Hong Kong: China derivatives update - PRC banks may trade cross currency swaps with their

clients and reforms on CBRC Derivatives Rules

1. Overview

At the beginning of the Year of the Rabbit, more reforms to the regulatory framework were announced by the PRC regulators to expand the types of derivatives instruments available for bank customers, and to enhance the supervision of derivatives businesses by financial institutions that are regulated by the China Banking Regulatory Commission (CBRC). To accommodate the increasing demand of hedging tools for foreign currency exposures in the domestic market, the State Administration of Foreign Exchange (SAFE) issued the Notice on Designated Banks' RMB-FX Cross Currency Swaps Business with Their Clients in January 2011 (SAFE Notice) to allow designated banks to trade RMB-FX cross currency swaps with their clients starting from 1 March 2011. In the same month, the CBRC also issued the revised Provisional Administrative Rules Governing Derivative Activities of Banking Financial Institutions (New Derivatives Rules) to replace the Provisional Administrative Rules Governing Derivative Activities of Financial Institutions (Old Derivatives Rules) issued in 2004 and revised in 2007.

The New Derivatives Rules prescribe two types of derivatives licences to regulate the derivatives businesses of financial institutions. This is achieved by referring to whether the relevant derivatives transactions are for hedging purposes or not. CBRC also promulgates further enhancements to its regulations on risk management, design, sales and the distribution of derivatives products, product description, risk disclosure and after sales services applicable to derivatives businesses.

2. Bank customers may start trading RMB-FX cross currency swaps in China from March

Currently, designated banks in the PRC are allowed to provide RMB-FX forward and RMB-FX swap services to their clients. RMB-FX cross currency swaps are only permitted to be traded amongst qualified members through the China Foreign Exchange Trade System (CFETS), i.e. within the National Inter-bank FX Market.

To support the continuing increase of international trade and the acceleration of overseas investments by PRC investors, the SAFE Notice expands the trading of RMB-FX cross currency swaps beyond the National Inter-bank FX Market, with a view to offer more hedging tools for PRC corporates to hedge their currency and interest risks in their global trading activities.

Starting from 1 March 2011, designated banks that have been engaged in RMB-FX swap businesses for at least one year will be qualified to also provide RMB-FX cross currency swap services to their clients without the need for a separate SAFE approval. RMB-FX cross currency swap is defined in the SAFE Notice to mean an arrangement between a designated bank and its client for the exchange of interest payments and principal amounts in RMB and foreign currency respectively within the prescribed contract period at a pre-agreed exchange rate. Banks may determine the key terms of a RMB-FX cross currency swap, including the type of the currency pair and the tenors. The applicable interest rates under a RMB-FX cross currency swap must be agreed between the bank and its client within the parameters of deposit and lending rates set by the People's Bank of China.

Cross currency swaps have traditionally been used in the financial market as a tool to fund foreign currency investments, secure cheaper funding in foreign currency or hedge against exchange rate fluctuations. The latest SAFE Notice is another step amongst the many recent reforms of the PRC regulators on the path towards RMB internationalisation.

3. New Derivatives Rules

Compared to the Old Derivatives Rules, the New Derivatives Rules prescribe a more comprehensive regulatory regime for the conduct of derivatives businesses by banking financial institutions in the PRC. The New Derivatives Rules also demonstrate that CBRC is dedicated to monitoring the onshore derivatives activities closely, and to aligning the PRC regulatory regime more closely with the developments on derivatives products regulations undertaken by other international financial markets following the 2008 Lehman Brothers collapse.

  • Scope

Under the New Derivatives Rules, the term "derivatives" is defined to mean financial contracts that derive their value from the prices of one or a number of underlying assets or indices, such as forwards, futures, swaps, options and any combinations of hybrid financial instruments with these characteristics.

The scope of the New Derivatives Rules has been expanded to govern derivatives businesses to be conducted by commercial banks, policy banks, city credit cooperative unions, rural credit cooperative unions, financial asset management companies, trust companies, financial leasing companies, financial holding companies and any other banking financial institutions approved by CBRC. All derivatives transactions entered into between these banking financial institutions or between any such banking financial institution and its clients will be subject to the New Derivatives Rules. The term "clients" is defined to include both individual and non-financial institutional customers.

  • New CBRC licensing regime

"Hedging Derivatives Transactions" vs "Non-hedging Derivatives Transactions"

"The New Derivatives Rules divide derivatives transactions into the following two categories:

Category of derivatives transactions


Hedging transactions

  • Derivatives transactions that are initiated by a banking financial institution for hedging its credit risk, market risk and liquidity risk associated with its own assets and liabilities.
  • Such transactions must comply with the specific hedging accounting rules and be recorded under the relevant banking financial institution's own book.
Non-hedging transactions

  • It mainly includes the following three types:

1. derivatives transactions that are (i) initiated by the clients of a banking financial institution and provided by such banking financial institution to satisfy its clients' needs; or (ii) entered into by a banking financial institution with any third party to hedge its exposure under the transactions that such financial institution has entered into with its clients;

2. derivatives transactions entered into between a banking financial institution as a market maker and other market participants; and

3. proprietary trading by a banking financial institution.

