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CHINA LEGAL SCIENCE 2021年第1期 | 对我国期货交易所组织形式的再认识及改革目标
日期:21-02-08 来源: 作者:zzs
A NEW UNDERSTANDING OF THE ORGANIZATIONAL FORMS AND THE REFORM OBJECTIVES OF CHINA’S FUTURES EXCHANGES



Zhao Wanfu

TABLE OF CONTENTS

I.    INTRODUCTION
II.  A BRIEF ANALYSIS ON THE CURRENT SITUATION OF CHINA’S FUTURES MARKET AND FUTURES EXCHANGES
III. THE CORPORATE SYSTEM AND THE MEMBERSHIP SYSTEM: DEBATES OVER THE ORGANIZATIONAL FORMS OF THE FUTURES EXCHANGES


A. Basic Characteristics of the Corporate System and the Membership System

B. Differences between the Corporate System and the Membership System

C. Debates over the Corporate System and the Membership System


IV. THE FOUNDATION OF THE ORGANIZATIONAL FORMS OF THE FUTURES EXCHANGES: RE-UNDERSTANDING THE LEGAL NATURE OF THE FUTURES EXCHANGES


A. For-Profit or Non-Profit: Dispute over the Legal Nature of Futures Exchanges

B. The Implementation of the Corporate System Is the Trend of Futures Exchanges

C. The Corporate Exchanges Is More Compatible with the Operation Requirements of the Exchanges


V. THE REFORM OBJECTIVES OF CHINA’S FUTURES EXCHANGES: TO RESTRUCTURE THE FUTURES EXCHANGES CHARACTERIZED BY THE CORPORATE SYSTEM


A. The Membership Futures Exchange Characterized by Non-profit Is Not the Best Choice for the Organizational Form of China’s Futures Exchange

B. China’s Futures Exchanges Meet All the Requirements for the Corporate System


VI. CONCLUSION

A futures exchange is an organized and fixed marketplace specializing in the trading of standardized futures contracts. It provides places, facilities, and services for futures trading, and supervises the trading activities in it. In other words, it is a financial market that organizes futures trading activities, with a core function to provide trading and settlement services based on standardized contracts for bilateral markets. As with other bilateral trading platforms, it has strong network effects. Since the development of the Chinese futures market has only a history of about 30 years, the relevant legal system is still imperfect, and the legal nature of the futures exchange is still unclear. This paper intends to discuss the legal nature of the futures exchanges, and holds that the legal nature of futures exchanges is closely related to their organizational forms, and the legal entity, profitability and self-discipline are the fundamental legal attributes of the futures exchanges no matter in practice or theory. That is to say, the futures market is dependent on legislation in essence. Considering its history, market environment, legal background and other factors, each country has a different choice on the legislation of futures market. Among organizational forms, ‘non-profit membership system’ and ‘for-profit corporate system’ are two representatives. Combined with the current practice in China, considering the differences in the nature of different organizational forms and trading mechanisms, and the existing normative legal documents cannot meet the needs of market development, it is suggested to adopt the corporate system and profit-making organizational form to construct China’s futures exchanges.

I. INTRODUCTION

From the early 1990s to modern times, China’s futures market has gone through nearly 30 years of development. There is a sharp contrast between the vigorous development in the futures market and the absence of relevant fundamental laws as well as the backwardness of theoretical studies on futures law. At present, China is in the process of legislation of the Futures Exchange Law. However, no consensus has been made so far in the theoretical circles on the organizational forms of futures exchanges, which is a premise to the legislation of the Futures Exchange Law. Also, scholars’ understanding of the legal status of futures exchanges falls behind the international mainstream. For this reason, the author hopes to make some institutional attempts to deepen the understanding of relevant issues through the discussion in this paper. The purpose of this paper is not to describe the existing practice of futures trading, and the method is not limited to the interpretation of existing methods, but rather to analyze and reconstruct the organizational form of the futures exchange in the way of law, so as to provide theoretical support for futures legislation in China. Similarly, the regulation of the organizational form of futures exchange is also an important content in the future Futures Exchange Law. It is of great theoretical and practical significance to explore its organizational form from the legal point of view, which can deepen the understanding of the legal status and legal nature of the futures exchange, and better guide the healthy and orderly development of the futures market.

II. A BRIEF ANALYSIS ON THE CURRENT SITUATION OF CHINA’S FUTURES MARKET AND FUTURES EXCHANGES

A futures market is essentially a rule-based market. A complete legal system of futures is the key for all market players to pull their weight, and the key to achieving the transformation of market regulations, further performing the functions of the market, so as to maintain a healthy and stable development of the market. After nearly 30 years of development, China’s futures market has formed a relatively sound system with various types, and has been increasingly important to China’s economy. However, the institutional environment and legal guarantee of the futures market fail to match the speed and scale of the development of the futures market, thus are in urgent need of improvement. At present, China faces many challenges of unbalanced development in the comprehensive development of the futures market and securities market, and in the whole investment structure of the market. While among those challenges in the institutional environment, the most noteworthy is the imbalance of interests allocation between futures companies and the futures exchanges; namely as an important bond between investors and the futures exchanges, the futures company earns far less than the futures exchange. Low profitability of futures companies not only limits the play of its functions, but also hinders the sound development of China’s futures market as a whole. Moreover, it also puts China’s futures trading system at a disadvantaged position in the world. In the author’s opinion, the main reasons for this prominent problem lie in the current operation strategies of futures companies and the excessive regulatory restrictions on the futures market. But on the other hand, it cannot be ignored that at present, the position of futures exchange itself is not clear, and the legislative attitude is also vague, which leads to its extremely high profit level. In contrast, the profit level of futures companies is too low, thus forming an unreasonable interest oriented pattern of the futures market. In order to correct the current contradiction, it is necessary to sort out the legal status of China’s futures exchange, so as to clarify the direction for the further deepening reform of China’s futures exchange and the whole futures market.

