48

CEA

CCER

49

绿色金融系列文章之（九）：林业碳汇项目开发与相关

碳权益交易

“ ” sink “ ” source

Greenhouse Gas GHG “ ” “ ”

“ ” “ ”

“ ” Land Use, Land Use Change and Forestry

LULUCF “ ”

10

11 Intergovernmental Panel on

Climate Change IPCC 2006 IPCC 2019

“ ” forest land remaining forest land “ ” land

converted to forest land 12

“

”

13

“ ”

14

Clean Development Mechanism “CDM” VCS Verified Carbon Standard

the VCS Program GS Golden Standard 15 GS

林旭霞：《林业碳汇权利客体研究》，载《中国法学》 年第 期。

杨博文：《“资源诅咒”抑或“制度失灵”？——基于中国林业碳汇交易制度的分析》，载《中国农村观察》 年第 期。

官网资料： 。

参见林旭霞：《林业碳汇权利客体研究》，载《中国法学》 年第 期。

曹福亮：《林业碳汇市场化助力碳中和国家战略——评〈林业碳汇运营、价格与融资机制〉》，载《林业经济》 年第 期。

高沁怡、金婷、顾光同、吴伟光：《林业碳汇项目类型及开发策略分析》，载《世界林业研究》 年第 期。

50

16 CDM VCS

1997 12 CDM

CDM Annex I

“

” Certified Emission Reduction “CER”

CDM 17

2006-2013 CDM 3740 “ ” “

/ ” “ ” “

” CDM CDM

18 2013 CDM 19 CDM

CDM

1. VCS

Verra VCS 20

21 VCS

Verified Carbon Unit “VCU”

VCU 22 VCU 23

VCS Agriculture Forestry & Other Land Use “AFOLU”

Chemical Industry Energy Demand Transport

Verra VCS 82 1800

909,364,286 24

2. VCS

许丁、张卫民：《基于碳中和目标的森林碳汇产品机制优化研究》，载《中国国土资源》 年第 期。

参见林旭霞：《林业碳汇权利客体研究》，载《中国法学》 年第 期。

国家林业和草原局 国家公园管理局网站： 。

财新网：《深度：气候大会终敲定〈巴黎协定〉细则 妥协的代价是什么？》， 。

参见牛玲：《碳汇生态产品价值的市场化实现路径》，载《宏观经济管理》 年第 期。

官网资料： 。

官网资料： 。

官网资料： 。

官网资料： 。

51

VCS AFOLU “

Afforestation, Reforestation and Revegetation ARR ” “ Improved Forest

Management IFM ” “ Reduced Emissions from Deforestation and

Forest Degradation REDD ” AFOLU 30

3. VCS

VCS 25

AFOLU VCU Verra VCS

VCU AFOLU

GHG

VCU VCU

VVB

VCU 26

官网资料： 。

官网资料：

第五步：签发VCU

业主提出减排量签发申请。减排量获得签发，由业主决定持有，出售或注销 。

第四步：核证VCU

项目业主需要监测记录减排数据，并制作监测报告。并由第三方进行核证。

第三步：审定项目书

业主需要聘请一个Verra批准的独立第三方机构VVB（Validation/Verification Body）对其项目阐释进行审定。

第二步：项目描述及公示

业主需要在VCS注册处开设账户并将项目书提交 VCS 项目开发列表进行公示。

第一步：选择方法学

项目业主必须选择一个适合自己项目的VCS方法学或通过VCS规定的方法学开发流程开发新方法学。

52

4. VCU

Verra VCU Verra VCU

VCU Verra

Green-e Climate ICROA/IETA

27

Verra Registry VCU

28

2012

China Certified Emission Reductions “CCER”

29

2017 3

30 CCER CCER

97 13 3

31

CCER 2020 12

CCER 2022 1

CCER 32

CCER

CCER CCER 2022 33

官网资料： 。

官网资料： 。

许丁、张卫民：《基于碳中和目标的森林碳汇产品机制优化研究》，载《中国国土资源》 年第 期。

《国务院关于提请审议国务院机构改革方案的议案》施行前，国家发改委通过印发施行《温室气体自愿减排交易管理暂行办法》，对国内温室气

体自愿减排项目等 个事项实施备案管理；自 年《国务院关于提请审议国务院机构改革方案的议案》施行至今，原国家发改委应对气候变化的

职能由生态环境部负责。

曹先磊、程宝栋：《中国林业碳汇核证减排量项目市场发展的现状、问题与建议》，载《环境保护》 年第 期。

中共河北省委网络信息安全和信息化委员会办公室网站： 。

上海证券报公众号： 。

53

CCER

34 CCER PHCER

FFCER “ + + ”

