trading rule of the stock exchange shall be subject to stock exchange disciplinary

sanctions. In serious circumstances, the relevant individual's qualifications shall be revoked and he or she shall be prohibited from

entering into the stock exchange to engage in securities trading. ” Such provisions on the power of self-disciplinary management and

penalty are valuable references for the Futures Law and the “member management rules” may be expanded properly. For membership

exchanges, the member management rules are part of and shall be incorporated in business rules of exchanges. For corporate exchanges,

market agreements shall be signed for the relationship with the futures companies, which shall render contractual authorization for the

self-disciplinary management of futures exchanges, that is, the market participants must observe the business rules of exchanges and the

business rules of exchanges shall constitute an integral part of market agreements.

Significance

Suggestion

Self regulation of futures exchanges

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• With the authorization of self-disciplinary management of futures exchanges, the risks likely caused by the self-disciplinary management

shall be separated. The futures exchanges, as self-disciplinary organizations, and the staff of futures exchanges, on behalf of their

employers, perform the self-disciplinary duties subject to the laws, regulations, and the rules and regulations of futures administrative

authorities and the business rules accepted and observed by the market participants, and safeguard the fair market order and public

interests. Therefore, same as the futures administrative authorities and their staff, the futures exchanges and their staff shall not be liable

to the legal consequence caused for performance of their statutory duties. Conditional on that the self-disciplinary management is

conducted properly in accordance with the laws, regulations, rules and regulations and business rules and without fault, the liability to

the self-disciplinary management shall be exempted.

• The relevant provisions of Singapore Securities and Futures Act are valuable references. Article 36 “Exemption of Criminal or Civil

Liability” of such law stipulates with respect to exemption of liability to self-disciplinary management that: “exchanges and persons

performing duties on behalf of the exchanges shall perform their obligations under this Act or rules of exchanges or listing rules in a

reasonable care and due diligence manner and their acts (including representations) or any omission shall incur no civil or criminal

liability.

Exemption

Lesson

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Source of business income:

•In most countries, the business income of futures exchanges mainly sources from clearing and trading fees (charges dependent on market turnovers), market data

and information service fees, technical service fees (access and communication fees, etc), other charges, etc. Generally, the clearing and trading fees will cover the

majority of the business income of each futures exchange, but the market data and information service fees are also important income sources.

Subjects of information rights:

•At present, Chinese laws and regulations contain no provision on the attribute of rights of trading information of futures market. It is extremely urgent to define

the attribute of rights of trading information of futures market in the law, and further to optimize the information disclosure system for Chinese futures market.

From point view of futures industry, all business rules of futures exchanges stipulate expressly that the exchanges own the right to the information disclosed by

them. However, in the academic circle, no consensus is reached.

Profit-making mode of futures exchanges

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Subjects of information rights:

•We suggest that in the legislation of Futures Law relevant provisions of the Securities Law on the attribute of rights to information of futures market be referred.

Upon enactment of the Securities Law, only the obligation of the securities exchanges to publicize the securities data is defined, and upon the revision to the

securities law in 2005, the rights of the exchanges are also defined. Article 113 of the Securities Law stipulates that “No entity or individual may publicize real-time

securities quotes without the prior permission from the relevant stock exchange”. Although the Securities Law does not define the legal properties of the securities

trading information, from point view of practice, the securities exchanges are empowered exclusively to publicize the trading information of the securities

exchanges. Such provision enables the securities exchanges to have adequate systematic incentives to provide adequate, timely and correct trading information for

the market, meanwhile lay legal foundation for the proper expansion of their business space.

•Meanwhile, we may also take reference to the relevant measures of offshore successful futures market, for example, the EU promulgates the specific EU Database

Directive to list the trading information in the database for exclusive protection; while the USA courts define by relevant cases the legal properties of the trading

information as the private property of exchanges.

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Subjects of Information Rights:

•With reference to the practice in EU, USA and China with respect to rights of publicity of securities trading information, for the fundamental information formed

in the trading in the futures exchanges and the information products generated thereby, we suggest that the law stipulate that the exchanges enjoy exclusively

rights to such information.

Statutory disclosure obligations:

•In the legislation, the statutory information disclosure obligation and scope of disclosure of the futures exchanges shall be defined, that is, the information that

shall be rendered freely by the futures exchanges and the scope of information shall be defined. While, with respect to other non-statutory information disclosure

or other information products generated by the exchanges, conditional on the definition of the exclusive rights of the futures exchanges in the law, the expansion of

business space and the development toward to profit-making institutions may be protected by the law.

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1. Inter-market supervision

•With the launch of equity futures and treasury bond futures, the features of inter-infiltration, fusion and highly interrelation of futures market and spot market (for

example securities market, etc) have become increasingly obvious, while the healthy and orderly development of futures market is under the challenge from the

inter-market violations and inter-market abnormal circumstances. The current Securities Law and the Administrative Regulations on Futures Trading are limited to

securities market and futures market respectively, contain provisions mainly on the violations in the singular market, and contain little concerns on the inter-market

supervision to some extent. Therefore, upon enactment of the Futures Law, relevant provisions shall be made with respect to the constitution and recognition of

inter-market violations, supervision power limit and coordination as well as accountability.

Everbright Securities “6.18”accident and thoughts on legislation of Futures Law

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1. Inter-market supervision

•First of all, as the basic law in the futures sector, the Futures Law shall define the violations, especially the acts of manipulation of futures market by affecting the

price in the spot market to make profits or the acts to make profits in a market by utilization of the abnormal circumstance in other market, which shall be cracked

down, punished and controlled vigorously, so to safeguard the legal performance of inter-market supervision. It becomes extremely urgent with the occurrence of

“8.16” accident and the coming launch of stock index option and individual stock option.

•Secondly, the China Securities Regulatory Commission, as the supervisory authority of Chinese securities and futures market, shall take full advantage of such

power and effectively utilize its rich experience accumulated from the performance of its supervision power in the securities and futures market by including the

proper supervision measures in the Futures law or through the authorization by the Futures Law.

•In addition, the Futures Law may guide the competent supervision authorities and self-disciplinary supervision organizations of securities market and futures

market to establish a information-sharing system, joint-early-warning system, linked adjustment system and other system to enrich the inter-market supervision

measures and strengthen the efficiency and strength of inter-market supervision.

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2. Inside information

•We shall also pay attention to the inter-market inside information issues caused by inter-market violations or abnormal circumstances in the futures market and

spot market. The inside information in the current Administrative Regulations on Futures Trading mean “the information that may cause great impact on the

futures trading price and has not yet publicized, including: the policies formulated by the futures regulatory authority of the State Council and other competent

authorities that may cause great impact on the futures trading price, the decisions of the futures exchanges that may cause great impact on the futures trading price,

the information about the members of futures exchanges, the funds and trading of clients and other important information recognized by the futures regulatory

authority of the State Council that may cause significant impact on the futures trading price.

•The Futures Law may further expand the scope of inside information stipulated in the Administrative Regulations on Futures Trading and list the abnormal

trading and violations in the market within the scope of inside information. The “6.18”accident indicates that wrong-bill trading in the securities (spot) market

causes significant impact on the stock index futures, and the disputes on the ambiguity in the law also exist, therefore lessons shall be learned, and the inclusion of

the inter-market abnormal trading and violations in the scope of inside information under the Futures Law is extremely urgent.

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3. Supervisory measures for abnormal market circumstances

•Upon occurrence of abnormal circumstances that likely cause great impact on the market, the exchanges shall be empowered through legislation to take emergent

measures to conduct direct supervision on the market and control the consequence likely caused by the abnormal circumstances. The futures exchanges, as the

primary organizations and supervisors of futures trading, own nature-borne convenience and advantages on the disposal of abnormal market circumstances,

including closing to market, direct control of trading system, unimpeded information publicity channel, concentration of professionals with rich experience, etc.

The reasons and impact on the market concerning all kinds of abnormal market circumstances are different, and the disposal of such circumstances is

comparatively urgent in term of its complexity and time, therefore, the exchanges are required to have necessary discretion, expand their self-disciplinary

regulation measures, and be allowed to make professional judgment and disposal in a timely and independent manner subject to the details of different cases.

•The supervisory measures available for the exchanges in abnormal market circumstances under Article 12 of the current Administrative Regulations on Futures

Trading are: “increase the security deposit; adjust up and down limits; restrict the maximum inventory of the members or clients; suspend the trading; take other

emergent measures”. However, no provision is made concerning whether the exchanges have the right to cancel the trading, adjust the trading price or make

mandatory liquidation. Turning back to the “6.18” accident, under the circumstance of wrong-bill trading, the Everbright Securities conducted hedging trading

through stock index futures successively in the trading in the afternoon. After opening a position, except the continuous follow-up and communication and control

of trading information, the exchanges have no effective measures available under the law to restrict the hedging operation of the Everbright Securities. In addition,

under the background of irreversible trend of quantized trading, large number of automatic trading generated by software or the man-made omission of operators

inevitably will cause similar “fat finger” accident to the futures market. On that account, the demands to expand the power of the exchanges shall not be ignored.

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3. Supervisory measures of exchanges under abnormal market circumstances

•We may take lessons from the offshore futures market concerning the supervisory authorization for exchanges (or clearing institutions) by the law under

abnormal circumstances. Article 16 of the so-called Futures Exchange Law of Taiwan stipulates that “trading information shall be disclosed if the futures

exchanges discover that the futures trading reaches the standard of abnormal trading upon performance of the supervision as stated in previous Article 1 (6). For

those causing gross impact on the trading order in the market, the futures exchanges may take following measures: adjust the limit of security deposits, restrict

completely or partially the amount of trusted sales and purchases of futures, restrict the trading amount of futures or position held, suspend or terminate such

futures trading or take other necessary measures maintaining the market order or protection of futures trading”. Article 801 of Hong Kong Rules and Procedures

for Futures Clearing Institutions stipulate that “if the market operated by the futures exchanges fluctuates sharply, the futures clearing institutions and futures

exchanges may simultaneous request all participants of futures exchanges and futures clearing institutions to cease to purchase or sell or register any new added

uncovered position contracts, and close the positions of the contracts not covered at that time within the time stipulated by the clearing institutions and futures

exchanges…..”In USA, German, Singapore, etc, the administrative regulatory authorities are authorized through legislation to conduct review and approve the

detailed rules on cancellation of trading under abnormal circumstances (for example wrong-bill trading) in the market.

•In addition, the introduction of “cancellation of trading”, “adjustment of trading price”, “forced closing of position” and other supervisory measures for abnormal

market circumstances requires the coordination of basic principals, legal basis and supporting rules, meanwhile, we shall also understand that above mentioned

supervisory measures shall balance and maintain the relation between the normal trading order and the interest indemnity for investors and follow the transparent,

open-ended and timely principles.

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4. Liability exemption and litigation block for self-disciplinary supervision by futures

exchanges

•While giving self-disciplinary authorization for futures exchanges and expanding the scope of self-disciplinary supervision measures, the legislation shall also block

the risk likely causing to the self-disciplinary management. The futures exchanges, as self-disciplinary organizations, and the staff of futures exchanges, on behalf of

their employers, perform the self-disciplinary duties subject to the laws, regulations, and the rules and regulations of futures administrative authorities and the

business rules accepted and observed by the market participants, and safeguard the fair market order and public interests. Conditional on that the self-disciplinary

management is conducted properly in accordance with the laws, regulations, rules and regulations and business rules and without intentional fault or gross

negligence, the liability to the self-disciplinary management shall be exempted. For “8.16” accident, the exchanges shall bear no external civil compensation liability

whatever measures taken for the abnormal trading circumstance and whether, when and what announcement is made, which is subject to the discretion of the

exchanges in accordance with the law.

•On the other hand, for the self-disciplinary penalty given by the exchanges on violations, if the parties involved have any objection to the penalty, such parties shall

firstly exhaust internal remedies of the exchanges, that is, submission of review application with the futures exchanges. The exchanges shall make the review

decisions within the statutory time, but the enforcement of the decision will not affected in the period of review. For any failure to filing review application to the

exchanges or before the review decision, the law shall stipulate the people’s court shall not accept such case so to safeguard the authority of the futures exchanges as

the organizers and self-disciplinary supervisors of futures market and to avoid the litigation expenditures of the parties and exchanges. If the parties involved are

allowed to initiate litigations without filing review application to the exchanges or in the review period, the litigation right may be abused and the exchanges may be

involved in may unnecessary litigations. In addition, the early involvement of judicial authority will damage the authority of the exchanges as self-disciplinary

supervisor, which is unfavorable for the exchanges to exercise their power of self-disciplinary supervision and punishment.

