Several Issues Concerning the Trial of Futures Dispute Cases Provisions

(Promulgated by the Supreme People's Court on June 18 2003 and effective as of July 1 2003.)

These Provisions concerning several issues in the trial of futures dispute cases have been formulated pursuant to such relevant laws and administrative statutes as the PRC Civil Law General Principles, the PRC Contract Law, the PRC Civil Procedure Law (2nd Revision), etc. and in the light of practical judicial experience, in order to correctly try futures dispute cases.

1. General Provisions

Article 1: When trying futures dispute cases, people's courts shall protect the lawful rights and interests of the concerned parties in accordance with the law, correctly determine the risk liability that they are to bear and safeguard the order of the futures market.

Article 2: When trying futures contract dispute cases, people's courts shall determine the liability bearable by the party in breach in strict accordance with the provisions of the contract between the parties, unless such provisions violate the mandatory provisions of laws or administrative statutes.

Article 3: When trying futures tort dispute cases or invalid futures trading contract dispute cases, people's courts shall determine the civil liability bearable by the party at fault on the basis of whether any party is at fault, the nature and seriousness of the fault and the causal relationship between the fault and the loss.

2. Jurisdiction

Article 4: People's courts shall determine jurisdiction over futures dispute cases in accordance with Articles 24, 25 and 29 of the Civil Procedure Law.

Article 5: When a branch, business office or other such establishment of a futures company executes a futures trade, the place of domicile of such establishment shall be the place of performance of the contract.

If a dispute arises over the delivery of actuals, the place of domicile of the futures exchange shall be the place of performance of the contract.

Article 6: In a futures dispute case that concurrently involves tort and breach of contract, jurisdiction shall be determined in accordance with the cause of action selected by the party concerned. If the party institutes an action both on the grounds of breach of contract and on the grounds of tort, jurisdiction shall be determined in accordance with the claim listed first on the complaint by the party.

Article 7: Futures dispute cases shall come under the jurisdiction of intermediate people's courts.

As needed, higher people's courts may designate certain basic level people's courts to accept futures dispute cases.

3. Liable Entity

Article 8: The civil liability arising from futures trades executed by the personnel of a futures company within the scope of business of such company shall be borne by the company.

Article 9: If a futures company authorized persons other than its employees to execute futures trades in its name, the futures company shall bear the civil liability arising from such trades. If persons other than futures company personnel executed futures trades in the name of a futures company and such persons satisfied the conditions of apparent authority specified in Article 49 of the Contract Law, the futures company shall bear the civil liability arising therefrom.

Article 10: If a citizen or a legal person was engaged by a futures company or a client as an intermediary to provide it/him with opportunities to conclude contracts or intermediary services for the conclusion of futures brokerage contracts, the futures company or client shall remunerate the intermediary in accordance with the agreed upon terms. The intermediary shall independently bear the civil liability arising from the intermediary broker relationship.

Article 11: If a unit or individual executed futures trades while using a fake identity and the futures trades it/he executed complied with the trading rules of the futures exchange, the consequences of such trades shall be borne by itself/himself.

Article 12: Where a futures company's branch, business office or other such establishment with a business licence and a business permit engaged in business activities exceeding the scope of business of such establishment, the civil liability arising therefrom shall be borne by the futures company if the said establishment cannot bear the same.

If a client was at fault, the client shall bear the attendant civil liability.

4. Liability for Invalid Contracts

Article 13: A futures brokerage contract shall be determined invalid in any of the following circumstances:

(1) futures brokerage business was engaged by anyone not qualified to act as a party in such business;

(2) futures trades were concluded by a client that was not qualified to be a party to such trades; or

(3) prohibitory provisions of laws or statutes were violated.

Article 14: If the invalidity of a futures brokerage contract caused a client to incur financial loss, the issue of which party shall be liable therefor shall be determined on the basis of the causal relationship between the invalid act and the loss. If either party's loss arose as a result of an act of the other party, the other party shall compensate for such loss; if both parties are at fault, the parties shall bear the attendant civil liability based on the seriousness of their respective faults.

