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Chinese Derivatives Market May Double On Back Of Guidelines

The People's Bank of China is preparing to issue derivatives guidelines that could double the size of the mainland's non-renminbi derivatives market. The guidelines are expected to give formal approval to foreign banks to trade directly with end-users before year end, a move cheered by international players. "Everyone's gung-ho on the prospect of a fully-fledged business in China," said Frédéric Lainé, Asian head of fixed income and derivatives at Credit Lyonnais in Hong Kong. Traders said the derivatives market in China could double in the next 12 months to USD10 billion a year as a result of the liberalization.

Li Fu An, deputy director general at the People's Bank of China in Beijing, explained, "We didn't have any formal guidelines or articles on [derivatives]. We do have banks doing some derivatives these days but most are not formally approved by the PBOC--the upcoming rules will give formal approval." He continued that the PBOC is currently ratifying the drafts internally and will release the final versions before year end. "We have been welcoming comment from the industry," Li added, noting that he has been speaking with market participants along with the International Swaps and Derivatives Association.

ISDA has been reviewing drafts of the regulations, providing feedback to Chinese officials as well as answering queries regarding market practices, according toAngela Papesch, head of the Asia-Pacific office at ISDA in Singapore. In addition, Papesch said ISDA will soon begin holding ongoing seminars in China for regulators and end-users. "Market participants are eager to get this going," she added.

The guidelines will likely explain the systems and procedures for firms to account for market risk and derivatives as well as promulgate regulations regarding derivative licenses for foreign banks, said Papesch.

"The regulations should make the processes clearer and offer better definitions for products," noted Paulus Mok, head of treasury marketing at Citibank in Shanghai. More transparent regulations should mean more end-users, such as local banks, starting to use derivatives, according to Mok. Indeed, JPMorgan is planning a major push into the Chinese mart (DW, 8/26).


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