There are two issues in the current research on the futures exchange in China’s theoretical circles: one is that the legal status of the futures exchange is not enough or insightful; the other is that the research on the profitability and corporate nature of the futures exchange is neither deep enough nor comprehensive and specific. In terms of specific issues, such as the legal attribute of the futures exchange, whether the futures exchange is profitable or not, and what kind of legal entity should the futures exchange belong to in the existing legal entity organization in China, there are different views and even endless debates. Even after the implementation of the Measures for the Administration of Futures Exchanges, the disputes over the above issues still remain. Due to the imperfection of the legal provisions of the futures exchange, there are some problems in the practical application. The existence of these problems has affected the smooth development of the futures exchange in China.

From the perspective of law to study the futures exchanges, the priority is to clarify the legal status of the futures exchanges. The Measures for the Administration of Futures Exchanges clearly defines the futures exchange as a ‘legal entity’, but it does not describe the essential characteristics of the legal entity. One explanation is that the exchange is collective, and it is primarily a group, an organization, and a collection of people, not just one person. Another shows that it has qualifications of the civil legal subject, and it can hold its own property and set up organizational structure, independently carry out civil and economic activities within the law, independently enjoy civil rights and independently bear all legal consequences. The futures exchange is only the intermediary of the operation process of the futures market. It does not participate in the futures trading activities, or in the price setting, and has certain punishment rights to its members. Therefore, the futures exchange is a kind of civil subject with special significance, which has the general characteristics of a special civil subject instead of the civil subject in the classification of legal entity in the sense of traditional civil and commercial law. However, the legal status of the futures exchange is ambiguous in theory. This ambiguity in legal relations can cause great confusion to the parties in practice, seriously affect the normal operation of the futures exchanges, and may threaten their survival in some severe circumstances. For this reason, it is vitally important to make clear the legal nature of the futures exchanges.

The futures market will show different natures seen from different perspectives. However, from the perspective of law, the nature of futures exchanges mainly involves the following two issues: one is that whether a futures exchange is profit-making or non-profit? If it is for-profit, it then becomes a corporate futures exchange; another issue is closely related to its organizational forms, that is, whether a futures exchange should adopt the membership system or the corporate system. If the membership system is adopted, then the futures exchange is non-profit. Such form has successful precedents internationally.

III. THE CORPORATE SYSTEM AND THE MEMBERSHIP SYSTEM: DEBATES OVER THE ORGANIZATIONAL FORMS OF THE FUTURES EXCHANGES

A. Basic Characteristics of the Corporate System and the Membership System

A corporate exchange is an enterprise legal entity set up for profits. Established by investors in the form of shares, it is a limited liability company or stock corporation that operates the exchange market with places and facilities provided by the investors. It adopts the management mode of corporate governance, with a board of shareholders, a board of directors, a board of supervisors and a general manager checking and balancing each other. It does not participate in the trading of the subject matter of the contract, but charges both sides of the transaction according to regulations, from which investors can share the profits. It has the following characteristics: first, it undertakes the guarantee liability for the exchange trading, that is, it is responsible for the loss caused by any party’s breach of contract. This is conducive to protecting the image of investors and gaining higher social trust. Second, the exchange is completely in a neutral position, and its personnel are not allowed to participate in trading. This is conducive to ensuring the fairness and impartiality of the exchange. Third, the corporate exchange has a strong cost concept, which is conducive to improving the market efficiency and increasing the infrastructure construction of the exchange. Fourth, the corporate exchange, for the purpose of profit-making, charges more fees, so that the member fees burden is higher. In the corporate system, investors are shareholders of the exchange, while the members are just the dealers. The commodity exchanges in the British Commonwealth generally adopt the corporate system, and some exchanges in the US adopt the corporate system, such as the New York Mercantile Exchange Inc., the Coffee, Sugar and Cocoa Exchange, and the Philadelphia Exchange.

The other form of the futures exchange is the membership exchange, which is a non-profit economic organization jointly funded and established by all the members, different from the corporate exchange. The construction and operation capital of the membership exchange is raised by its members in the form of membership fees. When the exchange has a surplus in revenue, members do not enjoy returns; when the exchange has a deficit, they have to pay more membership fees. Members shall have equal rights and obligations, and the power organ of the exchange is elected by all members in the general meeting, whose standing body includes a board of directors, a board of administrative council and a board of supervisors. It follows, then, that the membership futures exchange is a non-profit legal entity with self-disciplined management. According to the Regulations on the Administration of Futures Trading and the Measures for the Administration of Futures Exchanges, in terms of the nature of the subject, a futures exchange is a non-profit legal entity that exercises self-management in accordance with its articles of association and trading rules, which has two organizational forms: the membership system and the corporate system. In terms of operation, the appointment and removal of the main principals of the exchange are designated by the China Securities Regulatory Commission (CSRC), and the transaction varieties and trading rules are subject to the examination and approval of the CSRC. Due to a limited self-management scope, the rules and products that determine the trading content and quality of the exchanges are strictly regulated. Thus it can be seen that the futures exchanges in China are non-profit legal entities, operating as the mechanisms of quasi administrative organization.

B. Differences between the Corporate System and the Membership System

The membership exchange and the corporate exchange are different not only in their establishment, but they also have obvious differences in operation, application of laws, legal responsibilities, sources of funds and bankruptcy liquidation, which are mainly manifested as follows:

First, they are set up for different purposes. The membership legal entity is established for the public interest, not for profits, and it is an indispensable ‘decompressor’ for the national economic development. In contrast, the purpose of the corporate legal entity is to make profits. If it is not profitable, there is no need to set up, and whether it can make profits must be taken into consideration when establishing. A corporate futures exchange can distribute profits among shareholders if it has a surplus in revenue. In the event of severe losses and insolvency, however, it may declare bankruptcy.