Article 15: If a business organization caused a futures brokerage contract to be invalid by engaging in futures brokerage business without being qualified to act as a party in such business, and such organization traded on the market on the basis of the orders of the client, it shall refund to the client the commissions that it charged and the client shall bear the consequences of the trade.

If the organization traded on the market in violation of the orders of the client and if the client was faultless, the organization shall refund the client's margin and compensate for his loss. The scope of the damages shall include the transaction levies, taxes and interest.

5. Trading Liability

Article 16: If a futures company failed to bring the Explanation of Futures Trading Risks to the attention of a client when it concluded a futures brokerage contract with such client and the client signed or sealed such contract, the futures company shall bear the attendant liability for damages in respect of the loss incurred by the client during trading in accordance with item (3) of Article 42 of the Contract Law. However, the futures company shall be released from such liability if the records of past trading results establish that the client has a trading history.

Article 17: If a futures company accepted a client's instructions to trade in futures at the company's discretion, it shall bear the main liability for damages in respect of the trading losses incurred, but the measure of damages shall not exceed 80% of the losses, unless otherwise specified in laws or administrative statutes.

Article 18: If the futures brokerage contract between a futures company and a client made no provision for the method of giving orders or if the provisions thereon are not explicit and if the futures company is unable to prove that the trades it executed were executed in accordance with the instructions of the client, the futures company shall be liable for the loss incurred by the client through such trades, unless the client subsequently ratified the trades.

Article 19: If a futures company executed an order from an unauthorized person, thus causing a client to incur a loss, the futures company shall be liable for compensation and the unauthorized person shall bear joint and several liability, unless the client subsequently ratified the trade.

Article 20: If the order given by a client did not specify the commodity, quantity or whether it was a sale or purchase order, and if the futures company did not refuse the order and executed a trade, thus causing the client to incur a loss, the futures company shall be liable for compensation, unless the client subsequently ratified the trade.

Article 21: If the order given by a client explicitly provided for the quantity and specified whether it was a buy or a sell order but had no term of validity, it shall be deemed to have been a day order. If no execution price was specified, it shall be deemed to have been a market order. If no indication was made as to whether the order was for an opening trade or a closing trade, it shall be deemed to have been for an opening trade.

Article 22: If a futures company wrongly executed a client's order, the consequences of the trade, unless accepted by the client, shall be borne by the futures company and be dealt with as follows:

(1) if there was an error in the quantity traded such that the quantity traded was greater than the quantity instructed, the excess quantity shall be borne by the futures company; if the quantity traded was less than the quantity instructed, the futures company shall make up the shortfall or compensate for the direct loss;

(2) if the execution price exceeded the price range in the client's instruction, the loss resulting from the execution price differential or the consequences of the trade shall be borne by the futures company.

Article 23: If a client incurred a loss due to a futures company's unjustified delay in executing the client's order, the futures company shall be liable for compensation, unless the client's order could not be fully or partially executed due to a reason attributable to the market, in which case the futures company shall not be liable.

Article 24: If a futures company exceeded a client's instructed price range by selling at a price higher or buying at a price lower than the client's instructed price and subsequently appropriated the profits from the price differential to its own use, and if the client demands that the futures company return him such profits, the people's court shall support the client, unless the futures company and the client have agreed otherwise.

Article 25: If a futures exchange failed to notify a futures company of the settlement results of trades or positions by the time limit and in the manner specified in the trading rules, thereby causing the futures company to incur losses, the futures exchange shall be liable for compensation.

If a futures company failed to notify a client of the settlement results of trades or positions by the time limit and in the manner specified in the futures brokerage contract, thereby causing the client to incur losses, the futures company shall be liable for compensation.

Article 26: If a futures company and its client did not stipulate the method of notification of trade settlement results or if such stipulations were not explicit, and if the futures company is unable to present evidence proving that it gave such notice, it shall bear the main liability for damages in respect of the increase in the loss incurred by the client due to his continuing to hold the position. The measure of damages shall not exceed 80% of the loss.

Article 27: The confirmation by a client of the trade settlement results of that day shall be deemed confirmation of the settlement results for all positions and trades before that day, and the trading consequences arising therefrom shall be borne by the client.

