ISDA Presents Next Steps to Develop China’s Derivatives Markets


Once the close-out netting is completed, it will remove a major barrier to international participation in Chinese derivatives markets, according to ISDA.

The ISDA (International Swaps and Derivatives Association) has released a new white paper offering recommendations on policy measures to promote further development of China’s derivatives markets.

The report comes as the Chinese government continues to support the development of a mature onshore derivatives market through regulatory and legislative reforms.

Namely, the Futures and Derivatives Bill, which was presented for second reading to the NPC (National People’s Congress) Standing Committee in October, represents “China’s first step in recognizing the ‘Applicability of close-out netting in national law’.

“Recognition of netting will remove a major barrier to international participation in China’s derivatives markets,” the report said, adding that it will minimize disruption in the event of default, while increasing liquidity and credit capacity.

The report notes that some provisions of the bill need to be clarified to confirm the applicability of close-out netting and related financial guarantee agreements, and that ISDA is working with Chinese authorities, market participants and industry associations. sector to complete this work.

The report also offers recommendations for policymakers and market players to consider further developing China’s derivatives markets, once close-out netting is completed.

The recommendations focus on four key areas:

  • Risk governance: strengthen risk governance frameworks around the use of financial instruments; promote the use of derivatives as a risk management tool; develop the company’s capacities in terms of risk management and compliance; increase the number of professionals with expertise in risk management
  • Market structure: expand market access to increase the size and diversity of market participants; promote the use of credit derivatives; strengthen the supervision of credit rating agencies; implement capital relief qualifications for banks using credit derivatives; adopt a registration-based system for new product listings; establish a more comprehensive product portfolio for exchange traded derivatives; further open up the derivatives market to global investors; improve securities lending activity to improve market liquidity
  • Counterparty / market risk management: improve collateral management capacities and processes; prioritize obtaining a permanent CFTC exemption from COD registration and ESMA and BOE recognition for CCPs; strengthen the risk management and crisis simulation frameworks of central counterparties
  • Regulatory framework: improve communication of the rules and the regulatory framework to market players; improve transparency in future regulatory plans; allow the use of the English translation of regulatory publications; promote open consultation processes

ISDA said it will work closely with policymakers and market players to discuss the document’s findings and consider next steps.

The full article is published here.

A virtual conference will be held on January 20 to explore the key themes of the document, including the law on futures and derivatives and the future development of the Chinese derivatives market. Register here.


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