CSRC's New Regulations on Programme Trading in the Chinese Futures Market (Consultation Paper)

On 17 January 2025, the China Securities Regulatory Commission (CSRC) released the Regulation Measures on Programme Trading in the Futures Market (Trial) (Consultation Paper) (in Chinese, 期货市场程序化交易管理规定(试行)(征求意见稿)) for public consultation (“Future Programme Trading Rules”).

The draft Futures Programme Trading Rules have not caught the market by surprise, as their main objective is to formalise the informal verbal guidance previously provided by regulators into formal legal regulations without introducing any substantially new requirements.

The draft Futures Programme Trading Rules are structured into 7 chapters and 37 provisions, addressing a wide range of topics, including the definition of programme trading, reporting requirements, direct market access, colocation and seat allocation, trading monitoring and risk management, and supervision mechanisms.

Below are some highlights of the draft Futures Programme Trading Rules:

Scope of application: It is clarified that these provisions apply to all Programme trading activities in the futures market within the People's Republic of China (with ETF options traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange excluded from its scope), regardless of whether such activities are conducted through futures brokers or directly by non-member participants.

Notably, the draft Futures Programme Trading Rules state that futures exchanges will issue separate rules for market makers who use programme trading to conduct market-making activities, following the principles established in the draft Futures Programme Trading Rules.

Reporting obligations: Under current practice, before commencing any programme trading activities, all investors (including overseas investors as well as QFIs) must ensure that they have filed and reported their programme trading activities, along with essential information on accounts, trading and software details to the relevant futures exchange (which is a de facto review and approval process from the futures exchange). This process needs to be completed by a futures broker that is a member of the relevant futures exchange. Such process is formalised by the draft Futures Programme Trading Rules, which further stipulate that clients are not allowed to begin programme trading until they receive confirmation from the futures exchange.

In addition, for high-frequency trading (HFT) players, additional disclosures are also required, such as the type and key aspects of trading strategies, the maximum frequency of order cancellations, the highest daily count of order cancellations, server locations, technical system testing reports, contingency plans, and risk control measures. It appears that the draft Futures Programme Trading Rules have not deviated from the existing requirements but raised heightened disclosure requirements on HFT players.

Emphasis on market abnormalities: In the past, futures exchanges already issued very robust mechanisms in place to prevent market abnormalities. The draft Futures Programme Trading Rules have now set out the following principles to target major market abnormalities such as spoofing and reduce the impact the HFT activities may have when requiring immediacy during their trading process. Please note that whilst Items (A) and (B) sound similar to those in the existing rules, Item (C) seems to be newly introduced to elaborate on market abnormality in relation to programme trading.

(A) Excessive order placements or cancellations within a short timeframe or during a single trading day that exceed predefined thresholds;

(B) High order-to-trade ratio, either within short periods or over the course of a trading day, reaching established limits;

(C) Large, consecutive, or dense order placements within a short period that meet certain thresholds, with noticeable abnormalities in futures trading prices or volumes;

(D) Other circumstances identified by the futures exchange that warrant close supervision and monitoring.

DMA and Colocation: In the past, clients are permitted to utilise direct market access (DMA) and colocation to obtain market data or engage in programme trading of Chinese futures quantitatively. The draft Futures Programme Trading Rules reaffirm these arrangements while clarifying the risk management responsibilities of futures brokers.

Clients are also barred from using systems for illegal purposes, including connecting to unauthorised external systems, or transferring or leasing system usage rights to third parties, which appear to challenge the feasibility of swap investors using the brokers’ colocation arrangements.

High-frequency trading: Similar to another piece of regulation released by the CSRC concerning programme trading in the securities market on October 9, 2024 (please read the full article here). The definition of programme trading for the futures market is defined as the use of computer programmes to automatically generate or execute trading instructions.

HFT is defined as programme trading with one or more of the following characteristics, with extra reporting obligations attached, and detailed criteria to be further established by futures exchanges:

(A) Significant number of orders or a rapid frequency of both order placements and cancellations that occur within a very short timeframe;

(B) High volume of order placements and cancellations that take place during the course of a single trading day;

Under current practice and based on informal verbal guidance previously conveyed from futures exchanges to brokers, the quantifiable criteria for identifying “programme trading” in the futures market captures scenarios where a single client executes five or more order placements (regardless of the underlying contract) on at least five occasions within one second on the same trading day. It remains to be seen whether futures exchanges will follow the current quantifiable criteria or release more detailed rules regarding programme trading or high-frequency trading.

Moreover, the proposed draft of the Futures Programme Trading Rules also provides greater clarity regarding the possibility for futures exchanges to adopt a differentiated or tiered transaction fee structure specifically tailored for HFT transactions. We understand that this change is intended to address the various cost issues associated with HFT activities. However, detailed rules from the futures exchanges are yet to be released and remain to be observed.

It is also worth noting that investors who are non-member participants (e.g. Overseas Special Participant, an overseas institution that satisfies the prescribed conditions of the CSRC and the futures exchange, and is approved to trade directly at the futures exchange) are only permitted to take part in programme trading but are not allowed to engage in HFT.

Conclusion

In 2025, the market is likely to witness the issuance of more detailed standards and regulations governing programme trading in both securities and futures markets. These will include detailed transparency and reporting requirements, tiered fee structures associated with HFT, and heightened regulations over order execution, risk management and market conduct.

Please note that this article is produced by jointly Simmons & Simmons and Shanghai YaoWang Law Offices.

Should you have any questions or require further assistance regarding any of the above, please do not hesitate to contact us.

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