China: Chinese Regulator Issues New Rules To Regulate Derivatives Transactions

Last Updated: 11 August 2009
Article by David Olsson, Kennies Fung and Xiuli Zhao

In a move designed to protect onshore (domestic) Chinese banks and their customers from exposure to derivative products which are perceived as being high risk, the China Banking Regulatory Commission (CBRC) has unveiled stringent new rules to further regulate the issue and use of derivative products.

The Notice on Further Strengthening Risk Management for Derivatives Transactions between Banking Financial Institutions and Corporate Clients (Notice), issued on 31 July 2009, imposes restrictions on the ability of onshore banks to engage in derivatives transactions with onshore corporate clients together with significant ongoing administrative obligations on both the clients and banks.

The Notice has immediate effect and requires all onshore banks engaging in derivatives transactions to submit a report to CBRC by 31 October 2009 outlining its plans for compliance with the Notice.


The Notice applies to all "onshore banks" holding a derivatives license. These include Chinese domestic banks as well as the onshore branches of foreign banks and the locally incorporated subsidiaries of foreign banks.

The transactions which are affected are only those with "corporate clients", being all the clients of a bank other than individuals and financial institutions.

The Notice applies only to future derivative transactions between onshore banks and corporate clients. Existing derivative transactions are not affected unless they are restructured.

Prerequisites To Entering Derivatives Transactions

The Notice requires an onshore bank to comply with strict new rules whenever it enters into a derivative transaction with a corporate client. The key requirements are:

  • The corporate client must have evidenced a "real need" to enter into a derivatives contract. There is little guidance in the Notice on how this need is to be demonstrated but it is stated that the main risk profile of the derivatives transaction must have a "reasonable degree of relevance" to the main risk profile of the underlying assets or liabilities. The Notice expressly restricts onshore banks from treating their corporate clients' RMB debts as the transactional need for entering into a derivative transaction linked to non-RMB market parameters.
  • The derivative product which a bank offers to its corporate clients must be a basic product (i.e. simple and common) which has a risk profile that can be analysed and priced by the bank. The implication of this requirement is that if the bank does not have an appropriate evaluation and pricing system it will not be able to offer anything other than the most basic of products. While it remains to be clarified, it does seem that if an onshore bank has appropriate systems in place there is the possibility that it will be able to offer slightly more sophisticated products to its clients - but this will be the subject of specific discussions between the bank and CBRC.
  • The bank must have undertaken a formal risk evaluation process in relation to each product offered to its clients and concluded that the proposed derivative transaction is suitable for each client having regard to that client's ability to assume the risks of the transaction.

Restrictions On Marketing Activities

The Notice prescribes the way in which an onshore bank can market and sell derivatives products. The key features are:

  • All sale activities must be undertaken by staff employed by the onshore bank. The Notice prohibits onshore banks from jointly promoting derivatives products with sales persons employed by any offshore entities (i.e. any entity which is not registered or incorporated in the PRC) or engaging in such joint promotion by any disguised means
  • So called "back to back" derivatives transactions in which an onshore bank acts, at the request of its domestic corporate client, as the intermediary between that client and an offshore bank are now no longer allowed
  • The bank must not misrepresent the risks associated with the product it is offering. That means that the description of the product (including associated risks) has to be set out in an objective and fair manner. The bank must not mislead clients, exaggerate strong points, guarantee any return to the client, or force the client to purchase the derivative product as a condition for other businesses or products, and
  • All offering materials, product introductions and risk disclosure must be written in a clean and easy to understand way.

Ongoing Compliance Obligations

In addition to the above requirements, there are significant ongoing compliance obligations. The onshore bank will be required to:

  • Re-calculate the market value of the derivatives at least monthly and provide this valuation in writing to its customer
  • Evaluate all legal documents in relation to the derivatives (such as the master agreement, contracts and others) at least half yearly
  • Put in place internal compliance procedures, risk evaluation processes and pricing models that meet the requirements of CBRC, and
  • Ensure that all internal staff are properly trained and all sales persons are duly authorised to promote the products.


The new rules set out in the Notice are expected to have a significant impact on the ability of onshore banks to undertake derivative and trading activities in the Chinese domestic market. Clearly the government's objective in protecting onshore banks and their customers from the risks associated with high risk derivative products will be furthered by these rules, but it is likely that onshore banks will have to devote considerable time, energy and resources to developing the necessary internal compliance procedures and evaluation processes to satisfy CBRC.

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”

Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions