The new short-term trading regulations officially take effect today, with six core issues to help you quickly understand.

Why can the new rules release trading autonomy for directors, supervisors, and senior executives?

The new short-term trading regulations are here! On April 7, the “Several Provisions on the Regulation of Short-term Trading” (hereinafter referred to as the “Provisions”) officially began to take effect. Based on a systematic review of domestic and international legislation, judicial practices, and regulatory practices, the Provisions respond to market concerns and further clarify regulatory arrangements related to short-term trading by major shareholders, directors, supervisors, and senior executives.

What is worth noting is that, with the formal implementation of the new short-term trading regulations, many investors have confused them with quantitative trading regulations. As a result, rumors have even appeared in the market recently about “the implementation of quantitative trading regulations.” So, regarding the new short-term trading regulations, what questions are everyone paying attention to?

Industry insiders point out that, at its root, this new rule puts an end to the situation where directors, supervisors, and senior executives under incentives can “only go in, not come out.” At the same time, the implementation of the Provisions helps reduce institutional costs for medium- and long-term capital to enter the market, providing convenience for various types of professional institutional investors to participate in the market.

What is short-term trading?

In these new regulations, short-term trading refers to the behavior of certain categories of investors that, within six months after buying, sell; or within six months after selling, buy again the securities of the same listed company or a company listed on the National Equities Exchange and Quotations (NEEQ).

Who are the targets to which the new rules apply?

“Certain categories of investors” refers to shareholders who hold more than 5% of the shares of a listed company or a company listed on the NEEQ (including: shareholders whose total issued shares in China and abroad reach 5% or more) and directors, supervisors, and senior management of listed companies or companies listed on the NEEQ.

It is worth noting that the directors, supervisors, and senior executives personnel involved in the determination of short-term trading, as well as the securities held by individual shareholders, include the securities held by their spouses, parents, and children, and securities held through other people’s accounts.

What are the highlights of the new rules?

First, it clarifies the scope of applicable subjects and types of securities. When buying and selling, if the person has the identity of a major shareholder, director, supervisor, or senior executive, and if they do not have such identity at the time of buying but do have it at the time of selling, they must comply with the short-term trading system. “Other securities with equity characteristics” includes depositary receipts, exchangeable bonds, convertible bonds, and so on, and it further breaks down and clarifies regulatory requirements.

Second, it clarifies the standards for identifying and calculating holding and trading time points. The Provisions set the buying and selling time points as the securities transfer registration date. The shareholding percentage of major shareholders is calculated by combining the shares issued by the same listed company or listed company on NEEQ domestically and abroad. For securities held by foreign investors through different channels, the quantities are also calculated in aggregate, and other relevant requirements are aligned accordingly.

Third, it clarifies 13 exemption scenarios, including conversion of preferred shares, ETF subscription and redemption, grants, registration, and exercise related to equity incentives, judicial compulsory enforcement, market-making transactions, and repurchase orders for fraudulent issuance, among others; at the same time, it provides that in related scenarios, if they involve seeking illegal benefits by taking advantage of information advantages, they will not be exempted.

Fourth, for cases where securities accounts are opened separately for products or portfolios that are managed by professional institutions, shareholdings are calculated separately by the one-account-for-all (“one-code”) account for each product or portfolio, to facilitate trading and promote opening-up and the participation of medium- and long-term funds. Meanwhile, it also clarifies that if the above products or portfolios cannot achieve independent and standardized operation, or if there are conflicts of interest, illegal or non-compliant conduct, and the like, such circumstances will not be calculated separately.

What characteristics do the exemption scenarios have?

The exemption scenarios mainly cover 3 categories of situations: first, where, based on the design of product or business system arrangements, the market has clear expectations for relevant business links and support is needed to develop the business—such as conversion of preferred shares, conversion, redemption, and repurchase of convertible bonds, exchange, conversion, redemption, and repurchase of exchangeable bonds, ETF subscription, subscription/redemption/redemption, equity incentive-related grants, registration, and exercise, market-making business, and the like.

Second, changes in shareholdings caused by objective non-trading factors—such as judicial compulsory enforcement, inheritance, donation, and the gratuitous transfer of state-owned shares, and the like.

Third, transactions conducted in accordance with regulatory provisions or to respond to major financial risks and the need to maintain financial stability—such as repurchase orders ordered in connection with fraudulent issuance, and orders to repurchase in case of improper share reductions, and the like.

In addition, to prevent the use of exemption scenarios to circumvent regulation, the Provisions specify that the above behaviors, if they involve seeking illegal benefits by taking advantage of information advantages, will not be exempted.

What is the basis for implementing penalties?

If a certain category of investor violates the short-term trading regulations, the China Securities Regulatory Commission may, in accordance with the Securities Law and relevant provisions, take administrative regulatory measures or make an administrative penalty decision.

If a certain category of investor violates the short-term trading regulations and voluntarily reports unlawful acts that have not yet been discovered, or promptly pays all proceeds from the illegal gains to the China Securities Regulatory Commission, listed companies, and NEEQ-listed companies, the China Securities Regulatory Commission may, in accordance with the Administrative Penalty Law, impose lighter, mitigated, or no administrative penalties.

What is the significance of the new rules being implemented?

CITIC Securities stated that the implementation of the Provisions helps reduce the institutional costs for medium- and long-term funds to enter the market and provides convenience for various professional institutional investors to participate in the market. Clarifying the rules will reduce compliance concerns among market participants caused by ambiguity in identification standards and avoid unintentional violations arising from misunderstanding.

Separately calculating shareholdings for cases managed by professional institutions and where securities accounts are opened separately for products or portfolios resolves a previous operational difficulty: institutional funds may trigger short-term trading restrictions due to transactions between products. This provides institutional convenience for long-term funds such as social security funds and pension funds to participate in the market.

At the same time, while clarifying exemption scenarios, the Provisions also set negative clauses such as “seeking illegal benefits by taking advantage of information advantages,” reflecting the concept of equal emphasis on prudent regulation and encouraging compliance. This helps achieve a dynamic balance between facilitating market transactions and preventing illegal and non-compliant conduct.

Caitong Securities noted that this new regulation fundamentally ends the dilemma of “only in, not out” for incentive cycles of directors, supervisors, and senior executives. For a long time, short-term trading rules have imposed significant constraints on equity incentives: arrangements had to be split before directors, supervisors, and senior executives grant shares; exercise and vesting were considered as “buying,” resulting in a long 12-month period during which selling was prohibited and prominent pressure on capital being tied up. After the new rules take effect, incentive steps such as grant, registration, and exercise are no longer included in the determination of short-term trading. There is no longer a mechanical linkage with transactions in the preceding and following 6 months. Incentive recipients are freed from long silent period constraints, and trading autonomy and cash-flow arrangements fully return.

Beijing News Shell Finance reporter Hu Meng

Editor Yue Caizhou

Proofreader Liu Baoqing