[China Futures] Speed up the introduction of the Futures Law and improve the legal system of the futures market

From April 26 to 29, the 28th meeting of the Standing Committee of the 13th National People's Congress was held in Beijing. The draft of the Futures Law was submitted for initial deliberation. Shaoshi Xu, chairman of the Finance and Economic Committee of the National People's Congress, gave an explanation. This is the first time that China has specifically legislated to regulate and promote the healthy development of the futures market.

The formulation and promulgation of the futures law is a great significance for better fulfilling the functions of the futures market, further activating commodity circulation, promoting the market-oriented allocation of factor resources, stabilizing enterprise production and operation, promoting the upgrading of related industries, and maintaining national financial security. After the meeting, the Standing Committee of the National People's Congress announced the "Futures Law of the People's Republic of China (Draft)" to collect comments and suggestions for revisions and improvements from the public. The solicitation of opinions ended on May 28.

The article focuses on the draft futures law. Specialized exchanges, industry organizations, academics, and legal professionals have published insights based on their own practices, and elaborated on the improvement of relevant provisions and content.

The epidemic has enveloped the world, and the situation is complex and changeable. In the face of major changes in a century, the Party Central Committee has made major strategic arrangements to accelerate the construction of a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles mutually promoting each other.

General Secretary Xi Jinping emphasized at the celebration meeting for the 30th anniversary of the development and opening up of Pudong, “Improve the price influence of important commodities, better serve and lead the development of the real economy”, and gave expectations to the futures market under the new development pattern.

After more than 30 years of development, China’s futures market has not forgotten its mission. Through its inherent functions such as price discovery, risk management, and resource allocation, it plays a positive role in promoting the circulation of production, circulation, consumption, and distribution, and serving the development of the real economy. On this basis, speeding up the formulation and introduction of a futures law to regulate and promote futures trading is a great significance for activating commodity circulation, promoting industrial upgrading, and promoting high-quality economic development.

Entering a new stage of development, the formulation of the futures law is an inherent requirement for regulating and guiding the functions of the futures market, and it is also an institutional guarantee for improving the effectiveness of the futures market in serving the real economy

China’s futures market is an important part of serving the development of the real economy. After years of accumulation, the foundation and conditions for the establishment of a new development pattern of services are constantly being formed and consolidated. As of the end of June 2021, 91 futures and options varieties have been steadily launched. Covering major sectors of the national economy such as agriculture, metals, energy, chemicals, finance, etc., the transaction volume in 2020 was approximately 6.2 billion lots (unilateral, the same below) and 438 trillion yuan, a year-on-year increase of approximately 55% and 51% respectively.

In the first five months of this year, the cumulative transaction volume and the year-on-year growth rate of transaction volume continued to maintain a relatively high level, at approximately 51% and 77% respectively. China has been the world's largest on-market commodity derivatives market for 12 consecutive years. At the same time, over-the-counter businesses such as warehouse receipt trading, basis trading, and commodity swaps have also developed further. During the epidemic, the futures market assisted companies in managing price risks and supply chain risks brought about by the epidemic, and strongly supported the resumption of work and production of enterprises.

At present, the development of the futures market is successful. Focusing on the direction of furthering the function of the futures market and comprehensively improving the quality and efficiency of serving the real economy, it is urgent to introduce the futures law, clarify the rights and obligations of market participants, and use good laws and good governance to escort the high-quality development of the market.

Adhering to the new development concept, the Shanghai Futures Exchange focuses on the original intention of serving the real economy and provides a practical foundation for futures legislation

The Shanghai Futures Exchange (hereinafter referred to as the Shanghai Futures Exchange) strives to build a comprehensive international first-class derivatives service platform that integrates on- and off-exchange aggregation, online and offline integration, futures and spot integration, and commodity finance integration. Focusing on the aforementioned goals, the Shanghai Futures Exchange has carried out a series of useful explorations.

The combination of futures and spot opens a new chapter in serving the entities. In order to effectively enhance the adaptability of serving the high-quality development of the real economy, and drawing on the development experience of the multi-level market system combined with international futures and currents, the Shanghai Futures Exchange established the standard warrant trading platform in 2018, which opened up the service to the real economy. As of the end of May 2021, the platform has launched 13 varieties, covering non-ferrous metals, precious metals, ferrous metals and natural rubber. On the third anniversary of the launch, the platform has accumulated 1.1018 million warehouse receipts (unilateral, the same below), a transaction of 12.5944 million tons, and a transaction value of 424.763 billion yuan.

The platform has played an active role in stabilizing production and supply, and allocating resources. One is to better serve the enterprises in a variety of ways. This includes innovating the raw material procurement and product sales channels of entity enterprises with the "Internet + trade" transaction model to ensure smooth operation of enterprises during the epidemic.

Hubei Daye Nonferrous Metals Group holdings Co.,Ltd sold copper and silver through the platform, and recovered more than 400 million yuan of funds, which solved the company’s urgent need; Tongling bought aluminum warehouse receipts through the platform and compressed the process to achieve the timeliness of raw material supply. The company achieve zero inventory and improve the capital efficiency.

The second is to launch two quotation zones, Zhejiang Oil Center and Ouyeel business, which can form a useful supplement to the corresponding futures products. On June 23, the standard warehouse receipt trading platform Ouyeel Quotation Zone Trading Service was launched, realizing the trading interoperability between the Shanghai Futures Exchange’s on-exchange market and Ouyeel’s off-exchange spot market. It is an important innovation and breakthrough.

The third is to launch an online pledge business to solve the problems of repeated pledge of warehouse receipts and difficulty in handling warehouse receipts, this will help alleviate the problem of difficult financing in the bulk commodity industry. As of the end of May, the total transactions were 58, 852 pledged warehouse receipts, a total transaction weight of 21,500 tons, and a total pledge amount was 511 million yuan.

The fourth is to launch extended natural rubber warehouse receipts, explore non-standard warehouse receipt business, enrich market service functions, and further promote the combination of futures and spot. Opening up to the outside world promotes a domestic and international dual cycle.

The Shanghai Futures Exchange is the forerunner of China's futures market opening to the overseas. Shanghai crude oil futures is listed on as the "ice-breaking" futures in the international market. In the past three years after listing, Shanghai Futures Exchange has become the world's third largest crude oil futures market.

Later, it copied successfully the model of crude oil futures and accelerated the supply of international products. Four international products, namely NR 20, low-sulfur fuel oil, BC copper futures and crude oil options, were listed. Among them, BC copper futures is the first domestic international futures contract to operate under the "dual contract" model. That is, while keeping the Shanghai copper futures unchanged, BC copper futures are listed on the Shanghai International Energy Exchange in a specific product model. Copper futures, together with Shanghai copper futures, serve the "dual cycle" with "dual contracts".

The prices of NR20, low-sulfur fuel oil, and BC futures have begun to be used as pricing benchmarks in international trade. At the same time, by piloting cross-border settlement business on low-sulfur fuel oil futures, and authorizing the NOREXECO ASA-the Pulp and Paper Exchangef or the settlement price of pulp futures, it will expand the path of international development and open up a new opportunity

In the next step, the Shanghai Futures Exchange will continue to take advantage of its location in Shanghai and complete the “Four Major Transformations” under the guidance, that is, strive to achieve the transformation of the main line of business from on-site driving to a two-wheel drive driving the integration of futures and currents. The market layout is transformed from domestic-based to domestic and foreign linkages, the technological strategy is transformed from supporting development to active empowerment. The management model is transformed from traditional operation to modern governance + management. In the process of transformation, the Shanghai Futures Exchange will continue to demand itself with the standard, and provide practical cases for the continuous improvement of the system.

Relying on the new development pattern, accelerate the introduction of the futures law

The Futures Law of the People's Republic of China (Draft) (hereinafter referred to as the draft) has been submitted to the Standing Committee of the 13th National People's Congress for the first review. In the process of soliciting opinions, the academic and practical circles generally believed that the content of the draft was relatively comprehensive and basically feasible. It not only sums up practical experience, but also strives to strengthen the system, pertinence and operability, and at the same time, it also reserves the necessary space for reform and development.

On the one hand, the draft carefully sums up the development experience of the futures market and fully absorbs the existing institutional basis, including the "Administrative Regulations on Futures Trading" and the newly revised Securities Law. At the same time, the beneficial explorations that have achieved results will be consolidated in legal form to further stabilize market expectations and protect the rights of all parties. The draft establishes a protection system for the rights and interests of futures traders, stipulates the principle of suitability for traders, establishes a diversified futures dispute resolution mechanism, and introduces a mediation system and a class action system.

On the other hand, the draft adheres to the direction of marketization, adapts to the development trend of the international futures market, and makes innovative arrangements in terms of the listing mechanism of futures and option products, the business types of futures companies, and the application of extraterritorial laws: establishing a registration system for the listing of futures and option products ; stipulating the business scope and business norms of futures operating institutions; making principled provisions on cross-border jurisdiction and cooperation, etc., which reflects the forward-looking and leading role of legislation.

The current introduction of the futures law is of great significance and is an objective need to achieve the goal of "stabilizing expectations, benefiting the long-term, and strengthening the fundamentals" of the rule of law. China’s futures market needs to firmly adhere to the new development concept, combine the requirements of high-standard market system construction, consolidate the legal foundation for the smooth operation of the financial system, and strengthen the resonance with the spot market. Through in-depth connection with the international market, it will help goods and resources to flow smoothly and optimize the allocation of goods and resources on a global scale, and fulfill the original intention and mission of serving the real economy with high quality.