China’s National Association of Financial Market Institutional Investors (“NAFMII”) recently published a new cross-border version of the NAFMII Master Agreement, which is designed to promote the further opening up of China’s derivatives market. This significant development comes shortly after the PRC Futures and Derivatives Law (“FDL”) went into effect on 1 August 2022.
2022 NAFMII vs 2009 NAFMII
This article provides a high-level comparison between the existing 2009 version of the NAFMII Master Agreement (“2009 NAFMII”) and the new 2022 NAFMII Master Agreement (Cross-Border Version) (“2022 NAFMII”),[1] as set out in the table below.
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2009 NAFMII SECTION REFERENCE |
2022 NAFMII SECTION REFERENCE |
HIGH-LEVEL OVERVIEW OF KEY DIFFERENCES |
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Scope of Application
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Section 2 |
Section 2 |
2009 NAFMII: applies to onshore derivatives transactions (i.e., transactions entered into between two PRC[2] entities) 2022 NAFMII: applies to cross-border derivatives transactions (i.e., transactions entered into between a PRC entity and a non-PRC entity) and offshore derivatives transactions (i.e., transactions entered into between two non-PRC entities) |
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Termination Events
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Section 7 |
Section 7 |
2009 NAFMII: includes Illegality and Force Majeure as Termination Events 2022 NAFMII: introduces Tax Event (Section 7(IV)) and Tax Event upon Merger (Section 7(V)) as new Termination Events and sets out their related consequences |
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Tax Provisions
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N/A |
Section 12 |
2009 NAFMII: does not include tax provisions (for domestic onshore trades) 2022 NAFMII: includes tax gross-up and related tax provisions, which provide for the payment of an additional “Indemnifiable Tax Amount” |
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Termination Currency (where the contract currency for the terminated Transaction includes RMB)
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Section 12 |
Section 13 |
2009 NAFMII: RMB 2022 NAFMII: RMB, but if PRC laws do not permit the cross-border payment and settlement of the Early Termination Amount in RMB, the Termination Currency may be in such other currency as agreed by the parties |
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Cross-agreement bridge concept
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N/A |
Section 14(II) |
2022 NAFMII: at the parties’ election, the Early Termination Amount payable under other master agreements (e.g., an ISDA Master Agreement or SAC Master Agreement) will become Unpaid Amounts for the purposes of calculating the Early Termination Amount under the 2022 NAFMII |
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Multibranch parties
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N/A |
Section 19 |
2022 NAFMII: A party can enter into Transactions through its head office and/or any branch or office (including a non-PRC branch or office) designated in the Supplement. A 2022 NAFMII Supplement is a mechanism similar to an ISDA Schedule |
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Governing Law
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Section 18(I) |
Section 20(I) |
2009 NAFMII: PRC law is the mandatory governing law 2022 NAFMII: the parties may choose a non-PRC governing law, failing which PRC law shall be the default governing law |
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Dispute Resolution
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Section 18(II) |
Section 20(II) |
2009 NAFMII: CIETAC arbitration by default, although parties may select alternative arbitral tribunals provided that such tribunals are located within the PRC 2022 NAFMII: CIETAC arbitration by default, although parties may select alternative dispute resolution forums, which are not limited to arbitral tribunals or courts that are located within the PRC |
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Restrictions on amendments to the NAFMII Master Agreement
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Section 23 |
N/A |
2009 NAFMII: Certain provisions must not be amended or excluded (e.g., provisions relating to the scope of application of the 2009 NAFMII, the Termination Currency, the governing law and dispute resolution and the NAFMII record filing requirement) 2022 NAFMII: Subject to restrictions imposed by the applicable governing law, there are no specific provisions in the 2022 NAFMII that cannot be amended or excluded by agreement. |
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NAFMII record filing requirement
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Section 24 |
N/A |
2009 NAFMII: the master agreement and the Supplement (including amendments) must be filed with NAFMII for the record 2022 NAFMII: the 2022 NAFMII includes no mandatory contractual provisions for record filing. However, the official NAFMII announcement regarding the 2022 NAFMII (“NAFMII Announcement”)[3] still requires a record filing to be made |
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Other noteworthy provisions
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- |
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2022 NAFMII:
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Swap Connect and the 2022 NAFMII
The 2022 NAFMII not only reflects China’s desire to promote the internationalisation of its derivatives market and related standard derivatives documents, it also paves the way for the upcoming Swap Connect scheme, which was announced by the People’s Bank of China, the Hong Kong[4] Securities and Futures Commission and the Hong Kong Monetary Authority in July 2022.
Significantly, the “Northbound” leg of Swap Connect is designed to allow foreign participants in the China Interbank Bond Market (“CIBM”) to hedge their interest rate and other risks in China’s derivatives market through infrastructural links between onshore and offshore financial market infrastructures such as (i) trading facilities (e.g., the China Foreign Exchange Trading System Center (“CFETS”) and certain international electronic trading platforms) and (ii) central counterparties (e.g., Shanghai Clearing House (“SHCH”) and HKEX OTC Clear).
Swap Connect is expected to be particularly beneficial for Bond Connect investors’ hedging activities because these investors do not hold onshore accounts and are not otherwise onboarded by CFETS or SHCH.
The 2022 NAFMII helps market participants prepare for Swap Connect by enabling them to enter into cross-border derivatives in China’s onshore market using a more flexible, modern and internationalised version of the NAFMII Master Agreement.
Other significant developments
In addition to the 2022 NAFMII, NAFMII has recently published the following standard documents:
- the 2022 version of the NAFMII Interest Rate Definitions; and
- the 2022 version of the Basic Terminology and Application Rules for OTC Credit Derivatives.
In light of these developments, there is no doubt that the FDL has ushered in an exciting new era for China’s derivatives market, which offers tremendous opportunities to domestic and international market participants.
We at KWM are here to help you. KWM regularly assists international and PRC-based financial institutions and corporates with preparing and negotiating bilingual derivatives documents, as well as with designing and documenting innovative and complex cross-border derivatives and structured products.
We are familiar with the unique issues faced by PRC-based financial institutions and their counterparties as well as the latest developments relating to Swap Connect. We would be pleased to share our insights with you. Please feel free to contact our core team members below.
Disclaimer: This publication is provided for general information purposes only and does not constitute legal advice.
Thanks to Suodi Xi and Frederic Chang for their contributions to this article.
References
[1] The 2022 NAFMII is available here and an English translation is available here.
[2] “PRC” means the People's Republic of China, which for the purpose of this article only, excludes the Hong Kong Special Administrative Region (“Hong Kong”), the Macao Special Administrative Region and Taiwan.
[3] The NAFMII Announcement is available here.
[4] Any reference to “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People's Republic of China”.