CCER

Carbon Offsetting and Reduction Scheme for International

Aviation “CORSIA” VCS CORSIA 35

“ ” ESG

“ net zero ”

36

ESG

CCER VCS

CCER

参见许丁、张卫民：《基于碳中和目标的森林碳汇产品机制优化研究》，载《中国国土资源》 年第 期。

目前 接受 种碳标准以实现国际航空碳抵消，包括 、 、 、 、 （ ，美国碳注册）和

（ ，气候行动储备）。

。

54

VCS GS

CCER CCER 2017

CCER

2022 CCER

CCER

CCER

“ ”

55

绿色金融系列文章之（十）：中国碳衍生品市场观察及

《期货和衍生品法》对碳衍生品市场的影响

2022 7 16 CEA

1.94 84.92 37

37 https://www.mee.gov.cn/ywdt/zbft/202207/t20220721_989385.shtml

56

ISDA







38

8 1

“ ”“ ” “ ”

“ ”

57

BJEA

39

39 https://www.csair.com/cn/about/news/news/2020/1edqplmva1sre.shtml

58

2016 402017

41

“ ”

“ ” “ ”

42

ESMA 43

“ ”

44

45

[2021]124

2013 33

证监会新近推出的行业标准《碳金融产品》（ ）中亦注明 碳金融衍生品主要包括碳远期、碳期货、碳期权、碳掉期、碳借贷

等

59

CNY Emission

Allowance Forward, CEAF

“ ”

46

ISDA “ ” “ ” “ ”

47

/

“ ”

The International Emissions Trading Association

IETA ISDA The Emissions Trading Master Agreement ETMA

48 ISDA ISDA 49 ISDA 50

51

http://dfjrjgj.hubei.gov.cn/bmdt/145gh/tzgg/202207/t20220719_4226846.shtml

47 https://www.isda.org/2020/07/03/status-of-netting-legislation/

60

52

“ / ”

“ ”

2020 8

2021 17

61

“ ”

ITEA ISDA

“ ” 2022 3 ETF

ICE EUA 53 54

“

”

“ ”

55

8 1

“ ”

53 https://www.hkex.com.hk/News/News-Release/2022/220323news?sc_lang=zh-HK

54 https://www.hkex.com.hk/News/News-Release/2021/2102052news?sc_lang=zh-HK

55 https://www.info.gov.hk/gia/general/202203/30/P2022033000306.htm

62

绿色金融系列文章之（十一）：补贴渐行渐远，生物质

发电项目的碳市场机遇

2022-11-04

biomass

2021

808 3798 1637 2021

10.63 44.8% 3.91

3.28 3.06 3798

16.5% 13.8% 12.9% 1.6% 56

“ ”

2022 7 15

2022 1 2022

399 105

260 34 57

2020 9 29

82,500 15

58 | “

”

56 http://www.nea.gov.cn/2022-01/28/c_1310445390.htm

57 https://sgnec.sgcc.com.cn/home/newsenergydetail?newsId=2207150404300032986

58 http://www.gov.cn/zhengce/zhengceku/2020-10/21/content_5552978.htm

63

“ ”

“ ” “ ”

baseline

“ ”

“ + ”

59

2014 1 CCER

2017 CCER CCER

CCER

602022 10 27

CCER 61

CCER CCER CCER

“ ”