Second, the applicable laws are not identical. The membership exchange is a kind of legal entity in the civil law. If there is a dispute between membership exchanges, it should be solved according to the relevant provisions of the civil law, and the general law can only be applied if there is no provision in the civil law. The corporate exchange is a kind of legal entity in the commercial law. Disputes between these exchanges must be regulated by the provisions of the company law, and the general provisions of civil law can only be applied if there is no provision in the company law. That is to say, the corporate exchanges are regulated by the company law to a large extent. In other words, the special law is superior to the general law. The provisions of general law cannot be applied where there are special laws.

Third, their legal liabilities are different. In the membership exchange, the profits belong to the members, but cannot be distributed to the members during the existence of the exchange, and are mainly used to ensure the normal operation of the exchange and the improvement of the places and facilities. In addition to paying the share capital, the shareholders of the corporate exchange also bear the limited liability to the futures exchange. Because the purpose of the corporate exchange is to make profits and distribute the profits to other shareholders according to a certain proportion, if the management is not good and the debts are not paid, it can be declared bankruptcy.

Finally, their sources of funding are different. The funds of membership exchanges come from membership fees, the rent of their offices and some basic facilities, among which the annual expenditure is drawn from the profit of the whole year and the annual membership fee paid by the members. The surplus part cannot be distributed to the members as a dividend until the bankruptcy liquidation. The capital of a corporate exchange comes from the payment of the shareholders themselves. As long as the corporate exchange has a profit, it can be distributed to its investors or shareholders as dividends. In the event of a loss, the funds are paid up by shareholders who also bear the limited liability. This profitability means that the value of their shares can be increased, and they can share the company’s assets in liquidation.

C. Debates over the Corporate System and the Membership System

Two deficiencies are evident in the legal status of the futures exchanges in China. First, no clear provisions have been made on the nature of the futures exchange, which leads to the ambiguity of its legal status. This ambiguity also leads to uncertainties in the definition of the legal status of the futures exchanges, the relationship between the futures exchanges and their members, and the resulting rights and obligations of the futures exchanges and members. Second, there is a lack of an updated contract system in Chinese mainland, which results in that the futures exchanges lack the corresponding legal basis to intervene between the buyer and the seller after the futures trading contract is reached. The futures market is the inevitable result of modern market economy, and whether it can play a good role and whether it can give full play to the role of competitive markets are highly related to its economic environment. We can better understand this argument through corporate and membership exchanges. Two opinions are popular on whether the futures exchanges should adopt the corporate system or the membership system. One holds that the futures exchanges in China should learn from the international experience, return to the original track, and implement the practical membership system. Such idea was well received in the late 1990s. From this point of view, the implementation of a membership system has several advantages: it helps to straighten out the relationship between the exchanges and the government authorities, as well as that between the exchanges and its original investors; it is an effective way to improve the enthusiasm of members to participate in self-disciplinary management and democratic decision-making, so as to eliminate the negative attitude and the laxity of the members; it can effectively prevent exchanges from blindly improving trading volume in pursuit of profits and from great numbers of illegal operations, thereby promoting the exchange to spend most of the revenue in management and trading facilities; it helps to establish a sound and stable risk management system and enhance members’ awareness of risk prevention. The core of this view is the implementation of non-profit membership system. On the one hand, it cuts off the profit-making motivation of the exchanges, realizing fair and open trading. It puts the exchanges in a neutral position in the process of providing market trading and supervision, so as to ensure the ‘fairness, justice and openness’ of the market. On the other hand, members who become the managers and owners of exchanges will be more devoted to the construction and regulation of the market, and pay more attention to the development and the future of the exchanges.

Another view is that China’s exchanges should explore the reform of the corporate system and should not return to the old way of the membership system. This view is mainly influenced by foreign markets. At the end of last century, the wave of demutualization, which started from the stock exchanges swept into the futures exchanges. Some major futures exchanges in the world have completed the transformation of demutualization or are exploring how to carry out the transformation. Therefore, some scholars put forward that China’s futures exchanges should also implement the corporate system. They believe that the corporate system can improve the efficiency of the management and operation of the exchanges; it may provide more sources of funds for the development of the exchanges, which helps to improve the competitiveness of the exchanges and helps them to take a favorable position in fair competition; it is beneficial to attract more shareholders who are concerned about the development of exchanges; it is beneficial to preventing shareholders from abusing market monopoly and helps the exchange fulfill its important responsibilities of market supervision. They observe that the corporate system has become a trend, which China’s futures exchanges should follow. However, considering the specific situation of China’s current market, the scholars holding this view generally believe that China should not immediately implement the corporate system. At present, the priority is to improve the membership system, and then gradually transform it into the corporate system as the conditions permit.

As a traditional organizational form of the futures exchanges, the membership system has a history of 160 years, which has played an important role in the initial establishment and operation of the futures market. In the process of establishing its own futures market system, China also chose the membership system as the only organizational form of futures exchange. China’s futures market is not an organizational form developed freely in the market economy, but is established in the era of the planned economy. This organizational form has been able to play its functions from the very beginning, and at the same time, it is also accompanied by a series of disputes about its rationality. With the continuous discussion on the insufficiency of the membership system in China’s futures exchanges and the influence of external factors such as the current trading technology innovation, as well as the introduction of various futures trading market systems from foreign countries, the debate on the organizational form of futures exchanges in China has become increasingly fierce.

With the innovation of trading technology, the application of electronic trading technology in futures trading has caused a devastating impact on traditional organizational forms. With the increasingly fierce competition in the international futures market, the inherent limitations of membership system have become increasingly prominent, which are mainly manifested in the following aspects: the income of membership exchanges fails to be reasonably distributed among members, which makes the members lack motivation to manage the exchanges; the members of the futures exchanges can only be the members who participate in the futures trading, and non-members cannot enter the market to trade, thus restricting the channels for other members to expand the capital scale and improve the strength of the exchanges through financing from other investors; the non-profit nature of the exchange greatly reduces the management efficiency of the exchanges, and the exchanges cannot adapt to the increasingly fierce competition environment, for the lack of a good competitive atmosphere.

