Download PDF, Issue 26 - Swiss Futures and Options Association

Focus
“Further liberalisation
is required before RMB
derivatives emerge.”
16
Commission (CSRC). So under current
rules, it would seem unlikely that banks
would be able to structure any product
with an equity or commodity derivative
component, at least without separate
approval from the CSRC. The problem is
that no approval process exists to allow
the CSRC to give banks a waiver. In fact,
there are currently no rules governing
equity derivatives in China, and it’s
unclear as to whether the regulator
would be able to give banks the go-ahead
to structure products with an equity
derivatives component even if there
were.
However, if a bank structured a note
with returns linked to the performance of
a fund of hedge funds, and some of
those underlying hedge funds
invest in equity in offshore
markets as a part of their
strategy, would that fall
under the remit of the
CSRC? Questions like this
will probably have to be
worked out in practice, say
lawyers. “The regulations are about getting
a financial institution a licence to
trade derivatives. It’s not about the derivatives
products financial institutions can
do,” says Dare Bryan at Clifford Chance.
“There are still lots of issues, and I think
the questions that will follow from banks
will be about bringing in structured
notes or swaps, and working out how to
use these rules to make money or service
their clients.”
Philip Tsao, UBS,
Hong Kong
Foreign currency vs. Renminbi
The regulations themselves do not differentiate
between foreign currency and
renminbi-denominated derivatives, and
the CBRC has indicated that a bank with
a derivatives licence (and, in the case of a
foreign bank, a renminbi licence) will not
need to get a separate licence to deal in
renminbi (RMB) derivatives.
However, the caveat that banks have
to rely on existing rules for foreign
exchange, equities and commodities,
including those on foreign exchange
administration, regulated by the State
Administration of Foreign Exchange
(Safe), means that banks will most likely
focus on foreign currency-denominated
derivatives in the near-term. Currently,
“In 2003, China received
$53 billion foreign direct
investment.”
the only local currency derivatives product
available to onshore firms is a
12-month RMB forwards contract,
offered on a trial basis by the four largest
Chinese banks – Agricultural Bank of
China, Bank of China, China Construction
Bank and the Industrial and
Commercial Bank of China. The contract
is designed for short-term traderelated
purposes, and the size of the
trade is limited to the value of the
imported or exported goods. However,
the renminbi is currently non-convertible
on the capital account, meaning that
RMB cross-currency swaps are a nonstarter.
“There isn’t really a renminbi derivatives
market at the moment other than
renminbi forwards of not more than one
year, which can only be dealt with by the
big four banks,” says Liew at Allen &
Overy. “The regulations state that Safe
has its rules on foreign exchange, and
you have to comply with those rules. I
think people have read a bit too much
into it and talked about doing renminbi
derivatives straight away.”
There’s potentially more flexibility on
the development of RMB interest rate
swaps. However, the PBOC has tight
control of interest rates, both for loans
and deposits, meaning there’s no efficient,
market-driven floating rate index.
“The only thing I am really interested in
is the establishment of an acceptable
floating rate index in China,” says a
Hong Kong-based derivatives trader.
“How can you have an interbank market
with a government fixed rate? The rates
are managed, and as a result, you can’t
write swaps on them.”
Most bankers agree that
further liberalisation, or at
least some sign from the
PBOC, CBRC or Safe, is
required before RMB derivatives
emerge. “The regulations
do not explicitly specify
the currency covered. I think
the intention of the regulations is to
make it broad enough so that the CBRC
doesn’t need to keep amending the rules
as time goes by,” says Ivan Wong, head
of risk management advisory, Asia-
Pacific, at HSBC, in Hong Kong. “We
expect the RMB derivatives market to
grow strongly once interest rates are
liberalised and the RMB itself becomes
freely convertible on the capital
account.”
Certainly, bankers are eagerly awaiting
the emergence of a renminbi derivatives
market. “[The foreign currencydenominated
derivatives market] will be
a profitable business in its own right,
bearing in mind it’s not just access to the
corporate sector, but also potentially an
increasing amount of structured investment
products to retail and wealth management
customers,” comments Mike
Bass, head of rates and foreign exchange,
at Standard Chartered, in Singapore.
SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004