On April 21, 2023, the China Securities Regulatory Commission (“CSRC”) issued the Administrative Provisions on Trading Server Colocation for the Securities and Futures Markets (Consultation Paper) (the “Administrative Provisions”). The Administrative Provisions fill a legal gap with respect to securities and futures trading server colocation. It has been common market practice for securities or futures companies to lease cabinets in an exchange or its subsidiary’ data center and sublease it to customers to host their servers, although neither the CSRC nor exchanges have formulated specific regulatory rules on server colocation. The Administrative Provisions are the only administrative departmental rules that directly regulate colocation activities. The promulgation of the Administrative Provisions improves regulations regarding market infrastructures and is conducive to the safe and stable operation of the securities and futures markets.
The high-level legal foundations referenced by the Administrative Provisions include the Securities Law, the Futures and Derivatives Law, the Cybersecurity Law, the Administrative Measures on Securities Exchanges, the Administrative Measures on Futures Exchanges, and the Administrative Measures on Cybersecurity and Information Security for the Securities and Futures Industries. Consistent with the underlying principles established by the CSRC regarding cybersecurity and information security, the Administrative Provisions introduce comprehensive regulatory requirements for exchanges and securities and futures business operating institutions (i.e. brokers), fully implement the principles of “safety, fairness and reasonableness”, and emphasize “safety management” throughout the whole process of the colocation services and related leasing activities of the exchanges and brokers.
I. Scope of Application
The Administrative Provisions regulate trading server colocation activities from the perspectives of exchanges and brokers. The Administrative Provisions apply to exchanges’ provision of trading server colocation services using trading server colocation resources and brokers’ leasing of trading server colocation resources from exchanges. "Trading server colocation resources" refer to resources such as data centers and cabinets, communication networks, and software and hardware equipment provided by exchanges, the information systems deployed in which may be connected to the trading system of the exchanges.
II. Principles for Business Operation
The Administrative Provisions highlight the principles of “safety, fairness, and reasonableness” in all aspects of the trading server colocation service and related leasing activities. Brokers shall establish a sound governance structure and effective compliance, risk control, and internal control policies to engage in trading server collation activities. Exchanges shall formulate self-disciplinary rules and technical specifications.
III. Requirements of Exchanges
Exchanges shall implement the management of trading server colocation resources in dedicated areas and ensure the communication latency from relevant dedicated areas to the front-end communication processor of the core trading system remains consistent. The requirements on the development, operation and maintenance of trading server colocation resources shall not be more relaxed than the requirements on the entrusted parties of level-III systems as specified in the Basic Requirements for Hosting of Information Systems for the Securities and Futures Industries. Exchanges shall ensure the fairness and reasonableness of relevant services in terms of resource guarantee, resource allocation, service application, service agreements, charging standards, service exit, and re-allocation of resources.
With respect to resource reservation mechanisms, exchanges shall, based on the volume of order or the client’s volume of trade, formulate categorized allocation rules and reserve for members trading server colocation resources that can fit their basic trading needs. If a member applies for additional trading server colocation resources on top of the reserved resources, the exchanges shall impose a necessary upper limit of resources in each application and the interval of applications.
Exchanges that provide trading server colocation services shall enter into service agreements with members, which shall include the content of service, rights and obligations, conditions for recovering resources, confidentiality requirements, terms of service and emergency handling requirements. The Administrative Provisions also set out rules for an exchange’s charging standards for trading server colocation services. If any abnormality arises in trading server colocation services, the exchange shall, according to its emergency plan, take timely measures such as limiting trading speed and restricting order placement and notify and guide the concerned brokers in a timely manner to prevent and resolve potential risks.
IV. Requirements of Brokers
The Administrative Provisions clarify requirements for brokers from three aspects. First, it sets out general requirements regarding security protection. Second, it requires brokers to ensure the safe operation of customers’ equipment in terms of capacity assessment, governance structure, and due diligence. Third, it specifies brokers’ reporting obligations to exchanges.
Pursuant to the Administrative Provisions, brokers shall make comprehensive evaluations in terms of personnel, capital injection, and customer needs, prudently onboard customers, ensure that it has the capability to ensure the safe operation of the customer’s software or hardware equipment, and effectively segregate the information systems of different customers, and that of the customers and the broker itself. Brokers shall fully understand and track the intended purpose, technology implementation, type of trading strategy, order velocity, handling of abnormalities and other information of the customer’s software or hardware equipment and shall not provide services to any customer that does not have the corresponding capacity for risk management and control. These requirements specify a broker’s obligation to operate prudently, and a broker may be held liable if they fail to comply with these requirements.
The Administrative Provisions also specify the contents of the service agreement entered between brokers and customers. As required by the exchanges, brokers shall report their relevant management policies and the implementation of such policies, as well as their customer information to the exchanges and update the information in a timely manner.
Lawyers' Observations
The relevant rules provided in the Administrative Provisions are general in principle, leaving room for the CSRC and exchanges to formulate specific operational rules in the future. The Administrative Provisions provide that, “where the trading server colocation resources leased by securities and futures business operating institutions involve program trading or system connectivity, relevant provisions of the CSRC shall be complied with”, which implies that the CSRC may formulate rules on program trading and system connectivity separately.
The Administrative Provisions strengthen the duties of brokers, requiring brokers to prudently select clients and ensure the compliance of clients when engaged in colocation activities. We suggest concerned brokers and clients pay close attention to the relevant provisions of the Administrative Provisions and the relevant self-disciplinary rules of the exchanges in terms of server colocation, program trading and system connectivity and engage in compliance with these provisions.
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