HindustanTimes.com

Monday, October 13, 2003

China steps gingerly towards derivatives trading

Reuters
Beijing, October 13

China, which has been nervous about derivatives ever since the 1990s Barings
scandal, issued draft rules on Monday allowing banks and other financial
firms to tap the market.

Chinese banks are keen to develop the market to help them compete as the
country opens up under the World Trade Organisation.

Several state banks have won regulatory approval to settle foreign exchange
forwards for domestic firms, but financial derivatives -- spin-offs from the
debt and equity markets such as futures, swaps and options -- have been
largely untapped.

The proposed regulations, published by the China Banking Regulatory
Commission on its Web site (www.cbrc.gov.cn), are open for public feedback
until October 25.

The rules were aimed at "standardising and managing derivative deals by
financial institutions and help such institutions effectively control
risks", the commission said.

Non-financial firms would be banned from trading in derivatives and
financial firms, including commercial banks, must get regulatory approval to
start such business, the rules said.

To trade derivatives, financial firms must have sound risk-management
systems and the official in charge must have more than five years'
experience, the rules stated.

The firms must also have two trained dealers and at least one person tasked
to control trading risks, it said.

Branches of foreign banks applying for derivative deals in China must show
evidence their headquarters were subject to adequate supervision, the rules
stated.

Firms that failed to disclose their derivative transactions accurately would
be punished.

China's banking sector is bracing for full-blown overseas competition in
2006 when China opens its vast yuan currency business in line with WTO
promises.

Rogue trader Nick Leeson brought down British merchant bank Barings in 1995
with speculative derivatives trades, sending shockwaves around the financial
world and ringing alarm bells in China, which had yet to put firm markets
regulatory systems in place.

© Hindustan Times Ltd. 2003.
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