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Characteristics of futures disputes

•The law shall establish a diversified dispute resolution mechanism covering mediation, arbitration

and litigation.

Arbitration system for futures-related cases

Unpredictable

Sensitive Professional Technical Mass-based Group-based

International

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Characteristics of dispute resolution through arbitration

Confident

Professional

Friendly Efficient

Authoritative

International

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Key breakthroughs of Arbitration Rules in China (Shanghai) Pilot Free Trade Zone

•The arbitration rules of FTZ absorb and optimize many advanced systems of international commercial arbitration, for example, the optimization of “provisional

measures” and addition of “emergent arbitration tribunal” system; the establishment of the mediators’ mediation process before the formation of arbitration

process further improve the system in combination of “Arbitration and Mediation and further strengthen the evidence system in the arbitration. The arbitration

rules also introduce the “friendly arbitration” system, add the “small-amount dispute procedure" and lower the arbitration fees.

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•The optimization of provisional measures and close integration of the contents of the Civil Procedure Law revised in 2012 concerning property, act and evidence

attachments before arbitration are more favorable to safeguard the legitimate rights and interests of the parties involved, especially the intellectual property right

holders.

•As supporting system of the provisional measures, the establishment of the rush arbitration system causes the Arbitration Rules of FTZ more adaptable, which

will benefit the Shanghai International Arbitration Center to explore the arbitration market in the countries where the arbitration tribunal is entitled to make

decisions on provisional measures and will attract the parties more widely.

•The establishment of open-ended selection of arbitrators not only reflects the reference and supporting role of the register of arbitrators for the parties involved,

but also cause less restrictions on the selection of rights by the parties and satisfy the demands of the parties to select arbitrators in wider and diversified coverage.

If the parties select persons other than those in the register of arbitrators, the Rules also establish a specific mechanism to ensure that the arbitrators qualify the

requirements under the Arbitration Law of China.

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•The optimization of consolidated arbitration system and the establishment of “participation in the arbitration procedures by other parties”, “participation in the

arbitration procedures by persons not involved in the case" which will benefit for effective solution of related cases, maintain the uniformity of arbitration awards,

solve the disputes in package and realize the purpose of solution of disputes and reduction of litigation burden.

•In the design of the system in combination of arbitration and mediation, the contents of mediation by the mediators prior to the formation of arbitration tribunal

are added, which satisfy the demands of the parties for mediation before hearing the cases by the arbitration tribunal, and reduce the unnecessary impact of the

mediation process on the substantial hearing by the arbitrator (s), which is an innovation in combination of arbitration and mediation and may offer more

comprehensive dispute solution service for parties involved.

•The establishment of small-amount dispute resolution procedure will exert fully the advantage of the arbitration in term of efficiency and rapidness, which will

further expedite the solution of small-amount cases, and advance the pursuit of arbitration procedures for efficiency, flexibility and low cost through the reduction

of charges and lessening the burden of parties involved.

•Friendly arbitration system is introduced expressly, which enriches Chinese arbitration practice and is in line with the international practice.

Address:45-46/F, Nanzheng Building 580 Nanjing West Road 200041 Shanghai

Telephone: 86-21-52341668

Fax: 86-21-52341670

Cellphone: 139-0197-9035

E-mail: [email protected]

LV HONGBING LV HONGBING

CHIEF MANAGING PARTNER

Beijing/Shanghai/Shenzhen/Hangzhou/G

uangzhou

Kunming/Tianjin/Chengdu/Ningbo/Fuzh

ou

Xi’an/Nanjing/Nanning/Hong

Kong/Paris

Futures Law Forum

May 28, 2014

May this Forum a Great

Success

Thank You！

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lv hongbing vice chairman of all china lawyers association ... · engaged in securities trading who...

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