Derivatives and Structured Products in China

Derivatives in China: the legal foundation

Derivatives in China now rest on a statute, the Futures and Derivatives Law, which took effect on 1 August 2022 and gave the market a legal base for the first time. It confirms that a master agreement together with its supplements and confirmations forms a single agreement, recognises close-out netting where parties trade under a master agreement, and provides that netting carried out in accordance with the agreement is not suspended, invalidated or set aside because a party enters bankruptcy proceedings.

The law also covers central counterparty clearing and settlement finality, cross-border application and supervision. Its cross-border provisions allow Chinese regulators to act against conduct outside China that disrupts the domestic market or harms domestic investors, which matters to offshore dealers trading China-linked products. The text is available on the NPC national laws database.

The main milestones for international participants are set out below.

Where derivatives in China are traded

Derivatives in China are traded in three main venues: exchange-traded futures and options on the futures exchanges and stock exchanges; the interbank market, where banks trade interest rate swaps, FX forwards, swaps and options and credit derivatives through the China Foreign Exchange Trade System (CFETS); and the over-the-counter (OTC) market of securities and futures firms, which offer equity swaps, total return swaps and OTC options to institutional clients. Banks also sell structured deposits and structured notes linked to rates, FX, commodities or equities.

The venue determines the documentation, the supervisor and the dispute forum, so the first question in any China-linked derivatives relationship is where the trade will be booked and by which entity.

Master agreements and netting

For foreign dealers, the key question is whether close-out netting would be respected if a Chinese counterparty became insolvent. The Futures and Derivatives Law significantly improved the position for trades under master agreements, and industry netting opinions have been updated accordingly. A PRC netting opinion should be obtained from licensed PRC counsel. Points still to check for each counterparty include:

• the counterparty's legal form, licence and regulator, since netting analysis differs for banks, insurers, securities firms, funds and ordinary companies;
• whether the agreement is a recognised master agreement and how confirmations are linked to it;
• collateral arrangements, including the treatment of title transfer collateral and the perfection of pledges;
• whether the counterparty is a branch or a separate legal entity, and which insolvency regime would apply;
• any special resolution powers that a regulator could exercise over a distressed financial institution.

The CSRC's 2026 derivatives trading measures

On 15 May 2026 the China Securities Regulatory Commission issued the Derivatives Trading Supervision and Administration Measures (Trial), which take effect on 16 November 2026. They implement the Futures and Derivatives Law for derivatives other than futures, including swaps, forwards, non-standard options and combinations, and set rules on trading and settlement, traders, dealers, market infrastructure and supervision. Key points include:

• securities and futures firms applying to act as derivatives dealers must have maintained net capital of at least RMB 500 million continuously over the most recent six months, a threshold the CSRC may raise on prudential grounds;
• the executive responsible for derivatives business must have relevant experience;
• investor suitability requirements and real-name account rules apply to traders;
• firms that do not meet the requirements may not take on new derivatives business, and existing positions run off at maturity.

The measures form part of a wider tightening after the State Council's 2024 opinions on strengthening capital market supervision. Announcements are published on the CSRC website. Quantitative and programme trading rules are discussed on our page on quantitative and programme trading rules.

For international counterparties the measures raise three practical decisions. The first is counterparty selection: whether an existing onshore or Hong Kong-linked dealer will qualify, and what happens to open trades if it does not. The second is onboarding: suitability questionnaires, real-name account information and beneficial ownership details may need to be refreshed. The third is product design: structures that previously relied on informal arrangements may need to be rebooked within the new framework.

A short readiness plan for an international firm trading derivatives in China through securities or futures firms might run as follows:

1. list every onshore and offshore Chinese dealer counterparty and the products traded with each;
2. ask each dealer to confirm in writing whether it meets the new dealer requirements and on what basis;
3. refresh suitability, account and beneficial ownership information requested under the measures;
4. identify trades that would need to run off or be novated if a dealer cannot continue new business;
5. update internal approvals and limits so that new trades are only booked with qualifying dealers;
6. record the analysis for the firm's own regulators and auditors.

Bank derivatives and structured products

Banks' derivatives business is supervised by NFRA, which requires banks to hold the relevant derivatives qualification, maintain risk controls and assess customer suitability. Corporate hedging of FX risk onshore is subject to the "real needs" principle: forwards and options with banks must be linked to genuine underlying exposure, although documentation requirements have been simplified for many firms.

Corporate users should treat hedging as a governed activity rather than a treasury habit. A board-approved hedging policy, clear limits by instrument and tenor, matching of hedges to documented exposures and regular reporting help a company demonstrate real needs to its banks and avoid speculative losses. State-owned enterprises are subject to additional internal approval and reporting requirements from their state asset supervisors, which foreign dealers should understand when onboarding them, because a trade entered into outside the enterprise's authority can become the subject of a later dispute.

Structured deposits must include a genuine derivative component and be sold with clear risk disclosure, following regulatory clean-up of products that promised high fixed returns. Bank wealth management subsidiaries issue structured wealth management products under separate rules; see institutional asset and wealth management. For issuers and distributors of structured products linked to China, a review typically covers:

• whether the product is a deposit, a wealth management product, a security or an OTC derivative, since each triggers a different regime;
• the target investor category and the suitability evidence the distributor must keep;
• risk disclosure in Chinese, including worst-case scenarios and early termination terms;
• valuation and pricing sources, especially for products linked to onshore indices or commodities;
• cross-border marketing restrictions where an offshore issuer's product reaches mainland investors.

