China: Derivatives: PRC and Hong Kong

This Client Alert looks at some of the recent changes, issues and challenges facing those interested in the derivatives market in the PRC and Hong Kong. We look at the recent draft regulations issued by the CBRC, the CIRC's decision to allow all insurers to enter into interest rate swaps, possible changes that are ahead for the NAFMII Master Agreement, signs of development in the CDS market in the PRC and recent changes ISDA have announced to its credit derivative novation process.

CBRC Releases Revised Draft Regulations on Derivatives

Regulators around the world are taking a closer look at the use and regulation of derivative products. We are seeing this with the Dodd-Frank Act in the US and proposals for new measures in the EU, the UK and Australia - and China is no exception.

In July 2009, the national banking supervisory body, the China Banking Regulatory Commission (CBRC) promulgated the Notice on Further Strengthening Risk Management for Derivative Transactions between Banking Financial Institutions and Corporate Clients (CBRC Circular No. 74) which imposed restrictions on the ability of onshore (domestic) banks to engage in derivative transactions with their corporate clients and a significant ongoing administrative burden on both those banks and their clients, including an enhancement of client suitability verifications and risk disclosure measures (click here for a copy of CBRC Circular No. 74).

Now, following increased concern in China about the trading of leveraged, complex and what are termed "opaque" derivatives, as well as a disquiet about derivatives transactions that are felt to be "irrelevant to the needs of the real economy", the CBRC is considering imposing further regulation and has recently issued the draft Administrative Regulations on Derivative Products Transactions Business of Financial Institutions (金融机构衍生产品交易业务管理办法) (the Draft Regulations) to solicit public comments.

In summary, the main amendments proposed by the Draft Regulations are:

  1. clarifying that the regulations governing derivatives apply to financial instruments with embedded derivatives and spot transactions with delayed settlement of not less than three days;
  2. classifying derivative transactions into one of three categories, depending on its purpose:

  3. classifying derivative licenses into one of three categories:

  4. requiring a financial institution to obtain a "no objection" letter from the CBRC before selling complicated financial products which are new to the domestic market; and
  5. requiring that a financial institution obtain the license to trade on the spot market of the relevant reference assets before it may enter into FX, equity, commodity derivatives or exchanged traded products.

Coming only six and a half years after the CBRC promulgated China's first ever procedures to address the regulation of derivatives trading (with the promulgation of the Administration of Trading of Derivatives by Financial Institutions Tentative Procedures in March 2004), this shows remarkable progress and it is anticipated the Draft Regulations, which also incorporate the requirements in the CBRC Circular No. 74, will be formally published later this year.

We have a copy of the Draft Regulations and an English translation - clients and other interested parties can contact any of the O'Melveny & Myers lawyers listed on cover if they would like a copy.

CIRC: All Insurers Now Permitted to Enter into interest rate swaps

Following the conclusion of a four-year pilot programme during which selected insurers were authorized to enter into interest rate swaps (IRS), in July 2010 the China Insurance Regulatory Commission (CIRC) promulgated The Circular on the Engagement in Interest Rate Swaps by Insurance Institutions (中国保险监督管理委员会关于保险机构开展利率互换业务的通知) (the Circular) which allows all insurance institutions to enter into IRS.

An IRS is defined in the Circular as "a financial contract whereby both parties to the transaction agree to exchange interest calculated according to the agreed principal and interest rate within a certain time period in future" (Article 1). The Circular states that insurers are only to use IRS as a hedging tool to avoid interest rate risk (and not for speculative purposes or leveraged transactions) and requires the insurer to have proven risk management capability and prior approval from its board of directors. Limits have also been imposed on the nominal amounts involved (which should not exceed 10% of an insurer's fixed-income assets (including bank deposits, bonds and other debt instruments) at the end of the preceding quarter, with a further cap for IRS with the same counterparty) (Article 5).

Changes Ahead for the NAFMII?

In the Spring of 2009, the National Association of Financial Market Institutional Investors (NAFMII) published its China Inter-bank Market Financial Derivative Transactions Master Agreement to much acclaim. This Agreement was designed to replace both the previous version of the NAFMII Master Agreement (published in 2007) and the National Interbank Foreign Exchange Market RMB-FX Exchange Derivatives Master Agreement released by China Foreign Exchange Trading System (CFETS) in 2007. Having two sets of documentation had created issues for the market (including possible confusion, administrative burden and costs and netting concerns) and the single NAFMII master agreement addressed many of these.

The NAFMII Master Agreement, which governs all financial derivative transactions in China, was widely taken up but has recently faced criticism that it needs greater technical depth (for example, NAFMII Definitions are just over 20 pages in length whereas the similar definitions from the International Swaps and Derivatives Association (ISDA) stretch to over 140 pages) and to cover more asset classes (in particular, the NAFMII Master Agreement doesn't cover commodity derivatives, a booming market in the PRC).

In August 2010, NAFMII met with certain key members (including onshore and offshore banks) as a result of which it is expected that several key working groups will be set up to look at these issues.

CDS: Coming Soon to A Market Near You?

There are reports that China's central bank is considering rules to foster the creation of new derivative products. One area where we are seeing this is the nascent development of credit default swap (CDS) products. In the past, plans for a CDS pilot project in China have been postponed in the face of various concerns, including worries that the country's bond market is too immature (in a recent speech, Zhang Guangping, deputy director-general for the CBRC in Shanghai, said he believes three conditions need to be met in China before allowing CDS to trade onshore: a deeper corporate and enterprise bond market, a more active interest rates derivatives market and for credit rating agencies to be better developed). However, there are no doubts that the that bond market in China is expanding rapidly (reports state that in the first half of 2010, corporate debenture issues on China's interbank bond market totalled RMB 780 billion and debenture bonds under custody hit RMB 3 trillion) and the People's Bank of China (PBOC) and other regulatory bodies, including the CBRC and NAFMII (which would have responsibility for drafting the definitions for onshore credit derivative transactions) have been studying the feasibility of developing a credit derivatives market to hedge and mitigate credit risks, in response to market needs.

At the end of July 2010, Shi Wenchao, secretary general of NAFMII, announced that China was expected to launch its first CDS products this year. This was quickly followed by the launch of a pilot CDS project named "Optional CBIC 1". According to press reports, the product was designed by China Bond Insurance Co. Ltd., issued to Chongqing Chemical & Pharmaceutical Holding Group Co. on 13 July 2010 and underwritten by Industrial Bank Co. Ltd.

Nevertheless, some of the Chinese regulators including the CBRC, are still reported to have concerns and not many market participants expect that these shall be to be addressed any time soon.

ISDA Announces Changes to Its Credit Derivative Novation process

On 25 August 2010, the International Swaps and Derivatives Association (ISDA) announced a new project to streamline the novation process for credit derivative trades. This will be done by way of ISDA's "Credit Consent Equals Confirmation" project which will implement a process allowing parties to provide consent to and legal confirmation for a novation simultaneously by an automated, single-step process (rather than the existing two-step process of consent plus confirmation).

ISDA has published Additional Provisions for Consent to, and Confirmation of, Transfer by Novation of OTC Derivative Transactions on its website. These provisions amend the rules in the ISDA Novation Protocol to allow the changes to the novation process to take effect without requiring parties to re-adhere to the Novation Protocol.

The project will go live on Thursday, 30 September 2010 and more details (including the Provisions referred to above) are available on the ISDA website (click here).

O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.