QFI - Negotiating a Securities Brokerage Agreement

The Implementation Rules for Programme Trading Management ("Implementation Rules"), which were released by the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) on 3 April 2025, officially came into effect on 7 July 2025.

We have observed an uptick in QFIs' interest in investing in Chinese equities since programme trading has been regularised and Chinese regulators have vowed to launch a series of policies to boost the stock market.

In light of these developments, we have set out below a number of items to assist QFIs in understanding market practices and navigating negotiations with PRC brokers regarding securities brokerage agreements, ensuring their operations align with domestic market practices as well as international standards.

Key Considerations for Negotiating Securities Brokerage Agreements

• SAC's Template and Brokerage Agreement – In terms of market practice, each broker typically has its own standard form of securities brokerage agreement, which is developed based on the Securities Association of China (SAC) template. While these agreements broadly cover the same grounds, the structure and nuanced terms may differ due to the brokers' respective internal control policies and commercial practices. If the arrangement involves multiple brokers, it is advisable to negotiate these agreements in parallel to reconcile terms as much as possible and secure a consistent and more favourable set of terms across all brokers.

• Agency Model – In the context of securities brokerage agreements, the market practice in China is for the QFI licence holder, often the fund manager, to act as the contracting party rather than the fund itself. This differs from global practice, where the fund would typically be the contracting party. This distinction arises because open-ended funds in China are generally not structured as separate legal entities, and brokers and other QFI service providers customarily require the QFI licence holder to be directly accountable. To address this, it is crucial to ensure that the QFI acts solely as an agent and that risks are appropriately allocated among the QFI, the fund, and the broker. In particular, there should be no recourse to the assets of the broker or other funds managed by the same QFI licence holder.

• Pre-Execution Checking and Procedures for Erroneous Transaction Handling – The CSRC requires that the QFI, its custodian, and broker agree in writing on procedures to handle erroneous trading and risk allocation. Therefore, it is important to reconcile the procedures for handling erroneous trading among the manager, broker, and custodian and ensure that the relevant provisions across QFI custody agreements and brokerage agreements are consistent.

• Order Transmission/DMA – Under Chinese rules, Direct Market Access (DMA) is defined as connecting clients' trading systems directly with the exchanges via the broker's trading counter. Chinese regulators halted DMA in 2015, and while this restriction has not been fully lifted, brokers now offer various alternatives that can partially address the DMA issue. Such arrangements should be reviewed and reflected in the order transmission clauses.

• Fee Transparency – When engaging with brokers, it is important to demand full clarity on all potential fees involved. This includes, but is not limited to, commissions, charges, taxes, transaction fees, stamp duty pass-through charges, penalties for failed trades, connectivity fees, and other related costs.

• Risk Allocation and Liability Limitations – QFI securities brokerage agreements typically start with extensive liability exclusions in favour of the brokers. It is advisable to carve out liabilities arising from the broker's fraud, gross negligence, or wilful misconduct. Furthermore, given that separate and distinct agreements apply to different financial instruments (e.g., cash equities, futures contracts, or securities lending and borrowing), cross-default provisions are unnecessary in the QFI context.

• Boilerplates – Boilerplate clauses are important to ensure consistency across different QFI documents. For example, in dispute resolution clauses, while using foreign law as the governing law may be impractical and cause enforcement issues, arbitration is the market standard. Depending on the preferences of brokers, the selection of the arbitration venue may also be a focal point in negotiations. For instance, Chinese domestic brokerage houses often prefer domestic arbitration tribunals such as CIETAC over overseas options. It is essential to ensure that the arbitration clause is meticulously drafted to cover all necessary aspects of the agreement and that it remains enforceable under PRC law.

Summary

It is important to note that the securities brokerage agreement itself does not address market abnormalities. Regulators expect QFIs to hold ultimate responsibility for their trading activities onshore. For QFIs trading systematically, it may be difficult to rely solely on brokers to carry out effective and timely control, monitoring, and surveillance. This challenge is even more pronounced for multi-strategy manager QFIs, which may face complexities in reconciling their internal and external trading platforms.

This article underscores Simmons & Simmons' and our alliance firm in PRC, YaoWang Law Offices' commitment to delivering timely insights that help clients and industry stakeholders navigate complex regulatory landscapes.

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

Please also refer to our regulator update on QFI – negotiating a futures brokerage agreement via this link.