China – SHFE Amends Relevant Rules On Determination And Report Filing Of De Facto Controlled Accounts.

Determination Standards of the De Facto Controlled Account

• In this context, the term “de facto control” refers to the act of having or the fact that an actor (including an individual or an entity) has the authority to manage, use, obtain earnings from or dispose of the futures account of another person (including an individual or an entity) and thus has decision making power or material impact upon another person’s trading decisions.

• The New Measures set out eight detailed circumstances in which an actor may be deemed as having a de facto control relationship with the futures account of another person, on the basis of the principle of “substance over form”.

The relevant provisions under the New Measures are almost the same as those of the Old Provisions, though the following amendments should be noted:

1. The term “material impact” is added as a factor of  determining the De Facto Controlled Account, which means that a de facto control relationship can be established based on the fact that an actor has a material impact on another person’s trading decisions, even without exercising the decision making power on the futures trading activities of that person.

2. The catch-all clause under the Article 5 of the New Measures stipulates that in addition to the SHFE, the China Securities Regulatory Commission also has the discretionary power to determine the De Facto Controlled Account.

Report Filing of the De Facto Controlled Account

• Both the party controlling another person’s futures account and the party whose futures account is controlled by another party shall proactively file information relating to the De Facto Controlled Account with the China Futures Market Monitoring Center (“CFMMC”) through the futures company member in which they opened the futures accounts.

• The SHFE shall establish a sharing mechanism with the CFMMC for information relating to the De Facto Controlled Account, both of which shall only use such information in accordance with the relevant regulations.

• Any client satisfying the determination standards of the De Facto Controlled Account shall complete the filing of such de facto control relationship within ten trading days after executing a futures brokerage agreement. In case of any change to the de facto control relationship, the client or the non-futures company member shall proactively file such change to the CFMMC through the applicable filing agencies within ten trading days of the change.

• The SHFE is entitled to make inquiries in writing to a client, through a futures company member, about an account which is discovered during the self-disciplinary administration as suspected as having a de facto control relationship that has not been filed. The relevant client shall provide a timely response in writing to such inquiry and submit appropriate materials accordingly. The futures company member shall be responsible for forwarding such written explanation materials to the SHFE. 

• If a client or a non-futures company member which holds a De Facto Controlled Account but fails to provide assistance in report filing or during the exchange’s investigation, for example not being truthful when filing the relevant information or replying to the exchange’s enquiry, concealing facts or intentionally evading the exchange’s investigation, the SHFE shall take disciplinary measures such as holding a cautionary conversation, issuing a written warning, restricting opening of new positions or any other measures. In case of serious circumstances, the SHFE shall take further disciplinary measures pursuant to the Measures of the Shanghai Futures Exchange on Dealing with Violations and Breaches. 

Generally speaking, there are two methods for filing the report of a De Facto Controlled Account: the account openers filing to the SHFE on their own initiative; or the regulatory agencies initiating a written inquiry and order for such filing.

Key amendments to the Old Provisions include:

1. The New Measures require information about the De Facto Controlled Account to be ultimately filed to the CFMMC via the futures company member or the exchange, and the CFMMC shall establish an information sharing mechanism with the SHFE.

2. Both the person controlling another person’s futures account and the person whose futures account is controlled by another person are obliged to file the information about the De Facto Controlled Account.

3. The timeframe for the proactive filing is extended from five (5) working days to ten (10) trading days.

4. The filing procedures are clarified in further details.

5. The futures company members shall take additional responsibilities in relation to their clients’ filing obligations.