It is one of the objective elements to distinguish profit-making and non-profit by investigating the market functions of the two kinds of organizational forms. Any organizational form must have a market basis and market demand, and it must be based on legitimacy. The legitimacy of each trading mode is determined by the practical needs and the legitimacy of its unique functional positioning. The unique function of futures trading lies in its price discovery mechanism, the function of risk management and risk transfer, as well as the promotion of the real exchange and real circulation of commodities. Therefore, it is necessary to judge whether a certain form of trading organization is profit-making or non-profit in nature according to their unique functions.

The author believes that since the members of the futures exchanges cannot effectively exercise the rights of control and decision-making over the exchanges, it is not worthy of its name to call China’s futures exchange a membership exchange. Therefore, there is no foundation for the implementation of the membership system in China’s futures exchanges. With the development of science and technology, the electronic trading is becoming more and more popular. The traditional membership trading mode is not in line with the international development trend, nor is it the reform direction of organizational system of China’s futures exchange. If we want to conform to the international trend, we should reform the corporate system.

IV. THE FOUNDATION OF THE ORGANIZATIONAL FORMS OF THE FUTURES EXCHANGES: RE-UNDERSTANDING THE LEGAL NATURE OF THE FUTURES EXCHANGES

The regulation on the organizational forms of futures exchanges is also an important part of China’s Futures Exchange Law in the future. Discussing the organizational forms of futures exchanges from a legal perspective can not only deepens the understanding of the legal status and legal nature of futures exchanges, but can also guide the futures markets towards healthy and orderly development.

A. For-Profit or Non-Profit: Dispute over the Legal Nature of Futures Exchanges

It is generally specified in the legislation of governments whether their futures exchanges are for-profit or non-profit. The organizational forms of futures exchanges vary from different countries, and they mainly consist of three types: first, the for-profit form of Hong Kong, China. The Hong Kong Exchanges and Clearing Limited (HKEX), merged by the Hong Kong Futures Exchange Limited (HKFE) and the Stock Exchange of Hong Kong Limited (SEHK) and their respective clearing houses, was listed for profit. The articles of association of HKFE stipulate that HKFE can distribute dividends and make profits. Although not highly profitable, HKFE has always been operating as a for-profit company. Therefore, we can safely conclude that HKFE is a profit-making organization. Second, the non-profit form of Japan. According to the relevant provisions of Japan’s Commodity Exchange Law, a commodity exchange is a non-profit legal entity with membership system that conducts commodity futures transactions; in order to maintain orderly conduct of futures trading, the futures exchange shall not be for-profit; commodity exchanges shall not engage in profit-making business or illegal operations. Third, both for-profit and non-profit form of the US. The futures exchanges in America mainly rely on transaction fees to maintain transaction facilities and pay employees. Their balance of the expenses can only be used for costs directly related to the transactions, not for other investment or distribution. Their aim is to provide facilities and services for futures trading. They do not own any commodities, neither conclude futures contracts, nor participate in the formation of futures prices. Established to ‘protect the legitimate rights and interests of the parties’ and ‘promote the healthy and orderly development of the futures market’, they are required to be fair, just, and open, and to do their best to provide market services, so that they can develop in a healthy manner. Therefore, futures exchanges in the US are both for-profit and non-profit.

As for the organizational forms of futures exchanges in China, two viewpoints are popular in the domestic theoretical circles. The first is that the futures exchanges can choose to be either for-profit or non-profit, which is quite eclectic. The second is that they should be non-profit. It believes that only the non-profit futures exchanges with the membership system should be allowed in China at present. In the early stage of China’s futures market, the futures exchanges generally took two forms: one type was futures exchanges sponsored by the government, such as the Zhengzhou Commodity Exchange, which was mostly a non-profit public legal entity. Such futures exchanges met the economic needs of that time, but they encouraged large speculators to enter the market, and even tolerated the vicious operations of large investors. Consequently, it might cause great risks to the market, hurt the interests of ordinary traders in the process of transaction management, and deviate the market from the principles of fairness, openness and justice. Article 3 of the Measures for the Administration of Futures Exchanges issued by the CSRC in April 2017 has made the profit or non-profit issue of futures exchanges a new focus of debate among the theorists and the practitioners. As the foundation and organizer of market transactions, futures exchanges provide places and facilities for buyers and sellers to conduct transactions. They also research, develop and provide standardized futures contracts for trading, and they organize and supervise transactions through a complete set of trading rules to reduce transaction costs. In this way, at the industrial level, the futures exchange has acted as a market organizer.

Closely related to the profit-making and non-profit issues of futures exchanges is the organizational form of futures exchanges. Generally, the for-profit characteristics are related to the corporate system, while the non-profit characteristics correspond to the membership system. Therefore, it can be seen that the research on the nature of futures exchanges cannot separate its organizational forms from whether it is for-profit or not. Instead, it should be discussed from a comprehensive perspective of mutual influence and connection. Therefore, combined with the above discussion on the developmental direction of the organizational forms of China’s futures exchanges, a clear clue to the definition of the nature of China’s futures exchanges can be obtained.

