QFI’s inclusion of Chinese futures and options

On 2 September 2022, the China Financial Futures Exchange (CFFEX), the Shanghai Futures Exchange (SHFE), the Shanghai International Energy Exchange (INE), the Dalian Commodity Exchange (DCE), and the Zhengzhou Commodity Exchange (ZCE) respectively made announcements on the inclusion of eligible futures and options contracts into the permitted scope of Qualified Foreign Investors (QFIs) in response to the long awaited expectations of market. Please see our write-up on A roundup of the reformed QFI rules – what is next? for more details.

We have set out below some highlights in relation to the inclusion of Chinese futures and options.

Clarifying on the Eligible Futures and Options Contracts

Before the implementation of the new QFI rules , overseas entities and individual investors meeting certain eligibility criteria were permitted to trade seven types of commodity futures contracts through the internationalised futures regime, as well as trade stock index futures for hedging purpose under the QFI scheme. Now under the updated QFI policies, 23 commodity futures contracts, 16 commodity options and two index options contracts are now made available for QFIs, which are set out as follows:

Pre-trading Preparations for QFIs

Procedures with China Securities Regulatory Commission (CSRC)

Existing QFI licence holders are required to update their investment plans of existing/new funds and file such plans with CSRC through their QFI custodian banks. Only after CSRC’s approval of such updated investment plans may the QFIs start to invest into Chinese futures and options.

Procedures with the Futures Brokers

QFIs may also start to appoint futures brokers who would assist with applying for the corresponding futures trading codes as an electronic “futures account” to document and record the balance of the futures and options contracts, and open the margin accounts.

If QFIs are to invest into stock index futures, they shall also apply for a hedging quota. Generally, there are three types of trading on financial futures and options, namely hedging (in Chinese 套保), arbitrage (in Chinese 套利) and speculating (in Chinese 投机). Hedging should be subject to the quota issued by futures exchanges that review each entity’s application based on the actual trading needs and is the only available type of quota for QFIs as at today.

Please find more details on how to negotiate a PRC Futures Agreement here.

Procedures with the Custodian Banks

Apart from assisting with the filing of investment plans, QFI custodian banks would usually ask the QFIs to update their existing QFI custody agreements and also assist QFIs with opening up a special RMB deposit bank account for futures trading and link such bank account with the account of futures broker(s) in system for daily margin transferring.

Reporting and Connected Accounts

Similarly as with the domestic investors, QFIs would be required to comply with trading and position limits, as well as large position reporting obligations. They are also expected to comply with the exchange rules against abnormal trading behaviours involving cancellation of orders posted, cross trades, cross-market/cross-contracts manipulation, disruption of market order in the form of programmatic trading, hoarding and etc. Meanwhile, regulators would look at all connected accounts under the control of one and the same client as a whole to determine whether certain position limits are breached or abnormality is committed.

Please see more details on China’s futures trading system here.

Physical Delivery

It is not allowed for QFIs to participate in the physical delivery of futures due to the fact that they cannot receive and issue VAT invoices, which is the pre-requisite of such kind of delivery. Once getting involved in the physical delivery, QFIs would be at risk of a monetary penalty and forced liquidation.

With inclusion of Chinese futures and options under the QFI regime, we would expect to see a more internationalised futures market in China and more optionality and diversification added to the QFI products.

Please note that this article is produced by jointly Simmons & Simmons and Shanghai YaoWang Law Offices.

Should you have any questions or require further assistance regarding any of the above, please do not hesitate to contact us.

Melody Yang
Co-Head, Partner
Shanghai YaoWang Law Offices
T +86 21 8013 5022
M +86 135 2105 2486
melody.yang@yaowanglaw.com