59 https://www.cdmfund.org/30389.html

60 https://cenews.com.cn/news.html?aid=166393

61 https://www.mee.gov.cn/ywdt/zbft/202210/t20221027_998163.shtml

64

CCER

1997 12 CDM

CDM Annex I

“

” Certified Emission Reduction, CER

CDM 62

CER

2013 CDM CER 63

“ ” CDM CDM

VCS Verra 2005 VCS

Verra CDM VCS 64

VCS Verified Carbon Units VCU VCU

1 VCU 2

VCU 3 VCU

2022 8 29 NEA Verra Gold Standard VCS

65

Verra VCS VCS

62 https://cdm.unfccc.int/methodologies/documentation/index.html

63 https://database.caixin.com/2021-11-20/101807648.html。

64 https://verra.org/methodologies/

65 https://verra.org/the-straits-times-carbon-credits-used-to-offset-carbon-tax-bill-in-singapore-must-meet-certain-criteria-nea/

65

66

VCU

VCU

VCU CTX (Carbon Trade

Exchange) Verra CTX

CTX VCU VCU CTX Verra

CTX VCU VCS Verra

CTX CTX CTX Verra

“CTX ” CTX

VCU CTX Verra CTX

CTX CTX VCU CTX

VCU Verra 67

67 https://ctxglobal.com/carbon-tradeexchange/

66

VCU Verra VCU Verra VCU

Verra 68 Verra 1

General Account 2 Project Proponent 3 Retail

Aggregation 4 End User “ ”

Verra VCU “ ” VCU

VCU VCU “ ” “ ”

VCU “ ” “ ”

VCU VCU

VCU

Verra Verra“ ” Verra

VCS

CCER

CCER

68 Verra: Verra Registry User Guide

67

Margin Call 丨监管保证金要求——系列 1：基础知识

和重要性暨常见问题解答

3 8

“ ” 40

—— < >

“ ” “ ”

EMIR 31(1)

“ ” “ ”

 BCBS-IOSCO





2022

68

2008 20

HQLA

“ ”

“

”

“IM” “VM”

IM VM

69

“VM” VM

VM

“IM”

IM

VM IM

“ ”

“ ” “ ”

70

——

VM IM

“ISDA”

VM IM VM IM

ISDA Schedule CSA

VM IM

71

VM VM ISDA ISDA 2016

“VM CSA” VM CSA ISDA 1995 CSA

ISDA 1995 CSA VM CSA

VM CSA

IM IM

IM “ ” IM

IM VM IM VM

IM ISDA IM

ISDA international central

securities depository “ICSD” “ ” “ ” IM

ISDA “ ”IM 2018 “IM CSD” IM

CSD ISDA 1995 CSD ISDA

IM CSD

IM

IM CSD

IM IM CSD ISDA IM

“ CTA” “

72

SA” CTA SA IM CSD 1 CTA

ISDA 2 SA

CTA SA

“ACA” ACA

ACA

ACA

IM

IM 1

ISDA CTA SA 2 ISDA CTA SA IM / CTA SA

IM CSD IM

IM IM

IM

ISDA NAMFII CSA VM

IM

ISDA

margin collateral

73

During the 5th session of the 13th National People’s Congress (“NPC”) held on 8 March 2022, the

Chairman of the Standing Committee of the NPC (“NPCSC”) announced that the PRC Futures and

Derivatives Law (“FDL”), among other legislation, has been included in its 2022 annual legislative plan.

The market anticipates and welcomes the passing of the FDL within this year.

As summarised in our article “To the Future and Beyond – Thoughts on the PRC Futures and Derivatives

Law (Second Reading)”, it is highly likely that the FDL (once finalised and effective) will confirm, for

the first time, legislative recognition of the “Single Agreement” and “Close-out Netting” concepts

contained in international and PRC domestic OTC derivatives documentation. This will provide a robust

legal framework for the PRC to be regarded by foreign counterparties as a “clean” netting jurisdiction.

We will now briefly consider the impact of regulatory margin rules on OTC derivatives transactions with

PRC counterparties. Currently, we understand that a number of international firms may be relying on

certain exemptions (for example, Article 31(1) of the Regulatory Technical Standards for risk-mitigation

techniques for OTC derivative contracts not cleared by a central counterparty under EMIR) from posting

and collecting margin when trading with PRC-based counterparties, or they may be collecting margin

collateral from PRC-based counterparties on a gross basis.