Article 28: If a futures company raised an objection against a trade settlement result and the futures exchange failed to take timely measures, thus causing the loss to increase, the futures exchange shall be liable for compensation for the caused increase in the futures company's loss.

If a client raised an objection against a trade settlement result and the futures company failed to take timely measures, thus causing the loss to increase, the futures company shall be liable for compensation for the increase in the client's loss.

Article 29: If a futures company had an objection against the result of a trade settlement by the futures exchange or a client had an objection against the result of a trade settlement by the futures company but failed to raise it within the period of time specified in the trading rules of the futures exchange or in the futures brokerage contract, the futures company or the client shall be deemed to have confirmed the trade settlement result.

Article 30: If a futures company commingles funds in the accounts of two or more clients to execute a single trade, the clients shall not be liable, unless the futures company is able to present evidence that it traded on the market as per the orders of the clients, in which case the clients shall bear the corresponding trading consequences.

6. Liability for Trading on Overdraft

Article 31: If a futures exchange permitted a futures company to open positions and trade or to continue holding positions without or under margin, the futures company shall be deemed to have traded on overdraft.

If a futures company permitted a client to open positions and trade or to continue holding positions without or under margin, the client shall be deemed to have traded on overdraft.

When examining whether a futures company or client has traded on overdraft, the criterion shall be the margin ratio specified by the futures exchange.

Article 32: If a futures company's trading margin was inadequate and the futures exchange failed to issue a margin call to the futures company in accordance with provisions, the futures exchange shall bear the main liability for damages in respect of such increase in the futures company's overdraft loss as resulted from the market's moving against its positions. The measure of damages shall not exceed 60% of the loss.

If a client's trading margin was inadequate and the futures company failed to issue a margin call to the client in accordance with the agreed upon provisions, the futures company shall bear the main liability for damages in respect of such increase in the futures company's overdraft loss as resulted from the market's moving against his positions. The measure of damages shall not exceed 80% of the loss.

Article 33: If a futures company's trading margin was inadequate and the futures exchange performed its notification obligation, whereupon the futures company failed to deposit additional margin in a timely manner but requested that its positions be retained, and if a written consensus was reached thereon, the loss incurred during the period that the positions are retained shall be borne by the futures company. Losses arising from the account's being in a deficit position shall be borne by the futures exchange.

If a client's trading margin was inadequate and the futures company performed its notification obligation, whereupon the client failed to deposit additional margin in a timely manner but requested that its positions be retained, and if a written consensus was reached thereon, the loss incurred during the period that the positions are retained shall be borne by the client. Losses arising from the account's being in a deficit position shall be borne by the futures company.

Article 34: If a futures exchange permitted a futures company to open positions and trade on overdraft, the futures exchange shall bear the main liability for damages in respect of the losses resulting from the trading on overdraft. The measure of damages shall not exceed 60% of the losses.

If a futures company permitted a client to open positions and trade on overdraft, the futures company shall bear the main liability for compensation for damages in respect of the trading on overdraft. The measure of damages shall not exceed 80% of the losses.

Article 35: If a futures exchange permitted a futures company to trade on overdraft and agreed with it to share profits and risks, the futures exchange shall bear corresponding liability for compensation for losses resulting from the trading on overdraft.

If a futures company permitted a client to trade on overdraft and agreed with him to share profits and risks, the futures company shall bear corresponding liability for compensation for losses resulting from the trading on overdraft.

7. Liability for Forced Liquidation

Article 36: If a futures company's trading margin was inadequate and it failed to deposit additional margin within the time limit specified by the futures exchange, the matter shall be dealt with in accordance with the trading rules. If the rules are unclear, the futures exchange shall have the right to forcibly liquidate its open futures contracts and the losses arising from such forced liquidation shall be borne by the futures company.

If a client's trading margin was inadequate and he failed to deposit additional margin within the time limit specified in the futures brokerage contract, the matter shall be dealt with in accordance with the provisions of the futures brokerage contract. If the provisions are unclear, the futures company shall have the right to forcibly liquidate his open futures contracts and the losses arising from such forced liquidation shall be borne by the client.

