PROVISIONAL RULES ON DE-RIVATIVES BUSINESS

03/01/2004

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To further regulate financial institutions' trading in derivative products, on 4 February 2004 the China Banking Regulatory Commission (CBRC) announced the Provisional Administrative Rules Governing Derivatives Activities of Financial Institutions, which took effect on 1 March 2004.

Financial institutions covered by the rules in-clude banks, trust and investment companies, finance companies, financial leasing companies, and automobile finance companies established in the PRC, and PRC branches of foreign banks. Derivative products are defined as financial contracts with a value derived from one or more underlying assets or indices. They include four basic types—forward contracts, futures, swaps, and options—and other structured financial in-struments with characteristics of one or more of the basic types. The rules divide the derivatives activities of financial institutions into two major categories: own-account trading to hedge risk on their own assets or liabilities, or for profit; and the provision of derivatives services (dealing and market-making) to clients (including other fi-nancial institutions).

A financial institution applying to be engaged in derivatives activities must meet the following conditions:

It has a sound risk management system and internal control system for derivatives trading.

It has a complete trade processing system for derivatives trading that automatically links its front, middle, and back offices, and a real-time risk management system.

Its officer in charge of derivatives trading must have at least five years' experience of direct involvement in derivatives trading ac-tivities and risk management, and no record of misconduct.

It has at least two trading personnel, each with at least two years' experience in derivatives trading or related trading, who have received at least six months' training in derivatives trading skills; it has at least one derivatives risk management officer; and it has at least one risk model researcher or risk analyst. A single individual shall not assume more than one of the above functions concurrently, and the above personnel shall have no record of misconduct.

It has appropriate trading premises and facili-ties.

In the case of a branch of a foreign bank, its home country has a legal framework for the regulatory supervision of derivatives trading business, and the regulatory authorities in its home country have corresponding regulatory capabilities.

Other conditions imposed by the CBRC.

A foreign-invested financial institution that wishes to engage in derivatives business must submit application documents, signed by an au-thorized signatory, to the local CBRC office. After local approval, the application will then be submitted to the CBRC for final approval. If a foreign-invested financial institution wishes to be engaged in derivatives business at two or more branches within the PRC, its head office, if incorporated in the PRC, or its lead branch, in the case of a foreign bank, may submit a single ap-plication to the local CBRC office. After local approval, the application will be submitted to the CBRC for final approval.