Companies, Exchanges and Transactions: Regulating the Re-emergence of China's Financial Futures Industry

By Michael G. DeSombre, Robert Chu and Yingmao Tang
Sullivan & Cromwell LLP, Hong Kong and Beijing

Earlier this year, the China Securities Regulatory Commission (CSRC) promulgated the Measures for the Administration of Futures Companies (期货公司管理办法)(Futures Companies Measures), which became effective on April 15 2007, as part of an impressive flurry of legislative and rule-making activities that have yielded a far-ranging array of regulations, measures and other rules concerning futures companies, futures exchanges and their activities. It is both symbolically and substantively significant that the Futures Companies Measures have taken effect on the eve of the expected launch of stock index futures as the first product on the newly established China Financial Futures Exchange (CFFEX) in Shanghai.

The modern history of financial futures in China dates back to 1993, when the Shanghai Stock Exchange introduced futures contracts in China's treasury bonds. Two years later, following a period of aggressive growth accompanied by widely reported abuse that ranged from insider trading to price manipulation, the Shanghai International Securities Company collapsed in the wake of losses amounting to more than Rmb1 billion. These losses apparently were sustained over the course of only a few hours on February 23 1995 and resulted from a combination of poor trades instituted on the basis of partially incorrect insider information, followed by unsuccessful attempts to unwind such trades. Three months later, the CSRC prohibited trading of futures contracts in treasury bonds altogether. As a result, the number of futures exchanges plummeted from over 40 to just three - the Shanghai Futures Exchange, the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, each engaged only in the trading of commodity futures.¹ Refining preliminary rules promulgated in 2002, the Futures Companies Measures represent an important step forward in regulating China's futures industry at the enterprise level, to deploy a critical line of defense against abusive behavior while China's futures industry re-emerges from the setbacks of the 1990s.