China publishes new derivatives master agreement

The Chinese National Association of Financial Market Institutional Investors (Nafmii), a trade association set up by the People's Bank of China (PBOC), has published a new master agreement for trading, settlement and netting of onshore derivatives traded in the Chinese interbank market.

The new master agreement is intended to consolidate its Nafmii predecessor and a master agreement published by China Foreign Exchange Trading System (CFets), Nafmii said. The new master agreement is very similar to the international norm - the master agreement developed by the International Swaps and Derivatives Association - said Jane Jiang, Beijing-based counsel with law firm Allen and Overy and a member of the drafting group of the agreement.

"It is intended as a positive response to the market's concern over multiple onshore master agreements," said Jiang. The new Nafmii master agreement, unlike its predecessor, is a bilateral agreement in line with international practice, she added.

The new agreement covers much more onshore trading activity than the previous two agreements, which overlapped but broadly covered only renminbi-denominated foreign exchange and interest rate derivatives. The Mafmii master covers these two asset classes, whether or not they are traded in renminbo or a foreign currency as well as bond derivatives, credit derivatives and gold derivatives, and any derivatives product that is a combination of the above, said Jiang. "The notable absence of any reference to underlying equity and commodity [derivatives] also seems to indicate that PBOC recognises that it does not have jurisdiction over such derivatives," she added. Gold is often viewed as a financial product rather than as a commodity.

The Nafmii agreement is effective immediately; there will be a six-month transition period in which the new agreement and the two old agreements may all be used. The Isda master agreement may continue to be used by corporates and for cross-border trades, Jiang added.

Isda representatives in Hong Kong welcomed the new agreement. "We are very supportive of the developments that Nafmii is having in this space," said Keith Noyes, Isda's Hong Kong-based head of the Asia-Pacific region. "The more the two agreements look like each other means there will be less basis risk, and this is a good result for all the parties."

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