China Futures Law: netting, collateral and prudential requirements for banks

13/07/2021

The Standing Committee of the National People’s Congress of the People’s Republic of China (the “NPC”) published a draft Futures Law in May. The main purpose of the Futures Law is to codify the law in relation to futures (being standardized exchange-traded derivatives). The Futures Law also regulates other markets, including over-the-counter or “OTC” derivatives and includes protection for close-out netting for OTC derivatives. It will therefore alter the way in which European and UK financial institutions are able to treat their exposures to Chinese counterparties, and institutions will also need to review the impact on collateral arrangements and other regulatory risk mitigation requirements. The Futures Law is a welcome development and is part of a number of recent initiatives to update the legal framework for financial markets in China, and is consistent with reforms of the derivatives markets that have been adopted by major financial centres globally.