CSRC turns up heat on rogue traders
CHINA Securities Regulatory Commission's (CSRC) drastic decision to freeze treasury bond futures trading was a long time coming.
Despite attempts to clean up the market, some market players have no qualms about breaking the rules, triggering two scandals in less than three months. That, even by Chinese scandal-riddled industry standards, was an embarrassment.
If there is any lesson from the episode, it is that China's futures markets need a strong dose of regulation. If market players are not prepared to play by the rules, they must be taken to task.
True, last week's misconduct by five brokerages paled in comparison with the Chinese-style Barings outrage on February 23, when the largest brokerage, Shanghai International Securities (SISCO), was allegedly embroiled in price-rigging.
But the five were immediately dealt with severely while SISCO is still awaiting the findings of an investigation by the CSRC.
The different treatment has raised eyebrows but the rule violations by the five, coming so soon after the first scandal, should not be tolerated.
The punishment was swift and appropriate.
But that does not detract from the fact that China's sizzling bond futures industry was no different from a casino dominated by speculators instead of investors.
The returns on bond futures are high, yet few truly appreciate the risks.
It would only be a matter of time before someone or an institution gets severely burned.
Indeed, SISCO would have suffered a fate similar to Barings had not the Shanghai Securities Exchange (SSE) used administrative measures to control the damage.
But there is a limit to what the SSE can do to clean up the industry in the absence of a proper regulatory and legal environment.
Given the rapid expansion in trading and sharp price rises, the chances of more scandals are high.
Without a national futures law to regulate the industry, the CSRC's move to close down futures trading must be welcomed.
China has a practice of experimenting with high-risk capitalist financial instruments before putting up a proper legal framework to regulate the industry. The trial-and-error method has worked well elsewhere.
But this unique way of introducing capitalism into China obviously does not suit the high-risk bond futures market.
