New rules that take effect on 7 April on short swing trading will help attract long-term capital, grant greater market flexibility while reinforcing corporate compliance responsibilities, lawyers say. The China Securities Regulatory Commission (CSRC) issued the regulation on short swing trading on 6 March.
Partner Julia Zhang, of Haiwen & Partners, said the rules prompted companies to build internal short swing trading monitoring systems, reflecting a regulatory approach combining relaxation of some limits with tighter enforcement.
China’s short swing trading regulatory regime is an important investor protection mechanism in the securities market, designed to prevent insiders or those with information advantages from seeking short-term arbitrage.
As the A-share market continues to open up, with sustained inflows of foreign capital and a growing range of innovative financial products, the old framework has struggled to keep pace with new market structures and cross-border capital flows.
Dacheng Law Offices managing partner David Li said the regulation signalled a shift towards a more refined, systematic and internationalised approach to short swing trading supervision.
In recent years, regulators in Europe and the US have adopted more flexible arrangements in areas such as position calculation and exemptions. The new rules follow this trend, replacing the stringent “prior approval” requirement in the 2023 consultation draft with a “post-filing” regime for the independent calculation of overseas public funds, thereby lowering entry barriers and communication costs for foreign institutions, he said.
Under China’s Securities Law, short swing trading refers to transactions by shareholders, directors, supervisors or senior executives holding more than 5% of a company’s shares, who purchase and sell, or sell and repurchase, shares or other equity securities of the same company within six months. Profits from such transactions belong to the company, and its board of directors is obligated to reclaim the gains.
Building on this framework, article 4 of the new rule expands the scope of regulation to include investors who did not meet the Securities Law’s statutory criteria at the time of purchase but did when selling. Dacheng Law Offices associate Gao Shen said this article would have a significant impact on companies.
“In the short swing trading regime, a company’s most important, and perhaps only, right and obligation is to exercise its claim to recover profits in a timely manner,” he added. “This differs from insider trading enforcement, where the CSRC confiscates illegal gains.”
For institutional investors, Zhang said article 9 had the greatest impact, as it clarified how their shareholdings should be calculated.
The National Social Security Fund, annuity funds, insurance funds, as well as qualified foreign institutional investors (QFII) and RMB qualified foreign institutional investors (RQFII), if operating through separate accounts with independent investment decision-making, could calculate holdings on a single-product basis, eliminating the previous requirement to consolidate shareholdings across all products managed by the same asset manager, she added.
“This rule marks the first time that the calculation method has been explicitly extended to asset management products, private securities funds and insurance funds. For QFII, RQFII and other overseas public funds, the prior case-by-case application process has been replaced by a monthly reporting obligation to the stock exchange, significantly reducing their operational and compliance costs,” Zhang said. “This enhances compliance clarity for foreign institutions and helps further stabilise and attract long-term capital into China’s capital markets.”
Zhang also cautioned that, while the rules offered flexibility, they also impose stricter compliance duties.
“Although the rules permit product-by-product calculation of shareholdings, if multiple products under the same manager collectively hold a concentrated position in a listed company, particularly when the aggregate shareholding is high, regulators may scrutinise whether unified decision-making or circumvention arrangements exist. Accordingly, enterprises must reinforce product independence within their investment research and trading frameworks,” she said.
In addition to position calculation, the regulation specifies 13 exemption scenarios, including preferred share conversions, ETF subscriptions and redemptions, equity incentive grants, registration and exercise, and judicial enforcement.
Li said these exemptions were unlikely to remain static and could evolve dynamically. “If parties use information advantages to seek illegal gains, the exemptions would no longer apply,” he said.
Zhang added that companies should establish robust monitoring systems for short swing trading, covering real-time tracking of shareholding ratios, reverse trading alerts, compliance reviews of significant positions and cross-product transaction monitoring.