Article 37: If a futures exchange was required to carry out forced liquidation due to overtrading or other violation of provisions by a futures company, the losses arising from the forced liquidation shall be borne by the futures company.

If a futures company was required to carry out forced liquidation due to overtrading or other violation of provisions by a client, the losses arising from the forced liquidation shall be borne by the client.

Article 38: If a futures company's or a client's trading margin was inadequate and satisfied the conditions for forced liquidation, and if the futures company or the client should have effected liquidation itself/himself but failed to do so, such increase in the loss as resulted from that failure shall be borne by the futures company or the client itself/himself, unless laws or administrative statutes provide otherwise or the parties have agreed otherwise.

Article 39: The amount of a forced liquidation by a futures exchange or a futures company shall be basically equivalent to the amount of additional margin that the futures company or the client is required to deposit. Losses arising from excess liquidation shall be borne by the party, which effected the forced liquidation.

Article 40: If a futures exchange failed to effect forced liquidation in respect of a futures company in accordance with the conditions for and time and method of forced liquidation specified in the trading rules of the futures exchange or if a futures company fails to effect forced liquidation in respect of a client in accordance with the conditions for and time and method of forced liquidation specified in the futures brokerage contract, causing the futures company or the client to incur a loss, the futures exchange or futures company shall be liable for compensation.

Article 41: The expenses arising from a forced liquidation effected by a futures exchange in accordance with the law or in accordance with the trading rules shall be borne by the futures company against which the forced liquidation was effected. After the futures company has borne liability, it shall have the right of recourse against the client at fault.

The expenses arising from a forced liquidation effected by a futures company in accordance with the law or in accordance with the agreed upon terms shall be borne by the client.

8. Liability for Physical Delivery

Article 42: If a delivery warehouse caused a warehouse receipt holder to incur a loss due to its failure to perform its goods acceptance responsibilities or to take due care of the goods, it shall bear liability for compensation.

Article 43: If a futures company failed to perform the obligation of applying for delivery on behalf of the client, it shall bear liability for breach of contract. If the client incurred a loss as a result thereof, the futures company shall bear liability for compensation.

Article 44: A selling futures company's failure to deliver a standard warehouse receipt to the futures exchange by the delivery date or a buying futures company's failure to pay the full amount into the futures exchange's account by the delivery date constitutes a delivery default.

In the event of a delivery default, the defaulting party shall be liable for breach of contract. If the event of default is characterized by the circumstance specified in Item (4) of Article 94 of the Contract Law, the other party shall have the right either to demand termination of delivery or to demand that the defaulting party continue delivery.

If an invitation to purchase or auction failed, the defaulting party shall be liable for compensation in accordance with the provisions on compensation methods of the futures exchange.

Article 45: If a buying or selling client defaulted during the futures contract delivery term, the default liability to the other party shall be borne by the futures exchange on behalf of the futures company and by the futures company on behalf of the client.

Article 46: If a buying client did not raise any objections as to the quality or quantity of the goods within the time limit specified in the trading rules of the futures exchange, he shall be deemed to have no objection against the quantity or quality of the goods.

Article 47: If a delivery warehouse failed to deliver to a standard warehouse receipt holder goods complying with the requirements of the futures contract within the time limit specified in the trading rules of the futures exchange, thus causing the standard warehouse receipt holder to incur a loss, the delivery warehouse shall be liable and the futures exchange shall bear joint and several liability.

After the futures exchange has borne liability, it shall have recourse against the delivery warehouse.

9. Liability for Ensuring the Performance of Contracts

Article 48: If a futures company failed to perform its appropriate monetary payment obligations in accordance with the requirements of the marked-to-market system and the futures exchange also failed to perform the same on behalf of the securities company, thus causing the other party to the trade to incur a loss, the futures exchange shall be liable for compensation.

After the futures exchange has performed the obligations on behalf of the futures company or assumed liability for compensation, it shall have recourse against the party, which failed to perform its obligation.

Article 49: If a futures exchange failed to perform a futures contract on behalf of a futures company, the futures company shall assert rights against the futures exchange at the request of the client.

If the futures company refuses to assert rights against the futures exchange at the request of the client, the client may institute an action directly against the futures exchange and the futures company may participate in the action as a third party.

