International derivatives houses, including UBS, Citigroup and Bank of America, have applauded the Chinese regulator for opening and clarifying its derivatives market and expect the move to herald a huge surge in volumes. The China Banking Regulatory Commission published guidelines earlier this month that expanded the types of users that are permitted to execute derivatives, the number of products that it will allow and stated that users can enter derivatives for speculative purposes. "It will take three-to-six months for this to digest, then we'll see a real surge," said Freda Sze, managing director and regional head of global derivative products at BofA in Hong Kong. Another trader estimated that the Chinese interest rate derivatives market stands at a measly USD30 billion (notional) a year, which is about one-third the size of Hong Kong's market.
"This may be seen as a turning point to some extent in the Chinese market," said Angela Papesch, head of the Asia-Pacific office at the International Swaps and Derivatives Association in Singapore. Phil Tsao, managing director and joint head of the Asian debt capital markets group at UBS in Hong Kong, said, "It's a tremendous improvement in the regulations." Tsao is such a fan, because the regulations are now clear and in a workable format. He explained that foreign houses will now be able to deal directly with end users, rather than via the major domestic banks. Also, it will be easier for firms to offer products such as credit derivatives, which had been a gray area.
Jing Gu, associate in the international capital markets group at Allen & Overy in Hong Kong, said, "This will expand the scope of transactions that banks and financial institutions can do," adding, instruments, such as credit-linked notes and synthetic collateralized debt obligations will likely take off now they have been put on a firm legal standing.
The guidelines also pave the way for opening up other areas of China, such as an onshore renminbi derivatives market. Ying Ying Xu, head of global markets at Standard Chartered in Shanghai, predicted that the large number of foreign enterprises opening up in China could put pressure on the government to establish a framework within a couple of years.
Li Wen Hong, deputy director in the legal department at the CBRC in Beijing, who is responsible for promulgating the regulations, was traveling and did not respond to messages.