Published On: Mon, Mar 12th, 2012

DCE:Proposal on Relaxing Restrictions for Financial Institutions to Participate in Futures Markets

Liu Xingqiang DCE President

Liu Xingqiang DCE President

In recent years, China’s futures market has entered a new period of steady development with the scale gradually expanding and functions progressively realized, and has possessed the ability to service the national economy at a higher level. However, the basic framework of existing policies and regulations for the futures market was formulated in the 1990s during the cleaning up and consolidating period of the futures market, largely focused on guarding against risks and standardizing operations, and instituted strict control on the futures market, especially the firewall put up between financial institutions and the futures market. Prior to 2007, all relevant policies and regulations are expressly prohibited financial institutions from engaging in futures trading, and prohibited financial institutions from financing futures trading or providing guarantee. The Administrative Regulations on Futures Trading amended in 2007 (hereinafter referred to as the Regulations) deleted the provision of “prohibiting financial institutions from investing in the futures”, and permitted the use of credit funds to do futures trading under the premise of “non illegality”. But in practice, due to the imperfections of relevant policies and regulations, financial institutions are still difficult to enter the futures market as reflected in the following major aspects:

First, the term “illegality” is difficult to define and lacks operability. Paragraph 1 of Article 44 in the Regulations specifies: “any unit or individual shall illegally use credit capital, financial capital to do futures trading.” However, China currently has no provisions regarding credit capital in futures trading, and what is called “illegality” is difficult to define. In practice, in order to avoid legal risks, financial institutions generally rejected business loans when they are involved in futures trading regardless whether they are used for hedging or not.

Second is about the qualifications issue on banking financial institution to engage in the futures market. Article 33 and Paragraph 2 of Article 44 in the Regulations each specify that qualifications on engaging in futures margin deposits and futures clearing business by banking financial institutions is subject to examination and approval by the banking regulatory agencies, and qualifications on engaging in futures trading financing or guaranty business by banking financial institutions needs to be approved by the banking regulatory authority under the State Council. But so far, regulatory agencies have not yet introduced relevant standards and procedures for banks to carry out businesses as qualified above, therefore, the rights of banking financial institutions to participate in the futures market conferred by the Regulations have not yet been fully implemented. After the launch of gold futures, the regulatory agency issued relevant provisions of qualifications on engaging in gold futures trading by commercial banks, however, beyond the gold futures market, commercial banks are essentially unable to get involved.

Third, regulations defining modes and means of engaging in the futures market for non-banking financial institutions are not complete. At present, except that securities companies, funds and qualified foreign institutional investors (QFII) to participate in the stock index futures has been appropriately specified, and that commodity futures has also included into the scope of investment funds in the Trial Measures for Fund Management Companies to Provide Asset Management Services for Specific Clients, policy gaps still exist for other financial institutions to participate in commodity futures.

From the experience of developed countries, the involvement of financial institutions in the futures market not only help enhance their risk management, but also help optimize the investor composition in the futures market and better realize market functionalities. In mature foreign futures markets, financial institutions are the main participants in the futures market and represent an important component of hedging. Therefore we propose: to improve as soon as possible policies and regulations for financial institutions to participate in the futures market, and under the premise of improved internal risk control mechanism, to relax restrictions on financial institutions to engage in the futures market, thus promoting the further development of the futures market.

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