Chinese derivatives regulations expected soon, say bankers

The Chinese central bank is expected to publish new regulations within the next few months aimed at easing tough restrictions in the country’s derivatives market, say bankers.

The new regulations being drafted by the People’s Bank of China (PBOC) will pave the way for a wider range of permitted derivatives products, as well as a greater number of banks able to offer these products.

“The proposed new regulations on financial derivatives has been deliberated by the central bank for some time now,” said Xinqiang Zhu, general manager, global markets, at the Bank of China, speaking at the International Swaps and Derivatives Association’s (Isda) annual general meeting in Tokyo last week. “Due to the complexities of the business, the central bank adopted a prudent approach in drafting, and has consulted widely with the banking industry and international agencies and banks, including Isda.”

The new regulations are expected to allow financial institutions to apply for approval to engage in domestic forex derivatives business, subject to an assessment of the bank’s risk management capabilities. Crucially, a rule that prohibits speculation and limits the use of derivatives to the hedging of specific trades is also expected to be relaxed.

“The PBOC will continue to licence institutions, but it will be for a much wider range of activities,” said Tricia Bowden, executive director and senior counsel at Goldman Sachs in Hong Kong. “There’s also a focus on overall risk management, rather than simply putting specific limits on a product by product basis.”

Currently, the only domestic derivatives product available to hedgers is a six-month renminbi forwards contract, until recently offered only by the Bank of China on a trial basis. This hedging contract, which is limited to the size of a specific trade, can be extended by a maximum of a further six months. From the beginning of this month, however, a wider number of domestic banks have been permitted to apply for licences to offer forwards contracts.

“We are hoping that the PBOC will be releasing these regulations very soon,” said Bowden. “Obviously, there’s been a change of government, and the PBOC is setting up a new banking commission [the China Banking Regulatory Commission], but we’ve been assured that these regulations will be on the agenda very soon after that is firmly established.”