China hints at broader scope with netting law name change

Central bank reportedly behind name change as derivatives rise up political agenda

Industry participants have welcomed a move by the Chinese authorities to include derivatives in the name of China’s draft futures law, which lawyers say was done at the insistence of the People’s Bank of China, signalling a willingness to attach greater importance to the country’s emerging derivatives market.

“The People’s Bank of China had insisted that it should be called the futures and derivatives law. The fact that the title has been amended shows that the regulators in China, both the CSRC [the securities regulator] and the PBoC, are working together to try and pass this as quickly as possible because it’s important to the industry and to the Chinese economy,” said Terry Yang, a lawyer with Clifford Chance.

Yang was speaking at the annual International Swaps and Derivatives Association Asia-Pacific conference held today (October 19).

The new piece of legislation, which is currently in its second reading before the National People’s Council, the country’s legislator, is expected to set out the framework for dealing derivatives in China. Of particular interest for international banks is the extent to which close-out netting – where residual trades can be netted if one counterparty fails – will be allowed.

In the past China’s various regulators have been at loggerheads over what the new framework should look like, but an initiative to bring the regulators closer together, which began a few years ago, has seen many of these differences ironed out.

Whilst the draft of the netting law has not yet been made public, industry representatives on the panel expressed their satisfaction that the name of the law has been changed.

“It’s great news that we hear about the title [change] of the law today,” said Stewart James, head of group public affairs for Asia at HSBC. “I think it shows that there’s movement in the right direction to have a wider use and to recognise the utility of a wider use of derivative products.”

But it still remains to be seen whether there will be any meaningful substance within the text of the new law, beyond just the title change. Industry remains particularly anxious the wording around settlement finality – the idea that, once a trade is settled, it cannot be reversed – may not be strong enough to keep some cleared over-the-counter transactions out of the reach of China’s bankruptcy law.

According to Chin-Chong Liew, a lawyer at Linklaters, previous drafts of the futures law have included provisions for settlement finality of futures, but not for cleared OTC trades.

“[Settlement] finality [for cleared OTC trades] should be recognised in a similar way to futures because of the clearing process,” said Liew. “My observation is that hopefully they will not just change the name, but that they will also include [settlement finality] for OTC clearing.”

Benoit Gourisse, Isda’s head of Asia-Pacific public policy, said that tackling cleared OTC derivatives head-on will be vital to the development of China’s derivatives sector.

“We were not in a position in 2009 to see how successful central clearing would be because [central clearing] was all based on sufficient standardisation of products,” he said. “Today the largest category of derivatives traded are OTC centrally cleared, and this is something we now need to build up in the major emerging jurisdictions, including China. [We need to] reach out and provide some thought on…this development of OTC centrally cleared derivatives, the relationship with clearing houses and the development of [clearing house] infrastructure.”

He added: “Futures is a word that we usually use for exchange-traded derivatives, so the fact that they added the word derivatives is probably a positive sign for the development of OTC derivatives.”