Editor's Letter

The two Asian giants - China and Japan - once again take centre stage this month, but for very different reasons. China's derivatives market is still at a very early stage of development, and liquidity in the renminbi swaps market has remained very thin since the introduction last year of new regulations aimed at opening up the market. But there's no disputing the potential of the market. Almost every bank is hugely excited about business prospects in China, believing that the evolving regulatory framework will bring enormous opportunities over the next few years.

In our special report on China, we find out from lawyers and derivatives players how they would view a widely anticipated master agreement that was expected to be released by the State Administration of Foreign Exchange as Asia Risk went to press. The framework, modelled after that of the International Swaps and Derivatives Association agreement, will provide a definitive regulatory framework for cross-currency forwards and swaps, and players expect it to boost liquidity.

Japan, on the other hand, has a very different set of issues. Following the announcement by the Bank of Japan in March of an end to its zero interest rate policy, the central bank is expected to raise rates for the first time in five years and could do so as early as July. This, coming on the back of rate hikes by the US Federal Reserve and European Central Bank, has further increased systemic risks in the global financial system and presents a considerable threat to currency markets. The unwinding of yen carry trades by hedge funds in recent months, in particular, has piled pressure on a wide range of currencies, including the Icelandic krona, Australian dollar, New Zealand dollar, to name a few. Although markets seem to have stabilised after the March sell-off, the situation certainly warrants close attention, as there remains a huge position in yen carry trades outstanding in the market, according to dealers. Our cover story looks at this in more detail.

The region's energy market also warrants our attention, given that the Dubai Mercantile Exchange (DME) is soon to launch a sour crude futures contract (see our Energy special report). We talk to Gary King, DME chief executive, about the exchange's plans, and issues it faced in launching a Middle East-based sour crude oil benchmark.