China: New Master Agreement For Financial Derivatives In China - 18 March 2009

Last Updated: 23 March 2009
Article by David Olsson, Kennies Fung, Maggie Shen, Minny Siu and Xiuli Zhao

On 16 March 2009 the China Interbank Market Financial Derivatives Master Agreement (2009 version) (NAFMII Master Agreement (2009 version)) as well as a relevant notice (NAFMII Notice (No.5)) by the National Association of Financial Market Institutional Investors (NAFMII) was released. This is the latest step by the Chinese authorities to regulate and further support the development of the financial derivatives market in China.

The NAFMII Master Agreement (2009 version) provides a uniform documentation approach for interbank market participants involved in financial derivatives transactions. It was made effective from 16 March 2009, with a 6 month transitional period.


The NAFMII Master Agreement (2009 version) was formally adopted by a notice (PBOC Notice (No.4)) dated 11 March 2009 issued by the People's Bank of China (PBOC) which confirmed that PBOC and the State Administration of Foreign Exchange (SAFE) had approved the promulgation of the NAFMII Master Agreement (2009 version).

By way of background, the derivatives market in China first received formal government support in March 2004 with the issuance of rules for derivative activities by the China Banking Regulatory Commission (CBRC). In July 2006, SAFE and the China Foreign Exchange Trade System (CFETS) released the RMB-FX Forward and Swaps Principal Agreement (2006 Agreement) to govern all RMB-FX forwards and RMB-FX swaps traded through CFETS. The 2006 Agreement was the first attempt by the Chinese authority to develop a Chinese-law governed master agreement to incorporate novel concepts well recognised in the international financial and derivatives market, such as the single agreement concept, flawed asset provisions and close-out netting provisions.

In August 2007, an updated version of the 2006 Agreement, the RMB-FX Derivatives Master Agreement (2007 version) (CFETS Master Agreement) was released by SAFE and CFETS, which included a new product type, RMB-FX cross currency swaps. In October 2007, NAFMII (a self-regulating trade association for Chinese inter-bank market players and working under the direction of the PBOC) released a standardised set of master agreement and supplemental documents including the supplemental agreement, performance assurance documents and product definitions (together the NAFMII Master Agreement (2007 version)) to govern all onshore financial derivative transactions between inter-bank market members.

While the NAFMII Master Agreement (2007 version) and CFETS Master Agreement have been well received in the market, the cross-over between the two master agreements has given rise to a range of technical and legal issues, particularly in relation to the single agreement and close-out netting arrangements. The NAFMII Master Agreement (2009 version) goes a long way to addressing those concerns.

Principal Features Of The NAFMII Master Agreement (2009 Version)


The "single agreement" concept is retained, comprising a master agreement (as supplemented by a supplemental agreement), and a trade specific confirmation for each trade.

To deal with the legal treatment for different types of performance assuring assets (such as those created in the form of a pledge or by way of an outright title transfer), the NAFMII Master Agreement (2009 version) sets out two prescribed forms of performance assurance documents for use by market participants, namely:

  • a pledge agreement, and
  • a title transfer agreement.

These 2 forms of performance assurance documents contemplate cash and book-entry debt securities as the performance assuring assets and incorporate detailed provisions for the creation and operation of such assets. The trading parties may also adopt other performance assurance documents for other types of assets.

Scope And Application:

Under the NAFMII Master Agreement (2007 version), all onshore financial derivatives transactions concluded after the execution date of the NAFMII Master Agreement (2007 version) are automatically subject to such master agreement irrespective of the commercial intention of the parties.

The NAFMII Master Agreement (2009 version) continues to cover a broad range of onshore financial derivatives transactions. "Financial derivative transactions" is defined as the agreements concluded between the interbank market participants on a one-on-one basis having the terms tailored in accordance with the specific requirements of the trading parties, including derivatives transactions in respect of interest rate, currency, bond, credit, gold and any combination of the aforesaid transactions and such other financial contracts as the parties may agree.

A major change in the NAFMII Master Agreement (2009 version) however, is that it is only a mandatory requirement for the market participants to use the NAFMII Master Agreement (2009 version) if there is such a mandatory documentation requirement imposed by the PRC law or regulations. The trading parties now have the liberty to adopt other master agreements for transactions which do not fall within the mandatory documentation requirement under PRC law.

As at the date of this Alert, there is no mandatory documentation requirement under PRC law for non-RMB related financial derivatives transactions. However, certain RMB related financial derivatives transactions are required to be documented under the NAFMII Master Agreement (2009 version). Those transactions are:

  • RMB-FX forwards, RMB-FX swaps and RMB-FX cross currency swaps which were previously required by SAFE to be documented under the CFETS Master Agreement; and
  • RMB interest rate swap and forward rate transactions which were previously required by NAFMII to be documented under the NAFMII Master Agreement (2007 version).

