In response to excessive reneging on derivatives contracts, the China Banking Regulatory Commission now requires full disclosure of risks with respect to the sale of each product, customer confirmation that it fully understands and is capable of accommodating the risks and demands the use of international standard contracts, such as the International Swaps and Derivatives Association's master agreement. These regulatory advances will attract more foreign firms into China's derivatives market this year, said Lester Ross, a partner in Wilmer Cutler Pickering Hale and Dorr's Beijing office.
Without additional capital requirements placed on foreign institutions, satisfying the prerequisites for obtaining a license to participate in China's derivatives business should not be difficult, Ross said. He added individual investors there prefer structured deposits while institutions favor foreign exchange hedges, liability hedges including interest rate swaps, and back-to-back trades with Chinese institutions.
Still, foreign firms will be restricted in the Chinese market because renminbi transactions are off-limits. Also, some provincial foreign exchange bureaus impede inter-provincial payments in forex, he said, which lessens the appeal of the Chinese market.
