Isda AGM: China on course to further develop derivatives

The Chinese authorities are supportive of the development of a bilateral derivatives market in the country, despite losses suffered by corporations, asset managers and individuals from derivatives-linked products during the past year.

"The aim of the Chinese government is to further expand the derivatives market," Wu Xiaoling, vice-chairman of the finance and economic affairs committee of the National People's Congress, told delegates attending the International Swaps and Derivatives Association annual general meeting in Beijing today. She said this would involve the introduction of new products in the market in due course, without naming the instruments or a timeframe.

Her sentiments were echoed by Yi Gang, deputy governor of the People's Bank of China, the country's central bank. "The derivatives market is very important," said Yi. "The bond market in China has been steadily developing in the past decade, but mostly government bonds [and] bonds issued by policy banks and major commercial banks. Our problem is that the corporate bond market is lagging behind."

Meanwhile, Wang Lili, senior executive vice-president at ICBC in Beijing, said state-owned enterprises, including state-owned asset managers and banks, now have new guidelines related to their derivatives transactions following a "huge amount of losses" associated with derivatives positions entered into in 2006 and 2007. These losses stem from commodity, foreign exchange, equity and interest rate instruments. "People that used derivatives didn't do it properly," Wang added.

Indicating that major Chinese banks such as ICBC may no longer be comfortable acting solely as a distributor of derivatives instruments, Wang said it is "not appropriate" for officials at banks to sell a product that the officials themselves "do not fully understand" to "people that understand it even less".

Wu added there needs to be more regulatory co-ordination between government agencies responsible for supervision of banks, securities dealers and insurance companies in China, and said government officials are assessing whether or not to move towards a centralised clearing system for trades rather than the current "scattered" approach. She also indicated that more disclosure would be expected regarding derivatives transactions.

Wu also reminded the audience of the bond futures problems experienced in China during the 1990s and added that the government has an important role in protecting investors. Wu accepted there was a need to improve China's legal framework to allow for close-out netting, but gave no clear timetable for when such an amendment to Chinese law might take place.