The author believes that it is far from enough to simply discuss the nature of futures exchanges. Some futures exchanges seem to be of the membership system but can be profit-making, while others seem to be of the corporate system yet may be non-profit. For that reason, the legal status of futures exchanges can only be fully understood by combining the nature and the organizational forms of futures exchanges. Corporate exchanges are often set up in the form of joint stock limited companies or limited liability companies, and according to the current classification of the nature of legal persons, both companies are for-profit legal entities in China, since the organizational forms of exchanges with corporate system display profit-making orientation. Therefore, the organizational forms of futures exchanges determine the nature of futures exchanges, and the research is meaningful only when it combines the nature and the organizational forms of futures exchanges. This division of organizational forms is the result of free competition among exchanges. The difference in trading methods of different exchanges stimulates the exchanges to choose the most suitable derivative contract for listing and trading according to their own strengths, to ensure the exchanges trading systems and risk control arrangements the most efficient, thus enhancing their competitiveness in the market and safeguarding the interests of market participants and investors.

B. The Implementation of the Corporate System Is the Trend of Futures Exchanges

As stated in the second part of this article on the introduction of the corporate system and the membership system, the corporate system should become the choice for the organizational forms of China’s futures exchanges. Correspondingly, clear conclusions can be made regarding the nature of futures exchanges.

First of all, it must be clear that corporate exchanges have many advantages that membership exchanges cannot match. In terms of operating mechanism, by implementing the corporate system, exchanges can improve their governance structures, and change their bad trading habits; they can realize proper separation of ownership and operating rights, and make operations more market-oriented, transparent, and rationalized; they can increase their credibility, improve competitiveness, and avoid becoming an affiliate of the government. At present, China’s exchanges are under the direct control of the government regulatory agencies. Futures exchanges in China lack fair competitions, and are unable to launch sufficient competition. However, they are also facing competition from futures exchanges outside the Chinese mainland, especially from the futures exchanges in neighboring countries and regions such as the Hong Kong Futures Exchange and the Singapore Exchange. Many outstanding Chinese companies are listed overseas, which shows severe challenges from overseas exchanges. If Chinese exchanges do not work hard to improve their competitiveness and governance structures, they will find it hard to survive in the international environment with fierce competition. Since the corporate reform of exchanges has become an international trend, China’s futures exchanges cannot ignore the globalization of exchange reforms, and should adapt to the current development opportunities and prepare for corporate reforms. This is our main task at the moment. We should not miss the opportunity to integrate with the world, and we should use this wave of reforms of the international futures exchanges to carry out reforms.

Secondly, the current status of China’s futures exchanges determines that it is unnecessary and difficult for a Chinese exchange to become a typical membership exchange in the world. First of all, membership exchanges emerged in the early stages of western developed countries from traders’ mutual assistance and spontaneous association. China’s futures market was established under the impetus of the government from the very beginning. Therefore, the historical background of membership exchanges does not exist in China at current stage. Membership futures exchanges were created when social productivity was relatively low. With the progress of society, the development of science and technology, and the emergence of electronic trading, it is impossible to apply traditional membership standards to modern futures exchanges. Second, it is impossible for China’s legislature to completely reform the exchange into a full membership system. At present, in China, from the perspective of practice, the full membership exchange owned and controlled by the exchange broker conflicts with the current regulatory mode in China. As far as China is concerned, under the existing system, the exchange cannot play its due legal regulatory functions, and the government regulatory authorities actually exercise part of the functions of the exchange. If the system is changed into a full membership system, the members will take the place of the supervisory department in the decision-making and operation of the exchange. It is impossible for the futures exchange to implement the legislative mode of membership system completely without modifying the regulatory mode of the legislature in China. Third, it is difficult to realize the full membership system with the existing property right structure of the exchange, and the property of China’s futures exchange is not clear with that of the state. The characteristic of the membership system is that members have the ownership and decision-making power over the exchange. Although the property rights of China’s exchanges are unclear, the government’s role is indelible in some special circumstances. To completely deny the government’s property rights to the exchanges is neither in line with the history of the exchange, nor can it be accepted by the government. The Shanghai Futures Exchange was registered as a state-owned enterprise at its birth, which indicates the government’s ownership of the exchange’s property rights. The futures exchanges of today have been registered as government institutions, equivalent to the establishment of civil servants, which again reflects the nature of the exchange’s state-owned property rights. Therefore, as the exchange of public institutions, the nature of state-owned units or state-owned assets is quite obvious. Since it is difficult to deny the government’s ownership of the property rights of the exchanges, it is even difficult for the exchanges to become membership organizations in the full sense. If we want to recognize the property rights of the government to the exchange and follow the membership characteristics of the exchange owned by the members, the only solution is to let the government and the members share the ownership of the exchange, but this is no longer the real membership system. When the government and members both have their own legitimate reasons to claim the property rights to the exchange, then the best way to deal with China’s futures exchanges is to use the form of joint-stock company to coordinate the relationship between the members and the government. The government can enjoy a certain proportion of shares in the exchange, and the remaining shares are allocated to members according to their seats or other criteria. Although the member’s seat fee cannot be completely equivalent to the member’s capital contribution, the seat fee has played an important role in the establishment and operation of the exchange, and members’ claims on the property rights of the exchange should also be considered. Members have certain rights, and the government should entrust them to manage the futures exchanges. Therefore, the corporate system is more feasible than the membership system in terms of dealing with the ambiguity of exchanges’ property rights.
Finally, many exchanges in developing countries have carried out corporate transformation and achieved good results. Although China’s exchanges started late, they have made considerable achievements in terms of technology, hardware and scale, and some of them have reached the international leading level. Under the background that many exchanges in developing countries have been restructured one after another, China’s exchanges should not linger on the pace of reform. Many futures exchanges in developing countries, including the Mexico Futures Exchange, Philippine Futures Exchange, Budapest Futures Exchange, New Zealand Futures Exchange and Kuala Lumpur Futures Exchange, have successfully transformed into a corporate system and achieved good results. Before the reform, South Korea’s futures exchanges had always called themselves membership exchanges. However, South Korea has specially formulated an exchange law, the Korea Securities and Futures Exchange Act, to transform the exchanges into a shareholding system of exchanges, which has achieved good results. The trend of exchange reform in developing countries deserves our attention, reference and consideration. There are many similarities between the exchanges in these countries and those in China in terms of their establishment background and organizational structure. Their reform experience should also be used for reference, studied and considered by us.