When the PRC becomes a clean netting jurisdiction, the above exemption from regulatory margin

requirements may well become inapplicable. Unlike close-out netting issues, regulatory margin

requirements may be less familiar to PRC counterparties for the following reasons:

(a) the PRC has not issued or implemented any mandatory margin rules that align with the BCBS-IOSCO’s

Margin Requirements for Non-centrally Cleared Derivatives;

(b) the international margin requirements and documentation are highly technical and complex and

74

some PRC counterparties may be unfamiliar with the relevant legal and technical concepts;

(c) international firms have been reluctant to accept onshore collateral to satisfy margin requirements

and PRC counterparties do not hold that many offshore eligible assets, and may in any event be reluctant

to post offshore collateral.

As a result of these foregoing factors, some PRC counterparties may need time to familiarize themselves

with regulatory margin requirements. With the anticipated passing of the PRC Futures and Derivatives

Law in 2022, now is the time for international firms to actively focus on regulatory margin requirements

for OTC derivatives with PRC counterparties and related legal documentation issues. It is also the time

for PRC counterparties to get prepared because if they do not, international firms will have to quit

trading non-centrally cleared OTC derivatives with them (or still charge higher margin on a gross basis).

Based on KWM’s extensive experience in advising major international and Chinese financial institutions

and corporates on these issues, below are our answers to some frequently asked questions on this

important topic.

I. What are regulatory margin requirements?

After the global financial crisis in 2008, the G20 leaders committed to develop and implement series of

regulatory requirements (including margin requirements) in their respective jurisdictions to reduce

systemic risk and create a level playing field across the globe.

75

Under regulatory margin rules, counterparties to OTC derivatives are required to post and collect margin

(also referred to as collateral) to and from each other. This is designed to reduce counterparty credit

risk because the collateral (usually in the form of high quality liquid assets (“HQLA”, including cash or

highly liquid debt securities) is available to offset losses following the default of a derivatives

counterparty.

Fast toward to today, most major jurisdictions have adopted and implemented regulatory margin

requirements. While there are important differences in the detailed rules in each jurisdiction, the

broad requirements are similar because they are largely based on the global regulatory margin standards

established jointly by the Basel Committee on Banking Supervision and the International Organization

of Securities Commissions (“Global Margin Standards”).

Like most financial regulations, the Global Margin Standards and the local regulatory margin rules

implemented in each jurisdiction (“Local Margin Rules”) are highly complicated and full of technical

jargon. In this article, we will try to explain some of the key concepts and related legal documentation

issues in plain language.

II. What is initial margin (“IM”) and variation margin (“VM”) and what is the

difference between the two?

Regulatory margin requirements distinguish between IM and VM.

76

Variation margin (“VM”) is collateral that protects derivatives counterparties from the current exposure

that one counterparty has to the other. The amount of VM reflects the size of the current exposure,

which can change regularly due to market movements. Therefore, VM is generally required to be

exchanged daily to track changes in the mark-to-market value of derivatives and to fully collateralise

the mark-to-market exposure.

Initial margin (“IM”) is collateral that protects derivatives counterparties from the potential future

exposure that can arise from future changes in the mark-to-market value of the derivatives during the

time it takes to close out and replace the derivatives following a counterparty default. The amount of

IM reflects the size of the potential future exposure.

III. Who is subject to regulatory margin requirements?

Generally speaking, regulated financial institutions are directly subject to Local Margin Rules issued by

the relevant financial regulator(s). These rules generally require a regulated financial institution to

both post and collect VM and IM to and from certain types of counterparties. In this article, we shall

refer to the posting and collecting of margin between two counterparties as “exchanging” margin.

To comply with the regulatory requirement to exchange margin, a regulated financial institution will

negotiate and enter into margin documents with each of its counterparties, which will impose

contractual obligations on each side to exchange margin. Therefore, even if a counterparty to a

regulated financial institution is not directly subject to regulatory margin rules (e.g., because it is not

financially regulated), the counterparty becomes indirectly and contractually subject to margin

requirements by virtue of entering into margin documents with a regulated financial institution. Many

PRC counterparties will likely be in this situation in the absence of any PRC regulatory margin rules.

77

Financial and non-financial counterparties: It is important to note that a regulated financial

institution is not required to exchange margin with all types of counterparties. Generally speaking, a

regulated financial institution is only required to exchange margin with “financial counterparties” or

certain “systemically important non-financial counterparties”. The Local Margin Rules in each

jurisdiction contain detailed definitions of these key terms, which are all slightly different from each

other.