Article 50: If a futures company or a client incurred a direct financial loss due to the publication of wrong information or the wrong handling of an order attributable to a fault on the part of the futures exchange, the futures exchange shall bear liability for compensation, unless it can prove that such error was due to force majeure.

Article 51: If a client incurred a loss due to the futures exchange's taking reasonable contingency measures in accordance with relevant provisions to deal with an extraordinary situation that arose in the futures market, the futures exchange shall not be liable for compensation.

If a futures company implemented the reasonable contingency measures of the futures exchange and thereby caused a client to incur a loss, the futures company shall not be liable for compensation.

10. Tort Liability

Article 52: If a futures exchange or futures company deliberately provided false information to mislead a client into placing an order, the futures exchange or futures company shall bear the financial loss incurred by the client.

Article 53: If a futures company bucketed a client's order by cross-trading, taking an opposite position for its own account, etc., such act shall be determined to be null and void and the futures company shall compensate the client for the financial loss he incurred as a result thereof. If both the futures company and the client are at fault, they shall severally bear liability for compensation in proportion to the seriousness of their respective faults.

Article 54: If a futures company executed a trade in the name of a client without authorization, it shall bear the loss incurred as a result thereof, unless the client ratified the results of the trade.

Article 55: If a futures company misappropriated a client's margin, or if it transferred a client's margin in violation of relevant provisions, thereby causing the client to incur a loss, the futures company shall be liable for compensation.

11. Burden of Proof

Article 56: The futures company shall bear the burden of proof as to whether an order from a client was executed on the market.

In confirming whether a futures company executed a client's order on the market, the criterion shall be whether the commodity, the direction (i.e. sale or purchase), the price and the transaction time on the futures exchange's trading record, those on the trade settlement result communicated by the futures company and those on the client's order record are consistent with each other; and reference may be made to the quantity ordered to be traded, unless the client has counterevidence establishing that the order was not executed on the market.

Article 57: If a futures exchange issued a margin call to a futures company and the futures company denies that it received such call, the futures exchange shall bear the burden of proof.

If a futures company issue a margin call to a client and the client denies that he received such call, the futures company shall bear the burden of proof.

12. Preservation and Enforcement

Article 58: If a people's court preserves the membership fee or trading seat corresponding to a membership, it shall issue a ruling in accordance with the law that such membership may not be assigned, but it may not halt the use of the member's trading seat. During the enforcement process, the people's court shall have the right to enforce the assignment of such trading seat.

Article 59: If a futures exchange or a futures company is a debtor, the people's court may not freeze or transfer the funds in the margin accounts of futures companies with the futures exchange or the funds in the margin accounts of clients with the futures company.

If there is evidence establishing that there are funds in such a margin account that exceed the futures company's or the client's equity and the futures exchange or futures company fails to present evidence to the contrary within the reasonable time limit designated by the people's court, the people's court may, in accordance with the law, freeze or transfer those funds in the account that belong to the futures exchange or futures company.

Article 60: If a futures company is a debtor, the people's court may not freeze or transfer any part of the minimum clearing margin (deposited in the dedicated clearing account as a futures contract performance bond), which is not tied up by futures contracts. If the futures company has closed out all of its positions and paid back its clients' funds in full, the people's court may, in accordance with the law, freeze or transfer the clearing margin.

If the futures company has other property, the people's court shall first freeze, place under seal or subject to enforcement the futures company's other property in accordance with the law.

Article 61: If a client or a member trading for his own account is a debtor, the people's court may, in accordance with the law, take preservation or enforcement measures against his margin or open positions.

13. Miscellaneous Provisions

Article 62: For the purposes of these Provisions, the term "futures company" means a business organization that, having lawfully received approval, engages in futures trading as agent for investors, as well as such business organization's establishments as branches, business offices, etc. The term "client" means an investor that instructs a futures company to engage in futures trading.

Article 63: These Provisions shall be implemented as of July 1 2003.

Futures trading activities occurring and infringements committed prior to July 1 2003 shall be governed by relevant provisions in effect at such time. If the provisions in effect at such time are not explicit, such activities and infringements shall be handled with reference to these Provisions.