Therefore, from the perspective of the trend of the reform of the exchange and the settlement of the property rights of the exchange, it is not only unnecessary, but also impossible for the exchange to return to the membership system. We cannot go back to the original stage, and the best strategy is to apply the stock system to the exchange with the state retaining a certain proportion of shares, and turn the exchange into a listed company when the time is ripe. With the reform trend of state-owned commercial banks carrying out the shareholding system reform and listing on the stock market, the futures exchange should also learn from the successful reform experience of domestic commercial banks, so the stock system reform of the exchange should be put on the agenda as soon as possible.

Whether it is the spot trading or futures trading, there are still some common or similar trading rules in the specific system design and trading rules design, which is due to a certain degree of overlap between the two in the market function positioning. Therefore, in the process of determining whether the spot platform is suspected of engaging in disguised futures trading, in addition to the overall judgment from the two different trading purposes, functional positioning and trading results and other factors, it is still necessary to further compare some of the same or similar rules of two different trading platforms.

There are still some common or similar trading rules in the specific system design, and whether it is the corporate futures exchange or the membership futures exchange is determined by the overlapping of the two in the market function positioning. Therefore, in order to determine whether the exchange is profitable in the process of trading, it is necessary to further compare some of the same or similar rules of the two different organizational forms, in addition to the overall judgment of the two different trading purposes, functional positioning and trading results.

C. The Corporate Exchanges Is More Compatible with the Operation Requirements of the Exchanges

There should be some uniform and minimum requirements in terms of the organizational form, membership composition, qualifications of directors and senior managers, trading rules and trading systems for both the membership exchanges and the corporate exchanges. For the governance of the exchange, it is necessary to establish effective governance systems such as external directors, supervisors and mandatory audit because of the stakeholder nature of both forms of exchanges. Self-regulatory responsibility of the exchange should also be the common system of these two forms of exchanges. In other words, establishing a sound system should be a common characteristic of the two forms of exchanges so as to prevent excessive speculation and market manipulation, and disclose trading information. At the same time, a third-party custody system should be established to maintain the security of the exchange. The exchange is responsible for the security of trading, especially the security of trading capital. Economic globalization has made the capital of futures exchange more intensive than ever before. A huge investment is required to update the trading system. The defects of the financing mechanism of the membership futures exchange have impeded its improvement of technology and market competitiveness. The corporate futures exchange can raise money by selling stocks to external investors, which is an institutional advantage that does not exist in traditional exchanges. As for the internal governance of futures exchange, the Regulation on the Administration of Futures Trading stipulates that the one in charge shall be appointed or dismissed by the futures regulatory institution. Given the fact that the futures exchange in China perform some administrative supervision functions and the operation pattern of the futures exchange is not the result of free market competition, it is more appropriate for the futures exchange’s person in-charge to be appointed or dismissed by the futures regulatory institution. Therefore, it is suggested that the Futures Law should continue to adopt the relevant regulations in the Regulation on the Administration of Futures Trading, which stipulates that the person in charge of the futures exchange shall be appointed, dismissed or nominated by the futures regulatory institution. In addition, considering the particularity of China’s membership futures exchange, the power of general meeting of members should be weakened in the division of powers between the general meeting of members and the administrative council. The function and power of the council should be strengthened and implemented instead of following the provision that the general meeting of members is the power organ of the futures exchange in the Measures for the Administration of Futures Exchange. 

As for the various trading rules adopted by different trading modes, they serve their respective trading purposes and market functions, and belong to the external judgment standard rather than the fundamental judgment standard. It is one of the objective elements to distinguish the two modes by examining the similarities and differences of market function positioning between the two trading modes. Any commercial transaction mode must have its market basis and market demand, and must be based on legitimacy. The legitimacy of each trading mode is determined by the practical needs and legitimacy of its unique functional positioning. The unique function of futures trading lies in its price discovery mechanism, as well as the function of risk management and risk transfer. Although part of futures trading has the function of promoting commodity exchange, that is secondary. On the contrary, the unique function of spot forward trading is still to promote the real exchange of goods and the real circulation of goods. Although it also has certain functions of price discovery and risk management, the latter two functions are auxiliary functions. Therefore, to determine whether a trading mode is spot trading or futures trading, it should be judged according to its unique functions or primary functions. Whether it is spot trading or futures trading, there are still some common or similar trading rules in the specific institutional design and trading rules design, which is determined by the overlapping function positioning of these two trading modes in the market. Therefore, to determine whether the spot platform is engaged in disguised futures trading, it is still necessary to further compare some of the same or similar rules of two different trading platforms in addition to judging from the two different trading purposes, function positioning, trading results and other factors. Generally, both spot trading platform and futures trading platforms should have somehow uniform and minimum requirements in terms of organizational form, capital, shareholder composition, qualifications of directors and executives, trading rules and trading systems. In terms of the governance of the platform, due to the stakeholder nature of the two types of platforms in practice, it is necessary to establish effective governance systems such as external directors, supervisors and mandatory audit. Strengthening the self-discipline and supervision responsibility should also be the common system of these two platforms. To be specific, establishing a sound trading rules system should also be the common institutional characteristics in order to prevent excessive speculation, market manipulation and related party transactions, and disclosure of transaction information. At the same time, a third-party custody system should be established to maintain the security of transaction capital. In other words, the platform is responsible for the security of transactions, especially the security of trading capital.

From the analysis above, with the understanding that the futures exchange in China should inevitably adopt the corporate system, we should also clarify the nature of the futures exchange. Associated with the organizational form of the corporate system, legal entity, profitability and self-regulation should be the attributes of the futures exchange.

