Chinese and foreign banks still at loggerheads on parent guarantees

Foreign banks such as Standard Chartered, HSBC and BNP Paribas are making slow progress in China in signing what is considered the closest equivalent to a Chinese version of the International Swaps and Derivatives Association master agreement with their Chinese bank counterparts. Nearly two months have lapsed since a mid-September deadline by which all banks should have signed up if they wanted to continue trading derivatives in China. 

The signing of the new derivatives master agreement, published by the National Association of Financial Market Institutional Investors (Nafmii), is a prerequisite for any bank wanting to continue trading interest rate, foreign exchange, bond, credit and gold derivatives onshore in China. But disagreement about the terms demanded by some of the Chinese banks – with the Bank of China being the most vocal – as a pre-condition for signing the bilateral agreement has deterred many foreign banks from signing by the September deadline. 

By press time on November 5, 470 Nafmii master agreements had been signed, up from 270 agreements signed by the deadline on September 15 that was imposed by the trade association, which is affiliated to China’s central bank, the People’s Bank of China. 

Fiona Liu, a Nafmii spokesperson in charge of enquiries related to the master agreement, based in Beijing, says the figures also include contracts signed between banks and non-financial corporate users of derivatives, which includes the large state-owned enterprises that need to hedge risks with derivatives – and these corporate names are not published on Nafmii’s website.

“During the past two months since September 15, the rate of signing (of the Nafmii agreement) by the banks has been very slow,” says Liu. “On average we just have a couple of agreements signed per day. Before the deadline, the banks had been more active – we were seeing on average 20 or more agreements signed each day.”  

Each agreement, signed bilaterally between two derivatives trading counterparties, represent one count. According to data on Nafmii’s website, the number of banks that had signed the agreement has risen to 66 from 58 at the time of the September deadline, with the additions of the Shanghai branches of European banks such as Italy’s Intesa Sanpaolo and Belgium’s KBC Bank.  

Foreign banks such as DBS, Deutsche Bank, JP Morgan and Citi have all secured a couple of Chinese banks as new signatories to the agreement – mostly with mid-tiered Beijing-based China Everbright Bank and Shenzhen Development Bank. And Barclays Capital has signed with Industrial and Commercial Bank of China (ICBC).

Meanwhile, Bank of China and Agricultural Bank of China (ABC) remain two of the big four Chinese banks that have still not signed with any foreign banks. 

And foreign banks that have traditionally been some of the most active in the foreign exchange and interest rate derivatives market in China, such as HSBC, Standard Chartered and BNP Paribas, have still not signed with any of the big four state-owned commercial banks, namely ABC, Bank of China, China Construction Bank and ICBC. 

Foreign banks are resisting a demand by some of the Chinese banks for their offshore parent companies to provide guarantees to derivatives trades of the locally incorporated foreign banks. Liu says the disagreements remain unresolved.