26 April 2019

POLICY WATCH: China lets foreign banks trade derivatives

Chinese regulators have finally eased their grip on foreign banks, giving them the long-awaited nod to dive into the derivatives market and to issue credit cards and bonds.

The new opportunities are set to spur the offshore lenders’ growth in the world’s second-largest economy but the door may also close to smaller new entrants as the rules more than triple the registered capital required and tighten limits on shareholders.

According to draft rules released by the China Banking Regulatory Commission, foreign banks will be allowed to trade derivatives for the first time, the official Shanghai Securities News reported on Oct. 9. The public has until Oct. 30 to give feedback on the proposals.

If implemented, the initiative would give foreign banks more opportunities to diversify and differentiate themselves on the mainland. They have struggled to gain a foothold in the booming market due mainly to regulatory restrictions, and, according to a Financial Times report, control less than 2 percent of the nation’s banking assets.

They will be divided into two separate categories. Those in the “basic” category will be limited to fully hedged derivatives trading while those in the “ordinary” category will be able to trade in unhedged derivatives, the report said.

Derivatives managers will also have to have a clean track record of at least five years, with direct involvement in derivatives trading or risk control. Hedge-related and non-hedging products must be strictly separated, it said.

The move is part of Beijing’s broader efforts to internationalize its derivatives market. The authorities have launched a string of new derivatives in China. Trading in government bond futures resumed last month, and crude oil and iron ore futures are expected to debut soon. Allowing foreign banks to access these markets would boost market liquidity, observers said.

In addition, the bank regulators intend to phase out smaller players. Wholly foreign-owned or joint-venture banks will have to have at least 1 billion yuan (US$163.37 million) in registered paid-in capital, compared with 300 million yuan at present.

And the shareholders of these foreign banks must have experience in international finance and have obtained approval from financial regulators in their own countries. The shareholders of wholly foreign-owned banks must be financial institutions and the major shareholder must be a commercial bank, according to the rules.

Regulators have also set out rules for foreign banks to issue bonds and other tools to replenish capital; issue credit cards for domestic clients and set up wealth management operations, including overseas products.

– Contact the reporter at [email protected]



Freelance journalist

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