V. THE REFORM OBJECTIVES OF CHINA’S FUTURES EXCHANGES: TO RESTRUCTURE THE FUTURES EXCHANGES CHARACTERIZED BY THE CORPORATE SYSTEM

The futures market is produced and developed with the development of the modern market economy. It is a kind of system design introduced to reduce the transaction cost. It is caused by the inherent law of market economy. It has the characteristics of market intermediary function and efficiency enhancement. As a market intermediary, the cost for futures exchange to provide a trading place is extremely intensive and limited, and its institutional and regulatory functions are obviously mandatory. We should focus on improving the core competitiveness of the futures exchange in the core position of the development of the futures market. Guided by the establishment and improvement of the system and mechanism to ensure scientific development, we should adhere to the development direction of legalization, marketization and internationalization, and learn from the advanced international experience in the aspects of internal governance and management of systems and rules.

A. The Membership Futures Exchange Characterized by Non-profit Is Not the Best Choice for the Organizational Form of China’s Futures Exchange

1. The Establishment of Non-profit Futures Exchange Is the Product of Specific Social and Economic Conditions. — Among organizational forms of the exchange, the membership exchange has the institutional design characterized by self-regulation management which is non-profitable, but members of the exchange must have strong motivation of self-regulation. Why can the membership futures exchange survive? By analysis, we find that non-profit organizational structure serves for the interests of the public, and it is an indispensable ‘pressure reducer’ for the economic development of the nation. Therefore, the membership futures exchange emerges in the specific market environment, without profitable purposes. In addition, the author believes that applying the membership system to the exchange in China will inevitably lead to the situation that the members of the exchange obtain monopoly profits by taking advantage of the dominant position of the exchange. More likely, some senior members will take advantage of their super economic privileges to damage the interests of most market traders and other members. At present, the futures market in China has been developing in a stable way. The conditions for applying the membership system to the futures exchange are no longer available. If the membership system is adopted in a blind way, it is likely to be detrimental to the sound development of the futures market in China. Therefore, the membership system is not the optimal option for the reform of the futures exchange in China. In a word, on the surface, the organizational form of China’s futures exchange conforms to the characteristics of the membership system. However, compared with the membership futures exchange in western developed countries, it cannot be regarded as the membership system in the true sense. The membership system in China has a deep brand of administrative dominance. We should study the organizational forms of the membership and corporate exchanges in the developed countries, which can provide some reference for the reform of futures exchange in China.

2. The Membership Futures Exchange Cannot Protect the Interests of All Participants in the Market. — The membership futures exchange has some obvious disadvantages: first of all, the membership futures exchange is merely a market entity, and its relationship with customers depends on the contracts on trading service between both parties. It is difficult to define the regulatory power of the exchange overall market participants between equal market subjects. The theory of a contractual relationship cannot define the regulatory power of the membership exchange. However, the membership futures exchange cannot enhance its self-regulation, either. Secondly, the membership futures exchange is non-profit, and its purpose is to increase the membership. However, the members of the exchange may be subject to supervision because they are market participants. This can lead to the conflict between its non-profit purpose and its regulatory function of protecting market fairness, indicating that the exchange plays both the role of referee and the athlete. Therefore, it may fail to protect the interests of all parties involved in the market. Finally, the defects of financing mechanism of the membership futures exchange restrict the improvement of the technical ability and market competitiveness. On the contrary, the corporate futures exchange can raise money by selling stocks to external investors, which is an advantage that does not exist in the traditional exchanges.

3. China Lacks the Basic Conditions for the Reform of Membership Futures Exchanges. — Economic globalization has made the capital of futures exchange intensive more than ever before. A huge investment is required to update the trading system. The defects of financing mechanism in the membership system have restricted the investment in technology and the improvement of market competitiveness of futures exchange. Corporate futures exchange can raise funds by selling membership seats to external investors, which has incomparable organizational system advantages compared with traditional exchanges.

The emergence of the modern trading system characterized by the electronic trading system has posed a great threat to the exchange. Compared with the futures exchange with centralized trading, these alternative trading systems can be regarded as modern over-the-counter markets, because investors can bypass brokers in such markets, thus minimizing costs. The monopoly of the exchange has been shaken due to the emergence of the corporate futures exchange, which has obvious advantages compared with the membership exchange. As for the different trading rules adopted by different trading modes, they serve their respective trading purposes and market functions, which are external standards rather than the fundamental ones. The futures exchange in China needs to adopt the corporate system to get rid of the restriction from members’ interests on the development of the exchange. In this aspect, it is the direct incentive to the reform of the futures exchange in China.

B. China’s Futures Exchanges Meet All the Requirements for the Corporate System

The founders of futures exchanges are more willing to choose the company system with the purpose of profit rather than the membership system with only input but no output. This is the inevitable manifestation of the commercial subject’s profit tendency in the market economy. The purpose of corporate legal person is to make profits. The purpose of establishment is to make profits. If it is not profitable, there is no need to set up. The profit obtained is a problem that must be considered when establishing. It is the compromise reached by the market participants in the comparison and selection of their own interests whether the arrangement of the corporate system or the membership system is to help the market participants in the futures trading to achieve the maximum benefit and minimum risk. Therefore, in the emerging futures market, some membership futures exchanges adopt the institutional form which is profitable for the force of fierce market competition, because the corporate exchange that is profitable caters to investors’ need for low-cost trading, thus putting great competitive pressure on the members of the membership exchange who rely on the intermediary services fees to make profits. In order to ensure the interests of their members and the survival of futures exchanges, the membership exchanges need to adopt the corporate system to compete with the emerging futures exchanges. This is an important reason for the emergence of profitable futures exchanges.

