The new regulations for A-shares take effect today! Regarding short-term trading, what impact does this have on individual investors?

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Source: Financial Times App

Today (April 7), the “Several Regulations on Short-term Trading Supervision” (hereinafter referred to as “Regulations”) issued by the China Securities Regulatory Commission came into effect. Based on a systematic review of domestic and international legislation, judicial practices, and regulatory practices, the Regulations respond to market concerns and further clarify regulatory arrangements for large shareholders and senior executives regarding short-term trading. What impact do the Regulations have on individual investors? Will ordinary investors be restricted from swing trading or buying and selling stocks? In light of various concerns, Financial Times reporters have summarized key points.

What is the short-term trading described in the Regulations?

The Regulations define short-term trading as the behavior of specific identity investors selling within six months of buying, or buying the same listed company or securities of companies listed on the National Equities Exchange and Quotations (NEEQ, “New Third Board”) within six months of selling.

“Specific identity investors” refer to shareholders holding more than 5% of the shares of listed companies or NEEQ-listed companies, as well as directors, supervisors, and senior management of listed companies and NEEQ-listed companies.

The core reason for establishing strict supervision of short-term trading is to prevent major shareholders or senior executives of listed companies from exploiting inside information that ordinary investors cannot access to front-run and profit, thereby maintaining market fairness.

Will individual investors be restricted?

The Regulations target the “key minority” of listed companies, and short-term trading refers to the behavior of the aforementioned specific identity investors selling within six months of buying, or buying the same listed or NEEQ-listed company’s securities within six months of selling.

Major shareholders holding more than 5% of shares in listed companies and NEEQ-listed companies—this threshold is very high and almost impossible for ordinary individual investors to reach. Therefore, for most ordinary individual investors, daily stock buying and selling are completely unaffected by these regulations.

In addition, the Regulations explicitly include the accounts of spouses, parents, children, and other close relatives of these two types of entities in the consolidated calculation scope to prevent evasion through third-party accounts. However, this requirement is also unrelated to ordinary individual investors.

What are the main contents of the Regulations?

The Regulations consist of twelve articles, mainly including:

First, clarifying the applicable subjects and scope of securities types. It stipulates that if an investor holds the identity of major shareholder or senior executive at the time of buying and selling, or acquires the securities without such identity but has it at the time of selling, they must comply with short-term trading restrictions. It specifies that “other securities with equity characteristics” include depositary receipts, exchangeable bonds, convertible bonds, etc., with detailed regulatory requirements.

Second, clarifying the standards for determining shareholding and transaction timing. The transaction date is the securities registration date, and the major shareholder’s shareholding ratio is calculated by combining the shares issued by the same listed or NEEQ-listed company both domestically and abroad. Securities held by foreign investors through different channels are also combined, aligning with relevant regulations.

Third, clarifying exemption scenarios. Based on the Securities Law and regulatory practice, it specifies 13 exemption cases such as convertible preferred stock, ETF subscription and redemption, grants, registration, and exercise related to equity incentives, judicial enforcement, market-making transactions, and forced repurchase of fraudulent issuance. It supports market development and regulatory needs. It also states that if the behavior involves exploiting information advantages for illegal gains, it will not be exempted.

Fourth, for securities accounts managed by professional institutions and opened separately for products or portfolios, holdings are calculated separately per product or portfolio account, including public funds, social security funds, basic pension funds, annuity funds, insurance funds, private equity products managed by securities and futures firms, and qualified private equity funds, to facilitate trading and promote opening-up and long-term capital inflows. If such products or portfolios cannot operate independently or involve conflicts of interest, illegal activities, they will not be calculated separately.

What are the exemption scenarios specified in the Regulations?

The Regulations specify 13 exemption scenarios, mainly covering three categories:

1. Designed by product or business system, where market expectations for related business processes are clear and support business development, such as convertible preferred stock, convertible bonds, redemption, repurchase, exchange bonds, ETF subscription, redemption, equity incentives, and market-making activities.

2. Changes in shareholding caused by objective non-trading factors, such as judicial enforcement, inheritance, donation, and state-owned share transfers without compensation.

3. Transactions conducted in accordance with laws and regulations to address major financial risks or maintain financial stability, such as forced repurchase of fraudulent issuance and illegal reductions in holdings.

To prevent evasion of supervision through exemption scenarios, the Regulations specify that behaviors involving exploiting information advantages for illegal gains are not exempted.

What impact do the Regulations have on the capital market?

The Regulations will bring three “benefits”:

1. Clarifying regulatory requirements. The Regulations specify the scope of short-term trading restrictions and shareholding calculation methods, which will help further regulate the trading behaviors of major shareholders, directors, supervisors, and other specific entities, and stabilize market expectations.

2. Supporting market development. Based on the Securities Law, the Regulations clarify exemption scenarios for short-term trading under controlled risks, which will support related business growth and improve the system’s inclusiveness and adaptability.

3. Improving trading convenience. For products managed by legally established, compliant, and regulated domestic and foreign professional institutional investors, the Regulations specify that shareholding calculations are based on the product or portfolio, which will promote long-term capital inflows, facilitate opening-up, and stimulate market vitality.