CHINA & THE DERIVATIVES

“Starting Sept. 16, China will put into effect a new agreement governing how banks trade domestic financial derivative products among themselves. But as a condition of dealing with foreign banks, China’s five largest commercial banks are seeking to impose tough credit demands that will be hard to comply with, according to lawyers and sources at several foreign banks.” Said WSJ.

Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank, Agricultural Bank of China Co. and Bank of Communications dominate the domestic money markets, supplying as much as 80% of market liquidity. Not being able to deal with them would punch a big hole in the operations of foreign banks in China.

China’s derivative markets are rapidly developing, and foreign banks have been hoping their extensive international experience will help them tap a steadily increasing stream of revenues from those markets.

Under the new trading regime, banks will only be allowed to trade with counterparties with whom they have signed a master agreement. That agreement will initially cover existing trading in interest rate swaps, bond forwards, foreign exchange swaps and forwards and cross currency swaps.

But the five big banks are insisting that foreign banks, and in some cases their major shareholders, guarantee the credit of their China units before they sign any agreement, according to foreign bankers with direct knowledge of the situation. All five banks declined to comment on the new arrangements.

China is dictating its own rules after last 2 years catastrophe !!!