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

Ask AI · How do new regulations address the problem of capital stagnation in executive incentives?

The new short-term trading regulations are here! On April 7th, the “Several Regulations on Short-term Trading Supervision” (hereinafter referred to as “Regulations”) officially 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 related to short-term trading by major shareholders, directors, supervisors, and senior executives.

It is worth noting that, with the implementation of the new short-term trading regulations, many investors have confused them with the new quantitative trading regulations. As a result, there have recently been rumors in the market about the “implementation of the new quantitative regulations.” So, what are the main concerns regarding the new short-term trading regulations?

Industry insiders point out that this new regulation fundamentally ends the “only in and not out” incentive cycle for executives and directors. At the same time, the implementation of the Regulations helps reduce institutional costs for medium- and long-term capital entering the market and facilitates the participation of various professional institutional investors.

What is short-term trading?

In this new regulation, short-term trading refers to the behavior of specific investors buying and selling securities within six months, or buying the same listed company or New Third Board listed company’s securities within six months after selling.

Who are the targets of the new regulation?

Specific investors refer to shareholders holding more than 5% of the shares of listed companies or New Third Board listed companies (including shareholders whose total issued shares in China and abroad reach over 5%) and directors, supervisors, and senior management of listed companies and New Third Board companies.

It is important to note that the securities involved in the identification of short-term trading by these executives, directors, supervisors, and natural person shareholders include securities held by their spouses, parents, children, and securities held through other accounts.

What are the highlights of the new regulation?

First, it clarifies the applicable subjects and scope of securities. Both at the time of buying and selling, those with the status of major shareholders or executives and directors must comply with the short-term trading rules, regardless of whether they had such status at the time of purchase but not at the time of sale. “Other securities with equity characteristics,” including depositary receipts, convertible bonds, and exchangeable bonds, are explicitly regulated.

Second, it clarifies the standards for determining and calculating shareholding and trading timing. The regulation states that the trading date is the securities transfer registration date. The shareholding ratio of major shareholders is calculated by combining the holdings of the same listed or listed company in China and abroad, and securities held by foreign investors through different channels are combined, aligning with relevant regulations.

Third, it specifies 13 exemption scenarios, including preferred stock conversion, ETF subscription and redemption, grants, registration, and exercise related to equity incentives, judicial enforcement, market-making transactions, and orders for repurchase due to fraudulent issuance. It also states that if such activities involve the use of information advantages to seek illegal benefits, they are not exempted.

Fourth, for cases managed by professional institutions and where securities accounts are opened separately for products or portfolios, shareholdings are calculated separately for each product or portfolio account to facilitate trading and promote opening-up and participation of medium- and long-term funds. If these products or portfolios cannot operate independently or involve conflicts of interest, illegal activities, or violations, they will not be calculated separately.

What are the characteristics of exemption scenarios?

Exemption scenarios mainly cover three types:

1. Based on product or business system design, where the market has clear expectations for related business activities to support business development, such as preferred stock conversion, convertible bond conversion, redemption, repurchase, exchangeable bond conversion, redemption, ETF subscription, and redemption, equity incentive grants, registration, and exercise, market-making, etc.

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

3. Transactions conducted in accordance with regulatory requirements or to respond to major financial risks and maintain financial stability, such as orders for repurchase due to fraudulent issuance or forced buybacks due to illegal reductions.

Additionally, to prevent circumvention of supervision through exemption scenarios, the Regulations specify that if such activities involve the use of information advantages to seek illegal benefits, they are not exempted.

On what basis are penalties enforced?

If specific investors violate short-term trading regulations, the China Securities Regulatory Commission (CSRC) can take administrative regulatory measures or impose administrative penalties in accordance with the Securities Law and related regulations.

If such investors voluntarily report unknown illegal activities to the CSRC or pay all income from the transactions to the listed company or New Third Board company promptly, the CSRC may, according to the Administrative Penalty Law, impose lighter, mitigated, or no penalties.

What is the significance of the new regulation?

CITIC Securities points out that the implementation of the Regulations helps reduce institutional costs for medium- and long-term funds entering the market and facilitates the participation of various professional institutional investors. Clarifying rules will reduce compliance concerns caused by ambiguous standards and prevent unintentional violations due to misunderstandings.

By calculating holdings separately for products or portfolios managed by professional institutions and opened individually, it solves the operational difficulty where previous institutional funds might trigger short-term trading restrictions due to transactions between products, providing institutional convenience for social security funds, pension funds, and other long-term capital.

Furthermore, while clarifying exemption scenarios, the inclusion of negative clauses such as “seeking illegal benefits through information advantages” reflects a balanced approach of prudent regulation and encouraging compliance, helping to achieve a dynamic balance between facilitating market transactions and preventing illegal activities.

Zhongtai Securities notes that this new regulation fundamentally ends the “only in and not out” dilemma for executive incentives. Historically, short-term trading rules imposed significant restrictions on equity incentives, requiring splitting arrangements before grants, and considering exercises and vesting as purchases, leading to long holding periods of up to 12 months and capital stagnation pressures. With the new regulation, the processes of grant, registration, and exercise are no longer counted as short-term trading, removing the need to mechanically link them with transactions in the previous six months. Incentive recipients are freed from long silent periods, and their trading autonomy and cash flow arrangements are fully restored.

Beijing News Shell Finance reporter Hu Meng

Editor: Yue Caizhou

Proofreader: Liu Baoqing