It is important to note that the definition of financial counterparty can be quite broad under certain

Local Margin Rules and can capture any domestic or foreign entity that mainly engages in one or more

financial activities (such as banking, lending, insurance, securities, derivatives or asset management

activities) – even if that entity is not regulated. Therefore, it is crucial for an entity (including a PRC

counterparty) to make accurate communications about its status and catagorisation under the

applicable Local Margin Rules. Otherwise, its regulated financial institution counterparty may be

exposed to regulatory risks as a result of relying on inaccurate communications, which may in turn

expose the entity in question to potential risks and liabilities.

A regulated financial institution is generally not required to exchange margin with a counterparty which

is a sovereign, central bank, public sector entity or multilateral development bank. Again, these key

terms are defined somewhat differently in each jurisdiction’s Local Margin Rules.

IV. What kind of derivatives are subject to regulatory margin requirements?

Regulatory margin requirements generally apply to all non-centrally cleared derivatives. For cleared

derivatives, the central counterparty or clearinghouse will impose its own margin requirements.

Regulatory margin requirements generally do not apply to transactions such as repos and securities

lending transactions that are not themselves derivatives but share some common features with

78

derivatives.

In addition, the Local Margin Rules in many jurisdictions exclude physically settled FX forwards and FX

swaps as well as certain other categories of OTC derivatives from the scope of regulatory margin

requirements.

V. What legal documents are needed to comply with regulatory margin

requirements?

To comply with regulatory margin requirements, regulated financial institutions need to enter into a

large number of new legal documents with their counterparties. These legal documents impose, among

other things, detailed VM and IM calculation and exchange obligations on both parties.

The International Swaps and Derivatives Association (“ISDA”) has developed industry standard margin

documents that are designed to comply with applicable Local Margin Rules. Since VM and IM are

calculated differently and are required to be held in different ways, there are separate sets of legal

documents for VM and IM.

Despite the development and widespread use of standard margin documents, these legal documents are

highly complicated and heavily negotiated, because each document allows the parties to make a large

number of elections and further amendments to tailor for their specific commercial and regulatory

circumstances.

The process of negotiating margin documents is comparable to negotiating an ISDA schedule or the

elections and variables paragraph of a Credit Support Annex (“CSA”). However, the process can be much

more complicated because, as explained below, multiple margin documents are required to comply with

the VM and IM requirements. Accordingly, many financial institutions and their counterparties engage

external law firms to assist with margin documentation, negotiation and related legal and compliance

issues.

79

Overview of standard VM documents: To help parties comply with VM requirements, ISDA has published,

among other things, the English law governed ISDA 2016 Credit Support Annex for Variation Margin (“VM

CSA”). The VM CSA is based on the ISDA 1995 English law CSA and is an annex to the ISDA Schedule. Like

the 1995 CSA, the VM CSA involves the outright transfer of legal and beneficial title in the collateral

from the transferor to the transferee, while the transferee has a contractual obligation to deliver

equivalent credit support to the transferor in certain circumstances. The elections and variables

paragraph of the VM CSA allows parties to specify eligible collateral types (subject to regulatory

restrictions) and make other elections or amendments to meet applicable commercial and regulatory

requirements.

Overview of standard IM documents: The Local Margin Rules in most jurisdictions generally require IM

to be held in a segregated account and not to be rehypothecated, repledged or reused (“Segregation

Requirement”). Specifically, IM should be held in an account with an independent third-party custodian

which is segregated from the proprietary assets of the collateral taker and custodian, and adequately

protected from insolvency of the collateral provider, collateral taker and custodian. The Segregation

Requirement which applies to IM (but not VM) means that IM arrangements are documented separately

from VM arrangements.

To help parties comply with IM requirements, ISDA has developed a wide range of standard IM documents

designed to work with different types of custodians and governing laws. For example, ISDA has

developed IM documents for circumstances where the custodian is a bank and where the custodian is an

international central securities depository (“ICSD”) such as Euroclear or Clearstream.