Having said this, PBOC Notice (No. 4) requires all participants in the inter-bank market conducting financial derivatives transactions to execute the NAFMII Master Agreement (2009 version). As there is no definition of "participants" and the inter-bank market consists of the following five types of markets:

  • National Inter-bank bond Market (银行间债券市场)
  • National Inter-bank lending Market (银行间同业拆借市场)
  • National Inter-bank FX Market (银行间外汇交易市场)
  • National Inter-bank gold Market (银行间黄金市场)
  • National Inter-bank bill Market (银行间票据市场)

The scope of the term "participants" needs further clarification by the regulators.

In respect of the non-participants of the inter-bank market, NAFMII allows the non-participants (i.e. non-financial institutions) to use the NAFMII Master Agreement for their financial derivative transactions.

In addition, unlike the NAFMII Master Agreement (2007 version) which adopted a multi-party model, the NAFMII Master Agreement (2009 version) is drafted in the form of a bilateral agreement. The bilateral signing approach addresses concerns that a multi-party signing model together with the mandatory documentation requirement for a broad range of "financial derivatives" under the NAFMII Master Agreement (2007 version) could cover certain products (such as structured deposits) that the parties did not intend to be governed by the master agreement for close-out netting purposes.

Events Of Default And Termination Events:

In the NAFMII Master Agreement (2007 version), the application of the events of default and termination events is limited to the trading parties only. Under the NAFMII Master Agreement (2009 version), the events of default and termination events have been extended to apply tothe specified entity (or entities) and performance assurance provider(s). Such extension caters for the application of, for example, bankruptcy events to an offshore parent bank.

Calculation Of Early Termination Amount:

The trading parties may elect for one of the two calculation methods for the early termination amount following an early termination, namely:

  • the "Replacement Transaction Method": This is similar to the "Close-out Amount" approach prescribed under the 2002 ISDA Master Agreement, or
  • the "Market Quotation Method": This is based on the "Market Quotation" concept prescribed under the 1992 ISDA Master Agreement and CFETS Master Agreement.

However, under the NAFMII Master Agreement (2009 version), if a "Market Quotation" cannot be obtained or if the close-out netting calculation party makes a reasonable determination in good faith that the application of a "Market Quotation" will not produce a commercially reasonable results, the fallback is the Replacement Transaction Method (rather than the ISDA "Loss method"). This fallback calculation approach is intended to address concerns about the subjective test under the "Loss method" in light of the international market development towards the more flexible Close-Amount approach.

Additional Clarifying Provisions:

The NAFMII Master Agreement (2009 version) also includes additional provisions to clarify the interpretation of a range of boiler-plate matters. These additional provisions deal with interest payable before and after the early termination date, set-off, confidentiality and disclosure of information. 21 new definitions have also been added.

Transition Period

A 6 month transitional period applies. Market participants can continue using the existing master agreements for their onshore financial derivatives transactions entered into or to be entered into on or before 15 September 2009 and they are at the liberty to decide as to whether such transactions are to be novated or transferred to the NAFMII Master Agreement (2009 version) once it is executed by the parties.

However, the prescribed five types of RMB related financial derivatives transactions required to be documented under the NAFMII Master Agreement (2009 version) must be signed between the inter-bank market participants within the 6 month transitional period. All inter-bank market participants are required to execute the NAFMII Master Agreement (2009 version), the supplemental agreement and its amendment (if any) and file the same with NAFMII prior to the specified deadline. If a participant fails to execute the NAFMII Master Agreement (2009 version)with another participant within the 6 month transitional period, these two participants will be prohibited from engaging in those RMB related financial derivative transactions.


The new documents represent a significant step forward in the ongoing evolution of the China derivatives market and result from the ongoing and combined efforts of market participants and intermediaries, government officials and industry bodies. The NAFMII Master Agreement (2009 version) has not only consolidated and addressed the operational issues arising from the two existing master agreements, but also clarified a number of troublesome issues encountered under the current market practice. The improved documentation will facilitate the continuous growth of the PRC domestic derivatives market in the years to come.


Mallesons has assisted a number of banks in the negotiation process in relation to both CFETS Master Agreement and NAFMII Master Agreement (2007 version) and has also participated on the NAFMII working party responsible for the drafting of the NAFMII Master Agreement (2009 version). Please do not hesitate to contact us if you would like detailed information on the NAFMII Master Agreement (2009 version) and/or to discuss any of the issues raised in this Alert.

Please click here for a link to NAFMII's website and the Chinese language version of the NAFMII Master Agreement (2009 version).

Please click here for a link to NAFMII's website and the Chinese language version of the NAFMII Notice (No. 5).

Please click here for a link to PBOC's website and the Chinese language version of the PBOC Notice (No. 4).

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.

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