  • Such transactions must be recorded under the relevant banking financial institution's trading book.
  • Such transactions must not exceed 3% of the core capital of the banking financial institution.

"Basic Licence" vs "General Licence"

Based on the two categories of derivatives transactions, CBRC will impose different conditions on (i) a "Basic Licence" for conducting hedging transactions; and (ii) a "General Licence" for conducting both hedging as well as non-hedging transactions. The following table summarises the key conditions applicable to the applicants for the two types of CBRC derivatives licences. The New Derivative Rules do not specify that existing CBRC derivatives licence holders need to apply for new licences. As at the date of this alert, CBRC has not provided written guidance on the implications of this new licensing regime on existing CBRC derivatives licence holders.

Type of licence

Permitted derivatives business

Requirements applicable to the relevant licence applicant

Basic Licence

Hedging type of derivatives transactions

The applicant must have:

i. sound policies and procedures for risk management and internal control of derivatives activities;

ii. two traders with a minimum of six months' professional training and two years' experience in derivative trading, one risk control officer; one risk analyst or researcher of risk modelling; and one personnel familiar with hedge accounting rules to be responsible for compliance related matters;

iii. proper premises and facilities for trading derivatives;

iv. legal and compliance departments; and

v. satisfied any other conditions imposed by CBRC.

General Licence

Hedging and non-hedging types of derivatives transactions

In addition to satisfying the requirements to apply for a Basic Licence, it must also have:

i. a sound processing system for derivatives transactions that automatically connects the front, middle and back offices, and a real-time risk management system;

ii. an officer in charge of derivatives trading with a minimum of five years' experience in derivatives trading, and such officer must have a clean record;

iii. a strict Chinese wall system in place to ensure proper segregation of market information, risk management and determination of profit and loss between the hedging and non-hedging types of derivatives transactions;

iv. a sound risk control system to monitor market risk, operational risk and credit risk; and

v. satisfied any other conditions imposed by CBRC.

In respect of innovative products/business and commodity and equity related derivatives, the New Derivatives Rules adopt a similar approach to the Old Derivatives Rules. Article 7 of the New Derivatives Rules states that any banking financial institution intending to engage in foreign exchange, commodity, energy and equity related derivatives transactions should obtain the derivatives licence from CBRC and comply with the requirements imposed by SAFE and any other relevant regulators. This does not seem to impose any additional licensing requirement other than the Basic Licence and General Licence.

Article 18 of the New Derivatives Rules further provides that banking financial institutions are required to submit a written consultation with CBRC before engaging in any transaction for innovative products and business.

However, Article 8 of the New Derivatives Rules stipulates that CBRC may impose different requirements on the business model and product categories applicable to a banking financial institution under its General Licence. Therefore, imposing additional requirements for different types of derivatives products is at CBRC's discretion.

  • Restrictions on complex derivatives products

On many occasions, CBRC has emphasised that derivatives products offered by banking financial institutions should be kept simple and "vanilla" in type, taking into account the lessons from the global financial crisis. This principle has been incorporated into the New Derivatives Rules that the banking financial institutions are prohibited from holding for their own accounts or selling to their clients (i) any "naked short selling derivatives product " that may cause unlimited losses; and (ii) any "re-derivatives product " that has another derivative product embedded as the underlying asset or is linked to another derivatives product. However, what constitutes these two types of complex derivatives products are still subject to further clarification from CBRC.

  • Product sales and after-sales services for clients

CBRC continues to focus on the suitability assessment, risk disclosure measures and ongoing compliance obligations that are imposed on banking financial institutions by incorporating most of the provisions from the Notice on Further Strengthening the Risk Management of Derivative Product Transactions between Banking Financial Institutions and Institutional Clients Circular No. 74) into the New Derivatives Rules.

The New Derivatives Rules impose an enhanced disclosure standard for product descriptions and risk disclosure statements to be written in a clear and concise manner, but not otherwise presented in the form of footnotes/end notes, on the side of the page or in small font size. In addition, as a further reform to improve the after-sales services for customers, Article 53 of the New Derivatives Rules imposes a requirement on financial institutions to make periodic disclosures of the valuation reports and other risk factors for their derivatives transactions, rather than a minimum of once a month disclosures as previously stated in the Circular No. 74.

Both the Circular No. 74 and the New Derivatives Measures should be read together. The provisions in the Circular No. 74 will continue to apply unless otherwise superseded by any contrary provisions under the New Derivatives Rules. Please click here for our previous alert on the Circular No. 74.

Hyperlinks to rules and notices referred to in this alert

Provisional Administrative Rules Governing Derivative Activities of Financial Institutions promulgated by CBRC on 4 February 2004 and revised on 3 July 2007.

Provisional Administrative Rules Governing Derivative Activities of Banking Financial Institutions promulgated by CBRC on 5 January 2011.

Notice on Further Strengthening the Risk Management of Derivative Product Transactions between Banking Financial Institutions and Institutional Clients promulgated by CBRC on 31 July 2009.

Notice on Designated Banks' RMB-FX Cross Currency Swaps Business with Their Clients promulgated by SAFE on 30 January 2011.

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

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”

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

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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 unsubscribe@mondaq.com 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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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