As far as the English law documents are concerned, ISDA’s ‘flagship’ IM document is the 2018 Credit

Support Deed (“CSD”) for Initial Margin (“IM CSD”). The IM CSD is based on the ISDA 1995 English law

80

CSD and is therefore a separate security document executed as a deed and not forming part of the ISDA

Master Agreement. Instead of relying on title transfer, the IM CSD involves creating a security interest

over the segregated account and the collateral held in it. Significantly, pursuant to regulatory margin

requirements, IM must generally be transferred on a two-way gross basis, which means that each

counterparty must transfer collateral to the other counterparty’s segregated account and these two

separate transfer obligations cannot be netted or set off against each other. The elections and variables

paragraph of the IM CSD allows parties to make various elections and amendments to meet applicable

commercial and regulatory requirements.

Bank custodian IM documents: Besides the IM CSD, ISDA has published the Bank Custodian Collateral

Transfer Agreement for IM (“Bank Custodian CTA”) and separate corresponding Bank Custodian Security

Agreements (each a “Bank Custodian SA”) governed by the laws of different jurisdictions. In essence,

the Bank Custodian CTA and Bank Custodian SA represent the two halves of the IM CSD: (1) the Bank

Custodian CTA governs the mechanical and operational aspects of the margin exchange process and is

subject to the same governing law as the relevant ISDA Master Agreement; and (2) the Bank Custodian

SA relates to the creation and enforcement of the security interest and is governed by the law where

the segregated account is located.

In addition to the Bank Custodian CTA and SA, the collateral provider, collateral taker and bank custodian

will also need to enter into an account control agreement (“ACA”). The ACA governs, among other

things, the circumstances and manner in which the collateral provider or collateral taker can exercise

exclusive control over the segregated account and instruct the custodian to transfer collateral out of

the account. Major custodians have published standard form ACAs, which are subject to certain

elections that the parties can make to reflect their commercial and regulatory needs. Also, the

collateral provider will enter into a custody agreement governing the terms of the custody account it

has with the bank custodian. To comply with regulatory margin requirements, IM will be transferred

from the collateral provider’s custody account into the segregated account.

Euroclear and Clearstream IM documents: Where the custodian is not a bank but Euroclear or

Clearstream, the parties would enter into (1) the ISDA Euroclear CTA and SA or (2) the ISDA Clearstream

CTA and SA, as the case may be. The credit support document is split into a CTA and SA for similar

reasons as in the bank custodian context. The Euroclear and Clearstream IM documents are designed to

specifically work with the Euroclear and Clearstream membership documents, respectively. Therefore,

the elections and variations provisions in the Euroclear and Clearstream IM documents are somewhat

different to those found in the bank custodian IM documents. In addition, Euroclear or Clearstream (as

the case may be) may also enter into a Collateral Management Services Agreement with parties. We

81

can revisit the Euroclear and Clearstream IM documents in details in the following series.

VI. Where can I learn more about regulatory margin requirements and legal

documentation issues?

We at KWM are here to help you. KWM regularly assists international and PRC-based financial institutions

and corporates with ISDA/NAMFII, CSA, VM and IM margin document negotiations, as well as with

designing and documenting innovative and complex cross-border derivatives products. We also regularly

advise international and PRC-based clients on margin and other regulatory requirements that apply to

derivatives transactions.

KWM is ISDA’s legal counsel in the PRC and has been actively participating in legal developments relating

to the enforceability of close-out netting, collateral segregation and title transfer arrangements in the

PRC. We are familiar with the unique issues faced by PRC-based financial institutions and their

counterparties and would be pleased to share our insights with you. Please feel free to contact our core

team members below.

Important Note: “margin” and “collateral” used in this Article are not equal to security interest over

cash margin, moveable assets or rights under PRC law.

Thanks to Dolores Xie for her contribution to this article.

82

未来已来：《中华人民共和国期货和衍生品法》的历史

性颁布

2022-04-23

“ ” 20

“ ”

“ ”

69

2022 8 1

“ ”

——

“ ”

automatic early termination “AET” AET

83

—— 32

35

32 “

”

“ ”

35 “ ”

“ ”

32 35

“ ” “ ” “ ISDA

” “ ”

32 35 33

32

32 35

34 “ ” “ ”

initial margin “IM”

34

variation margin “VM”

84

VM IM

70

155

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2022-04-23

The passage of China's Futures and Derivatives Law (FDL) is arguably the most significant legal

development in Asian derivatives markets over the past two decades. The FDL will make China a 'clean

netting jurisdiction', thus marking an exciting new chapter in the development of derivatives markets

in the world's second largest economy. This article explores some key takeaways from the FDL for OTC

derivatives.

You may also wish to refer to our partner Stanley Zhou's observations on the FDL when interviewed by

the China National Radio on 20 April 2022. 71

I. What is the FDL and why is it important?

The FDL is a significant legal milestone because, for the first time in China's modern history, the legal

enforceability of close-out netting will be expressly recognized at a national legislative level. The FDL

takes effect on 1 August 2022.

Close-out netting basically involves terminating individual derivatives transactions documented under a

master agreement and reducing them to a single net amount due from one party to the other. It is a

very important mechanism for the reduction of counterparty credit risks associated with derivatives

transactions, and close-out netting enforceability is critical for safe and efficient derivatives markets.

The enactment of the FDL means the People's Republic of China (\"China\") will become a clean netting

jurisdiction, meaning that reputable legal counsel in China will be able to issue an industry legal opinion

(called a \"clean netting opinion\") concluding that close-out netting is legally enforceable in China before

and during bankruptcy proceedings involving a Chinese entity. Significantly, this conclusion will not

depend on the parties to the relevant master agreement switching on automatic early termination

(\"AET\"), which is a mechanism under which derivatives transactions will automatically terminate

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immediately before certain bankruptcy events occur.

Based on the clean netting opinion, financial institutions will measure their credit and risk exposures to

Chinese derivatives counterparties on a net (as opposed to gross) basis for a wide range of risk

management, quantitative and regulatory purposes, including for the purposes of calculating their

regulatory capital ratios and other regulatory metrics. Measuring derivatives exposures on a net basis

can significantly reduce transaction and regulatory costs, thereby promoting the further growth and

development of China's derivatives markets.

II. How does the FDL recognize and protect close-out netting? What about the Filing

Requirement?

Two key provisions of the FDL recognize and protect the legal enforceability of close-out netting – Article

32 and Article 35.

In the final version of the FDL, Article 32 provides that where derivatives trading is effected using a

master agreement, that master agreement, its schedules and the derivatives transactions under it

constitute a legally binding single agreement. This statutory recognition of the single agreement concept

is designed to prevent a bankruptcy official from 'cherry picking' individual derivatives transactions

under a master agreement.

In the final version of the FDL, Article 35 provides that, where derivatives trading is effected \"in

accordance with law\" using a master agreement (in Chinese: “依法采用主协议方式从事衍生品交易”)

close-out netting shall not be stayed, invalidated or revoked because one of the parties has entered into

Chinese bankruptcy proceedings.

Those closely following the development of the FDL are aware that, in the previous draft of the FDL,

the legal protection for the close-out netting and single agreement concepts conferred by Articles 32

and 35 was expressly made conditional upon the template master agreement (such as the pre-printed

version of the ISDA Master Agreement) being filed with Chinese financial regulators (\"Filing

Requirement\").

While the Filing Requirement has been retained (albeit in modified form) in the final version of the FDL,

compliance with the Filing Requirement is no longer stated to be a pre-requisite for the legal protections

under Articles 32 and 35 to apply. Rather, Article 33 of the final version of the FDL simply refers to the

master agreement described in Article 32 (i.e., the master agreement used to effect derivatives trading),

and states that a template of such master agreement should be filed in accordance with rules

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promulgated by the relevant Chinese regulator. We understand that these changes in the final version

of the FDL are intended to clarify that legal protections conferred by Articles 32 and 35 of the FDL are

not conditional upon satisfaction of the Filing Requirement. This is a significant change in the final

version of the FDL and will be welcomed by the market.

III. What about legal protection for collateral arrangements?

Article 34 of the FDL provides for statutory recognition of the ability to collateralize derivatives

transactions by methods such as creating pledges. This wording covers the exchange of initial margin

(\"IM\") under applicable regulatory margin rules, because IM is usually subject to a security interest in

favor of the collateral taker. However, Article 34 does not expressly refer to title transfer collateral

arrangements, which are commonly used in connection with the exchange of variation margin (\"VM\")

under applicable regulatory margin rules. Despite the absence of any express reference to title transfer

collateral arrangements in the FDL, we believe that such arrangements, when used to provide credit

support for derivatives transactions, are legally valid and enforceable in China.