1. Compared with the Membership Futures Exchange, the Corporate Futures Exchange Has the Maximum Benefit in the Trading System and Supervision. — The corporate exchange links ownership and control of an exchange with the right to use a product or service, and it is owned and controlled by market makers, brokers and other members,  and operates for the benefit of its members. Therefore, for the corporate exchange, all disputes between the company and its shareholders are settled by civil or commercial litigation or arbitration because the exchange is a commercial organization, under which the relationship among its members depends on the articles of association which regulate the interests of the company and shareholders, and the rights and obligations of shareholders in the company. The company and the general meeting of shareholders can restrict or deprive the rights of members through the general meeting of members. Therefore, it can deter the illegal acts and violations of the dealers.

2. The Membership System Dominated by Government Administration Is Not Conducive to the Innovation of the Exchanges. — The membership futures exchange dominated by government is not conducive to the sound development of the futures market. The futures exchange established earlier in China is the result of administration. At present, the business scope of the four futures exchanges in China is determined by the regulatory authorities, and the competition between them is very limited. The newly established futures exchanges are not the goal that can be achieved by independent market behavior. Therefore, this has resulted in the realistic pattern that China’s major futures exchanges have a strong monopoly position in fact. Therefore, it is necessary for the institution designers to consider how to ensure the legal rules on trading information to restrict the exchanges in monopoly and protect the vast numbers of market participants in the futures market in China. The status and maturity of the futures markets in Britain and the US indicate that their futures legislation has gone ahead and is more representative. Their success or failure in the legislation on market manipulation is of great significance for China to learn from and provide a convenient way to improve the legislation of futures manipulation in China. With more than 30 years of development, though the efficiency of China’s futures market has been greatly improved, it has not completely got rid of the brand of ‘policy market’ just like the stock market. In particular, the development of domestic futures market is immature, and external factors such as policies have great impact on futures. The membership futures market fails to fully meet the requirement of marketization. Therefore, the trading of the membership futures exchange in China has not reached the standard of the international market. Since China is an emerging market in transition, its legislation and?practice of futures should strive to turn the futures exchanges into the for-profit corporate ones.

3. The Implementation of the Corporate Futures Exchange Is Conducive to Bring It into the Scope of the Company Law and Carry out the Third-party Supervision System. — As the futures market in China is still in its initial stage of development, the government, market participants and industry associations should jointly help maintain the operation of the futures market. According to the North’s Path-Dependence Theory, the initial choice of institution determines the later development of institution. From this perspective, we can also explain the reasons for the lack of autonomous status of the exchanges in China. We should give full play to the regulatory role of self-regulatory organizations in the market such as exchanges and industry associations, give them corresponding autonomy, and reduce government’s direct control over exchanges and industry associations. With the development of the market, the government should gradually transfer part of the supervision power on the market to the self-discipline organizations of the industry. The third-party supervision can be introduced into the current supervision system of the futures market in China. Only by making use of the third-party supervision to make up the administrative supervision can we effectively protect the legitimate rights and interests of all parties in the market and ensure the sound development of the futures market in China. Article 10 of the Regulation on the Administration of Futures Trading stipulates that futures exchanges shall not directly or indirectly participate in futures trading. In China, the futures exchange has dual functions including the organization of futures trading and futures settlement. The third-party supervision can alleviate and settle the conflicts caused by administrative supervision and establish a buffer zone between the administrative supervision authorities and the supervised. If the third-party supervision is regarded as a department of the administrative supervision organ or as a quasi-administrative organ, it will lead to transformation from self-regulation to administrative supervision, which will make some contractual supervision activities administrative, turn a large number of disputes within self-discipline organizations into administrative disputes, and then evolve as administrative litigation which turns non-adversarial conflicts into adversarial conflicts. This will not help to prevent and defuse regulatory risks. In the face of these problems, the Chinese government adheres to the construction of the rule of law and standardization of the futures market as the core, and takes the construction of long-term supervision mechanism of the futures market as the starting point. By clarifying the functions of the government, institutions and enterprises, the Chinese government has improved the construction of laws and regulations system composed of self-discipline organizations, institutional behaviors, market activities and other elements to promote the development of the industry.

VI. CONCLUSION

The futures exchange should have a special status in the futures market. As a special legal entity, the futures exchange has its basic attributes. Due to its particularity in the futures trading market, the futures exchange is attached to some special attributes to cater for the need of the futures market. In terms of the legal status of futures exchanges both in practice and in theory, we can clearly draw a conclusion that self-discipline, legal entity and profitability are the fundamental attributes of futures exchanges. China’s current futures exchange is essentially a ‘quasi membership system’ with strong administrative color, which can no longer meet the needs of reform and opening up and the development of market economy. Thus, the reform on the futures exchange is inevitable. In order to ensure the smooth progress of the reform, the Futures Trading Law should make scientific and reasonable norms on the organizational form of the exchange.

Because of its historical background and development process, China’s futures exchange must get rid of the strong administrative color to a certain extent and become a real trading intermediary organization which can represent the market will and independently perform corresponding functions. It is possible to turn the demutualization into one in the form of corporate system when the futures market in China has been completely marketized and where the survival environment of exchanges is changed because of fierce competition between exchanges. As for the various trading rules adopted by different trading modes, they serve their respective trading purposes and function positioning, which are external standards of judgment rather than the fundamental ones. However, at present, in order to solve the problems such as unclear legal position, weak independence and weak regulatory functions of China’s futures exchanges, only by accurately restoring China’s futures exchanges to self-regulatory member organizations with real significance and giving them the regulatory functions of exercising self-discipline beyond administrative supervision, and only in this way can we form an intermediate supervision mode, in which CSRC exercises macro regulatory power (manifested as supervision according to the law), and Futures Exchange’s Micro regulatory power (manifested as binding market participants’ behaviors in accordance with contracts) can be formed. Only by establishing the independent self-discipline organization status of China’s futures exchange can we ensure that China’s futures market can further reduce administrative intervention and meet the market-oriented demand. This is the direction and goal that China’s futures exchange reform should adhere to.



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