Since 2012, spot commodities trading venues have been sprouting up and growing rapidly everywhere around the country, but they have also been surrounded by fierce debate. This is because the main objective of many of those trading venues is not in fact the circulation of commodities, but rather serving as a platform for speculation. The occurrence of a large volume of customer losses and complaints has given rise to a continuous string of disputes in the industry, with some of those cases even ultimately evolving into criminal cases.
In recent years, as regulation has become more stringent, the opening of cases for, and the trial of cases of, the “crime of illegal business operations” in connection with spot commodities exchanges have become more numerous. However, despite their all being similar cases, in practice, the judgments rendered by the courts have diverged, sometimes substantially. There are also instances where cases have failed to go forward after being opened. Theoretical and practical opinions are also not in complete agreement with respect to the issue of the compliance of these exchanges. This column proposes to conduct an analysis of the criminal liability disputes that such exchanges could be involved in, in the course of investment.
Based on the definition in relevant regulations and documents, the term “spot commodities market” means a lawfully established venue or online trading platform that has information, logistics and other complementary service functions, and where buyers and sellers openly carry on regular or periodic spot commodities trading activities. The main forms of trading on spot commodities markets in China are trading by agreement, and trading by one-way bid. Trading that has over-the-counter trading, spot continuous (deferred) trading or margin trading features is illegal trading.
Before 2012, legislation for, and regulation of, spot markets were lacking. While block spot commodities trading was growing rapidly, certain trading venues or their members operated illegally, causing disorder in the market, and large numbers of investor complaints and claims. Since the issuance by the State Council of the Decision of the State Council on Clearing Up and Rectifying the Various Types of Trading Venues to Duly Guard Against Financial Risks (document No. 38) and by the General Office of the State Council of the Implementing Opinions on Clearing Up and Rectifying the Various Types of Trading Venues (document No. 37), instances of complaints filed by investors due to losses have markedly increased, with the grounds for such complaints gradually changing to illegal transactions and invalid contracts.
Since the issuance by the China Securities and Regulatory Commission (CSRC) of the Notice on Duly Carrying Out the Work of Determining Illegal Futures Trading Activities on Spot Commodities Markets (document No. 111), an increasing number of investors have directly instituted legal action or arbitration procedures with futures trading disputes as the cause of action. Their claims mainly include requests for a finding that the trading was illegal futures trading, the trade was invalid, the exchange was liable for compensation, etc.
From the regulatory regulations and adjudication practice it can be seen that the main legal basis for pursuing the criminal liability of a trading venue is the crime of illegal business operations in item (3) of article 225 of the Criminal Law, namely engaging illegally, without the approval of the relevant state authority, in securities, futures or insurance business, or illegally engaging in fund payment and settlement business, which are punishable as for the crime of illegal business operations.
Accordingly, the key in determining whether a spot trading member or an agent has committed the crime of illegal business operations lies in examining whether its trading violates state provisions on engagement in futures business.
ANALYSIS OF CRIMINAL LIABILITY
The precondition for determining whether a trading mechanism could involve the crime of illegal business operations is determining whether the trading mechanism constitutes illegal futures trading. Pursuant to the Administrative Regulations for Futures Trading, a futures trade is required to simultaneously satisfy two basic features: “open and centralized trading” and “the subject matter of trading is standard contracts”. In other words, the method of trading futures is an open and centralized trading method; and the subject matter of futures trading is standard contracts, with such contracts including and only including “futures contracts” and “option contracts”. The two features must be present simultaneously and neither one may be absent, failing which the connotation and denotation of futures trading are not satisfied.
In light of the provisions of documents No. 37, No. 38 and No. 111, the main factors considered in determining whether futures trading is illegal include: (1) with respect to the definition, illegal futures trading first needs to satisfy the features of futures trading and, second, that such trading has not been approved in accordance with the law; (2) with respect to form, the illegal futures trading employs, or employs in a disguised manner, the centralized method for the trading of standard contracts; (3) with respect to objective, the objective of the illegal futures trading is not the delivery and acceptance of physical goods, or the delivery of the physical goods is not necessary.
In the existing spot commodities trading mechanism, with respect to the trading price, it is usually the internationally accepted sale and purchase price for the commodity provided by the exchange based on international spot price quotations, and the buyer and seller are specific and the information clear, i.e., a typical over-the-counter “one-to-one trade”. Accordingly, there is no centralized trading. In the existing trading method, the subject matter of the trading in a spot trading venue is generally actuals, and even if at the moment that the buyer and seller reach agreement there is not necessarily a delivery of physical goods, the contract reached by the parties also does not satisfy the features of a futures contract or options contract, clearly differentiating it from standard contracts.
In short, although there is not necessarily a delivery of physical goods currently on spot commodity trading markets, the factors for the determination of a futures transaction are not met. Accordingly, it is relatively difficult to construe the trading mechanism as constituting illegal futures trading. Therefore, the key conditions for constituting the crime of illegal business operations set out in article 225 of the Criminal Law are not satisfied.
Yang Guang is a partner and Zhang Xiaoke is an associate at Lantai Partners