IV. How does China becoming a clean netting jurisdiction impact regulatory margin

documentation?

Currently, under the regulatory margin rules in certain jurisdictions, a regulated financial institution

may be exempt from the requirement to exchange VM or IM with a counterparty that is based in a nonnetting jurisdiction. With China becoming a clean netting jurisdiction, international financial institutions

should carefully re-assess their regulatory margin arrangements with their Chinese counterparties. We

have been working closely with our financial institution clients to get ready to negotiate and enter into

margin documentation with their major international counterparties in anticipation of the FDL. You may

also refer to our bilingual FAQs on regulatory margin requirements and legal documentation issues.

For completeness, we note that China has not yet implemented any regulatory margin requirements for

OTC derivatives. However, a consultation paper published by Chinese financial regulators last year

proposed, in principle, that margin be posted for OTC derivatives.

V. What else is covered in the FDL besides legal recognition of close-out netting and

collateral arrangements?

The FDL has over 150 articles and covers a broad range of topics relating to both futures and OTC

derivatives. These topics include licensing and authorization, conduct of business, central clearing,

trade reporting, regulatory cooperation, insider trading and other market misconduct, trading venues

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as well as the trading and listing of futures contracts.

On the topic of licensing and authorization, compared to previous drafts, the final version of the FDL

introduces a new Article 31. New Article 31 provides that financial institutions conducting derivatives

trading business must obtain approval in accordance with the law and comply with trader/counterparty

suitability management obligations as well as relevant Chinese supervisory and regulatory requirements.

These approvals could include, in the case of Chinese commercial banks, derivative licenses granted by

the CBIRC, and in the case of Chinese securities firms, no-objection letters from the China Securities

Regulatory Commission (\"CSRC\") or filing records with the Securities Association of China (\"SAC\").

VI. What's in store in the post-FDL world?

The significant legal certainty that the FDL provides for close-out netting and collateral enforceability

opens up an exciting new era for the growth, development and further opening-up of China's derivatives

markets in particular, and its financial sector in general.

China's status as a clean netting jurisdiction will encourage more domestic and international end-users

and financial institutions to turn to China's derivatives market to hedge and manage all types of risks.

The size of China's derivatives market is not yet commensurate with China's status as the world's second

largest economy. But the FDL has the potential to change all that over time.

Derivatives and related financial products will play a greater role in supporting China's real economy,

including China's five-year plan and development goals. For example, as Chinese companies expand their

international activities and as foreign companies increase their business dealings with their Chinese

counterparts, they will look to more sophisticated FX and related hedging solutions offered by China's

derivatives markets. Domestic and international investors will also increasingly look to credit derivatives

to manage credit risks associated with Chinese issuers, which is important to support the healthy growth

and internationalization of China's bond markets, especially now when there is a growing need to

mitigate such credit risks. The development of carbon emissions derivatives and other ESG-related

derivatives will also have an important role to play in helping China meet its climate and other social

objectives. As more Chinese entities exchange VM and IM with their international counterparties, we

may also see greater use of RMB-denominated assets as collateral, thereby promoting the

internationalization of the Chinese currency.

VII. Where can I learn more about the FDL and its impact on my business?

We at KWM are here to help you. During the consultation process for the draft FDL, KWM acted as ISDA's

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counsel and has been actively participating in Chinese legal developments relating to the enforceability

of close-out netting and collateral arrangements. We have advised the derivatives industry and key

market participants extensively on the legal, regulatory, compliance, documentation and transactional

implications of the FDL.

Besides our expertise in all things FDL, we regularly assist international and PRC-based financial

institutions and corporates with ISDA, NAMFII, CSA, VM and IM margin document negotiations, as well as

with designing, structuring and documenting innovative and complex cross-border derivatives and

structured products.

We are familiar with the unique legal and practical issues faced by Chinese entities and their

international counterparties and would be pleased to share our insights with you.

Please feel free to contact our core team members below.

Thanks to Dolores Xie and Eva Sun for their contribution to this article.

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证监会发布《期货交易所管理办法（征求意见稿）》

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