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On 13 October 2021, China’s financial regulator CSRC announced that in addition to the investable stock index futures, starting from 1 November 2021, QFIs will be eligible to trade commodity futures, commodity options and stock index options, of which trading in stock index options shall be limited for the sole purpose of hedging (i.e., no speculation).

 

Following CSRC’s announcement, on 2 September 2022, the relevant futures exchanges in China issued implementing rules, which clarified the scope of eligible commodity futures and options and elaborated on other issues such as futures margin depository banks, account opening and investor suitability.

 

1.Investable Financial Derivatives

 

For your easy reference, we have summarized below all financial derivatives that QFI is allowed to invest in, to date.

 

Futures Exchange	Tradable Futures by QFI	Tradable Options by QFI
China Financial Futures Exchange (CFFEX)	✔️ CSI300 Index ✔️ CSI500 Index ✔️ CSI1000 Index ✔️ SSE50 Index (Hedging purpose only)	✔️ CSI300 Index ✔️ CSI1000 Index (Hedging purpose only)
Shanghai Futures Exchange (SHFE)	✔️ Gold ✔️ Silver ✔️ Copper ✔️ Aluminum ✔️ Zinc ✔️ Steel Rebar ✔️ Hot Rolled Coils	✔️ Gold ✔️ Copper ✔️ Aluminum ✔️ Zinc
Shanghai Internal Energy Exchange (INE)	✔️ Crude Oil ✔️ TSR20 ✔️ Low Sulfur Fuel Oil ✔️ Bonded Copper	✔️ Crude Oil
Dalian Commodity Exchange (DCE)	✔️ No. 1 Soybean ✔️ No. 2 Soybean ✔️ Soybean Meal ✔️ Soybean Oil ✔️ RBD Palm Olein ✔️ Iron Ore ✔️ LLDPE	✔️ No. 1 Soybean ✔️ No. 2 Soybean ✔️ Soybean Meal ✔️ Soybean Oil ✔️ RBD Palm Olein ✔️ Iron Ore ✔️ LLDPE
Zhengzhou Commodity Exchange (ZCE)	✔️ PTA ✔️ Methanol ✔️ White Sugar ✔️ Rapeseed Oil ✔️ Polyester Staple Fiber	✔️ PTA ✔️ Methanol ✔️ White Sugar ✔️ Rapeseed Oil

 

2.Update of Investment Plan

 

When a foreign investor applies for QFI license with CSRC, it needs to submit its investment plan in China with QFI license. It shall be noted that such foreign investor is required to undertake to CSRC that it will keep its investment activities consistent with the investment plan and will update the investment plan with CSRC in advance if there is any change.

 

Therefore, those foreign investors that have obtained a QFI license from CSRC may need to update its investment plan with CSRC before commencing trading the above-mentioned commodity futures, commodity options or stock index options.

 

3.Negotiating a Brokerage Agreement

 

China’s Futures and Derivatives Law (“FDL”) has taken effect since 1 August 2022, which is a big leap forward in terms of futures and derivatives legislation.

 

When negotiating the brokerage agreement with local brokers, QFIs need to note relevant legal updates behind the FDL.

 

Just taking margins for futures trading as an example, please see some of the key changes below.

 

Administrative Regulations on Futures Trading (Revised in 2017)	Futures and Derivatives Law	Notes
When the margin of a customer is insufficient, the customer shall supplement margin or close out the position. Where the customer fails to supplement margin or close out the position within the period specified by the futures company, the futures company shall carry out forced liquidation of the customer's contract and relevant expenses and losses thus incurred shall be borne by the customer.	Where the margin of a trader fails to meet the standards agreed upon between a clearing participant and the trader, the clearing participant shall, in accordance with the agreement, notify the trader to provide additional margin or close the position voluntarily within the agreed time limit; if the trader fails to do so within the agreed time limit, the position shall be closed out forcibly as agreed.	Forced liquidation shall be subject to mutual agreement. It leaves room for negotiation when signing the brokerage agreement, although in practice it is hard to convince the broker.
The margin collected by a futures company from any customer is owned by that customer and shall not be used for any purpose unless transferred as follows: …	Prior to the completion of clearing and delivery, no one may use the margin to be used for a performance guarantee and delivery or the deliverable property which has entered delivery proceedings.	FDL keeps silent on the ownership issue. Further legal analysis based on actual situations shall be made.

 

4.More to be Expected

 

Still, QFIs are looking forward to more eligible investments in the future, such as Treasury Bond Futures and ETF Options.