Trader protection under Futures and Derivatives Law

By Guo Zhongqing, AllBright Law Offices
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China’s Futures and Derivatives Law (FDL), effective since 1 August 2022, is considered vital to the stable development of the futures market, especially to all market participants. It constructs a comprehensive system to protect traders in the futures market.

TRADER SUITABILITY MANAGEMENT

Guo Zhongqing, AllBright Law Offices
Guo Zhongqing
Senior Partner
AllBright Law Offices

Before the implementation of the FDL, the obligation of trader suitability management of futures trading institutions was mainly based on the Measures for the Suitability Management of Securities and Futures Investors, and the Measures for the Supervision and Administration of Futures Companies, both issued by the China Securities Regulatory Commission (CSRC), as well as relevant self-disciplinary rules published by associations and exchanges in the futures industry.

Since the implementation of the FDL, suitability management has been upgraded to a statutory obligation, providing a concrete legal basis for the compensation liability of futures trading institutions in the case of violating the suitability obligation.

CLASSIFICATION AND PROTECTION

One highlight of the trader protection system under the FDL is the classification between ordinary traders and professional traders, with protective measures leaning towards the former.

Shifting burden of proof. Article 51 of the FDL provides that where an ordinary trader is in dispute with a futures trading institution, the institution shall bear the burden of proof that its conduct complies with laws and regulations, and that there are no misleading or fraudulent circumstances.

Compulsory mediation. Article 56 of the FDL provides that where any dispute arises between a trader and a futures trading institution, both parties may apply to an industry association for mediation, and that a futures trading institution shall not refuse an ordinary trader’s request for mediation and must negotiate on the settlement of the dispute, thus increasing the likelihood of settling disputes quickly through mediation.

CLARIFICATION OF DUTY

Clarifying the civil liability of futures market participants. The FDL contains provisions for the civil liability of futures market participants. If a futures trading institution fails to fulfil the suitability obligation, or its service violates laws and regulations or provisions of the futures regulatory agency under the State Council, or there are misleading, fraudulent circumstances that caused losses to traders, it shall be liable for damages. Chapter 12 of the FDL provides for the corresponding penalties for illegal operations of futures trading institutions, as well as compensation liabilities in case traders sustained any losses.

A futures trading venue should take measures against abnormal circumstances in trading in accordance with articles 87 and 89 of the FDL, or compensate losses, if any, caused by material faults.

With regard to futures service institutions, article 134 of the FDL provides that where a futures service institution fails to act with due diligence, and the documents prepared and issued by it contain any false or misleading statement or material omission, which cause losses to others, it shall be liable for damages.

Priority of civil damages. Article 154 of the FDL provides that if the property of the violator in the futures market is insufficient, payment of civil damages shall take precedence over that of administrative fine.

Representative litigation system. Article 57 of the FDL provides that where traders file civil actions for damages caused by futures-related market manipulation or insider trading, they may lawfully recommend and select representatives to participate in the actions as long as the subject matters are of the same kind and either side involves a large number of parties.

UNDERTAKING SYSTEM

The undertaking system refers to the administrative law enforcement method that, during the period when the securities regulatory agency under the State Council investigates an entity or individual suspected of violating securities and futures-related laws, the subject of investigation may undertake to correct its suspected violation, compensate the relevant investors and traders for losses, and eliminate damages or adverse effects. If the undertaking is approved by the securities regulatory agency under the State Council, the agency will terminate the investigation after the subject of investigation has fulfilled its undertaking.

Article 112 of the FDL upgrades the undertaking system in the futures market to a legal institution, which is of great significance in improving the efficiency of law enforcement and restoring market order as soon as possible.

PROTECTING TRADER

The FDL clarifies the rights of traders, specifically:
Right to know. Article 54 of the FDL provides that traders have the right to know about their entrustment records, transaction records, margin balance and other important information related to receiving services, and have the right to make inquiries.

Protection of trader information. Article 55 of the FDL requires all four main types of futures market participants, namely futures trading institutions, futures trading venues, futures clearing institutions and futures service institutions, as well as their staff members, to protect traders’ information and trade secrets.

Prohibiting related personnel from participating in futures trading. Article 53 of the FDL provides that practitioners of futures trading institutions, futures trading venues and futures clearing institutions, staff of futures regulatory agencies under the State Council and futures associations, as well as other persons prohibited from participating in futures trading by any laws, administrative regulations or the rules of the futures regulatory agency under the State Council, shall not trade in futures.

Setting up a trader guarantee fund. Article 58 of the FDL provides that the state shall set up a futures trader guarantee fund. The specific measures for raising, managing and using the fund shall be formulated by the futures regulatory agency under the State Council in conjunction with the finance department under the State Council.

Protecting the rights and interests of traders in the futures market is conducive to attracting more participants in futures and derivatives trading while encouraging fair, just and open trading, thus promoting the development of futures and derivatives markets.

Guo Zhongqing is a senior partner at AllBright Law Offices

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