Decision of China Banking Regulatory Commission on the revision of the Interim Measures for Administration of Derivative trading by Financial Institutions in Banking Sector

Decision of China Banking Regulatory Commission on the revision of the Interim Measures for Administration of Derivative trading by Financial Institutions in Banking Sector

Order of China Banking Regulatory Commission [2011] No. 1

January 5, 2011

The Decision of China Banking Regulatory Commission on Amending the Interim Measures for Administration of Derivative trading by Financial Institutions in Banking Sector, adopted at the 101st Chairman's Meeting of China Banking Regulatory Commission, is hereby promulgated for implementation as from the date of promulgation.

Liu Mingkang, Chairman

Decision of China Banking Regulatory Commission on Amending the Interim Measures for Administration of Derivative trading by Financial Institutions in Banking Sector

China Banking Regulatory Commission ("CBRC") has decided to make the following revisions to the Interim Measures for Administration of Derivative trading by Financial Institutions in Banking Sector:

1. Article 2 shall be revised to: "For the purposes of these Measures, 'financial institutions in banking sector' (hereinafter, 'banking financial institutions') refer to financial institutions and policy banks incorporated in accordance with the law, including commercial banks, urban credit cooperatives and rural credit cooperatives, which absorb deposits from the public. Operation of derivative trading by financial asset management companies, trust companies, financial companies of corporate groups, financial lease companies and any other banking financial institutions which are established with approval from China Banking Regulatory Commission ('CBRC'), shall be governed by these Measures."

2. Article 4 shall be revised to: "'Derivative trading by financial institutions in banking sector', as referred to in these Measures, may be classified into two categories of transactions according to their trading objectives:
(1) Hedging derivative transactions, i.e. derivative transactions initiated by banking financial institutions for the purposes of avoiding exposure of self-owned assets and liabilities to credit risks, market risks or liquidity risks. Such transactions shall comply with the hedge accounting rules and be subject to bank account management.
(2) Non-hedging derivative transactions, which means transactions of derivatives other than hedging derivatives, including: (A) transactions initiated by the clients and offered by banking financial institutions to meet such clients' needs and transactions conducted by banking financial institutions to hedge relevant risks associated with the aforesaid transactions; (B) market-making transactions conducted by banking financial institutions with other market players at the sell-side and buy-side prices which are continually offered by the institutions in order to fulfill their market-making obligations; and (C) proprietary transactions initiated by banking financial institutions to make profits with its self-owned capital according to their judgment on market movements. Such transactions shall be subject to trading account management."

3. Between Articles 4 and 5, one Article shall be inserted stating that: "for the purpose of these Measures, 'clients' shall refer to individual clients and institutional clients other than financial institutions. In the event the wealth management products sold by banking financial institutions to clients are derivatives in nature, the design, trading and management thereof shall be governed by these Measures, and the client access and sales stage thereof shall be governed by relevant CBRC provisions on wealth management business. The risk assessment and sales stage associated with derivative trading by individual clients shall be governed by relevant provisions on personal wealth management business."

4. Article 5 shall be revised to: "Derivative trading conducted by banking financial institutions shall be subject to approval, supervision and inspection by the CBRC.
Banking financial institutions which are licensed to conduct derivative trading shall operate in business activities that are appropriate to their risk management ability."

5. Article 6 shall be revised to: "Banking financial institutions that engage in trading of derivatives and exchange-traded derivatives associated with foreign exchange, commodities, energies and equities shall have been licensed by the CBRC to conduct derivative trading and shall abide by foreign exchange control regulations and other relevant provisions of the state."

6. Between Articles 6 and 7, one Article shall be inserted stating that: "the licenses of banking financial institutions in derivative trading can be classified into two categories:
(1) Basic license, which permits only transactions of hedging derivatives; and
(2) General license, which permits transactions of non-hedging derivatives in addition to derivative transactions allowed by the basic license.
Regulators may, in light of the risk management ability of banking financial institutions, implement differentiated license management in such respects as the specific business modes and product varieties."

7. Article 7 shall be revised to: "A banking financial institution that applies for the basic license shall:
(1) Have a sound risk management system and an internal control system for derivative trading;
(2) Have at least two dealers who have received more than half-year special training on expertise of derivative trading and have engaged in derivative trading or relevant trading for more than two years, at least one employee responsible for managing relevant risks, one risk model researcher or risk analyst, and at least one employee who is familiar with the procedures and rules of hedge accounting, all of who shall be specifically designated for such posts, may not hold these posts concurrently, and must not have bad records;
(3) Have appropriate places and facilities for trading;
(4) Have a specific department and relevant professionals to deal with legal affairs and to be responsible for checking compliance of internal controls;
(5) Satisfy prudential regulatory indicators of the CBRC; and
(6) Meet other requirements set out by the CBRC. "

8. Between Articles 7 and 8, one Article shall be inserted stating that: "in addition to the conditions required by the basic license, a banking financial institution that applies for the general license shall have:
(1) A well-established business processing system and real-time risk management system that automatically connect the front, middle and back stages of derivative trading;
(2) Management of derivative trading that shall have over five years of experience of direct involvement in derivative trading activities or risk management and shall be free from bad records;
(3) A strict business separation system, ensuring that the market information, risk management and accounting of losses and gains of hedging business and non-hedging business are effectively separated;
(4) A well-established management framework for risks that include market risks, operational risks and credit risks; and
(5) Other conditions stipulated by the CBRC."

9. Article 8 shall be revised to: "A foreign-invested bank that intends to engage in derivative trading shall submit application materials signed by its authorized signatory to the local regulator, and upon review and consent by the regulator, shall submit them to the CBRC for examination and approval.
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