Cross-border access and hedging

Offshore investors access onshore derivatives through several channels. Swap Connect, launched in May 2023, allows eligible offshore investors to trade onshore RMB interest rate swaps through Hong Kong infrastructure. Investors in the China Interbank Bond Market and QFII/RQFII holders can hedge FX and rate exposure with onshore banks. Chinese corporates and banks hedge offshore through ISDA documentation with international dealers. Each channel has its own eligibility and documentation requirements, and cross-border use of collateral may need FX handling. Related topics are covered on our pages on Hong Kong–Mainland market connectivity and QFLP, QDLP and QFII schemes.

Worked example: hedging an onshore bond portfolio

An offshore asset manager holds Chinese government bonds bought through Bond Connect and wants to hedge interest rate and currency risk. It can trade onshore RMB interest rate swaps through Swap Connect, hedge onshore CNY exposure with eligible onshore banks under the relevant access rules, or hedge in offshore CNH with international dealers under ISDA. Each route differs in pricing, basis risk between CNY and CNH, documentation and clearing. The manager's own regulator in the EU, the United States or elsewhere may impose clearing, margin and reporting duties, which should be reconciled with Chinese venue rules before trading begins.

Home-state regulation is an important part of the cross-border picture for derivatives in China. Dealers subject to EU EMIR or US swaps rules need to consider whether margin, clearing and reporting requirements apply to trades with Chinese counterparties, whether collateral can be posted and segregated in practice, and whether netting and collateral opinions support capital relief. In Hong Kong, the SFC and HKMA OTC derivatives regime adds its own reporting and conduct duties for licensed firms.

Chinese corporates expanding into ASEAN markets add another layer. A manufacturer building plants in Vietnam, Thailand or Indonesia may need to hedge local currency, commodity and interest rate exposures through regional banks, often under ISDA documentation governed by English law, while its parent's treasury in China remains bound by onshore real needs and SAFE rules. Group treasury policies should state which entity may hedge which exposure, how intragroup back-to-back trades are documented and how collateral calls will be funded without breaching foreign exchange rules. Dealers onboarding such groups should check the authority and creditworthiness of the regional subsidiary rather than relying on the parent's name.

Collateral, disputes and common mistakes

Collateral arrangements are often the weakest link in a China-facing derivatives relationship. Onshore, collateral is usually provided by pledge, which requires delivery or registration to be perfected, and the treatment of title transfer collateral under Chinese law has historically been less certain than under English law. Cross-border collateral transfers also need to fit foreign exchange rules, particularly where cash or bonds move from an onshore entity to an offshore dealer.

Parties commonly choose English law and Hong Kong or Singapore arbitration for ISDA documentation with Chinese counterparties' offshore entities, while onshore NAFMII, SAC and CFA documents are governed by Chinese law with disputes in Chinese courts or arbitration. Where a structured product dispute involves mis-selling or suitability allegations, courts apply the financial institution's duties to know its customer and disclose risk, as emphasised in the SPC's 2019 minutes of the national conference on civil and commercial trial work. See financial disputes.

Forum choice has practical consequences. An award from a Hong Kong-seated arbitration can be enforced in the mainland under the arrangement on mutual enforcement of arbitral awards between the mainland and Hong Kong, and awards from other New York Convention states are enforceable subject to the Convention's grounds for refusal. A foreign court judgment faces a less predictable route. Where the Chinese counterparty's assets are mainly onshore, arbitration is usually the more reliable choice.

Recurring mistakes in cross-border derivatives in China include:

• Contracting with the wrong entity. Trading with a Chinese group's offshore subsidiary without a parent guarantee or keepwell assessment.
• Relying on stale opinions. Netting and collateral opinions that predate the Futures and Derivatives Law or do not cover the counterparty type.
• Ignoring FX constraints on collateral. Assuming onshore entities can post cash or bonds offshore at short notice.
• Weak suitability records. Missing evidence that a corporate or individual client understood a structured product's risks.
• Missing the CSRC timetable. Failing to plan for counterparties that cannot continue new business after 16 November 2026.

Looking ahead to 2027, participants in derivatives in China should watch how the CSRC applies the new dealer rules in practice, any further opening of exchange-traded products to foreign investors, developments in Swap Connect and other Hong Kong channels, and the interaction between Chinese rules and evolving EU and US requirements on clearing, margin and reporting.

How TRW & Co helps with derivatives in China

We advise dealers, asset managers, corporates and Chinese financial institutions on China-related derivatives and structured products. We negotiate ISDA Master Agreements, credit support documents and confirmations under English and New York law, advise on the interaction with NAFMII, SAC and CFA documentation, and review structured notes and product terms. We explain how the Futures and Derivatives Law and the CSRC's 2026 measures affect international counterparties and help firms plan compliance. Where PRC netting or enforceability opinions, onshore filings or PRC regulatory advice are required, we work with licensed PRC law firms. To discuss a matter, contact us.