Editor's Letter

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The People's Bank of China (PBoC) has issued regulations allowing derivatives licence holders to conduct renminbi-denominated interest rate swaps on a trial basis. The long-awaited move is another huge step in the regulator's efforts to open up the domestic derivatives market and has been welcomed by derivatives practitioners in the mainland. The PBoC released the regulations after a long consultation process with local and foreign banks and various official bodies.

But there are still issues that need to be addressed in order to make it work. For one, the trial scheme allows banks with derivatives licences to enter into interest rate swap transactions with each other, and also with customers that do not have derivatives licences, but only for hedging purposes. Yet the regulations do not specify what 'hedging' means, and dealers are awaiting clarification before entering into the transactions.

What's more, there is still the need for a proper documentation framework for interest rate swap transactions. Chinese institutions are uncomfortable with using documents provided by the International Swaps and Derivatives Association (Isda), and the new regulations say the interest rate swap transactions will be governed by Chinese courts in the event of dispute or breach of contract. This is unlikely to sit well with foreign banks, and may well deter them from entering the swap market quickly.

Still, in releasing the new rules, the PBoC has shown its commitment to liberalising the interest rate regime and developing the over-the-counter market in China. And there'll be many more exciting developments in China's derivatives market this year. Isda has been working with Chinese authorities to develop a regulatory framework for OTC derivatives transactions and close-out netting, and more may be revealed at Isda's AGM in Singapore this month.

In South Korea, the financial regulator has also been busy fine-tuning and adapting its regulations in response to a fast growing derivatives market. We find out how the Korean regulatory approach is evolving and how practitioners are coping with the changes. Meanwhile, accounting changes in Japan are set to spark pension funds' interest in inflation-linked Japanese government bonds. Demand for those contracts is potentially huge - the situation will certainly be worth keeping an eye on.

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