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Regulation

CSRC likely to allow banks to trade bond futures

The Chinese regulator says that opening up bond futures trading to banks will cater to their needs to better manage risks

PUBLISHED : Thursday, 25 May, 2017, 8:27pm
UPDATED : Thursday, 25 May, 2017, 10:42pm

The mainland’s securities regulator is mulling to allow banks to trade government bond futures to hedge risks under a tightened regulatory environment.

Fang Xinghai, a vice-chairman of the China Securities Regulatory Commission (CSRC) told a forum hosted by the Shanghai Futures Exchange on Thursday that they were actively collaborating with the relevant authorities to push ahead with the move to “satisfy the commercial banks’ needs for better managing risks.”

He did not disclose the time frame for the deregulation, which has been in discussion for more than three years.

Fang’s remarks coincided with the banking regulator’s tightened oversight on lenders’ quality of assets and Beijing’s drive to de-leverage an economy facing increasing financial risks.

The CSRC launched government bond futures at the Shanghai-based China Financial Futures Exchange in September 2013 to help institutions hedge against interest-rate volatility.

But it barred mainland banks and insurers which hold the majority of the country’s treasury bonds, from trading in the market. Only brokerages, mutual funds and cash-rich individuals are allowed to trade bond futures.

Chinese government bond futures start trading again after 18-year hiatus

A 1995 bond future trading scandal at the Shanghai Stock Exchange continues to spook regulators and cast a shadow over the market’s development. Regulators have maintained a go-slow approach after re-launching the financial derivative after an 18-year hiatus in 2013.

In 1995, the regulators suspended trading of bond futures after Shanghai Wanguo Securities hugely exceeded a ceiling on its futures position and dragged down prices of a bond futures contract, triggering massive selling.

The government was eventually forced to spend more than 1 billion yuan (US$145 million) to pay off Wanguo’s losses in the so-called “327 incident”.

Fang said that with the absence of commercial banks, the role of China’s bond futures market was diminished.

The CSRC has been considering the plan to allow banks into the bond futures market since its re-launch in 2013.

“It’s obvious that the liberalisaton will take place sooner or later,” said Wang Feng, chairman of Shanghai-based financial services firm Ye Lang Capital. “Without banks, bond future trading is of little significance. As a reform-minded official, Fang would probably play a big role in implementing the liberalisation.”

Without banks, bond future trading is of little significance
Wang Feng, Ye Lang Capital

Beijing has been pressuring banks to curb the growth of wealth management products (WMP) sold to their clients who have difficulty securing bank loans, which in turn boosted the development of the country’s shadow banking system. The banks act as middlemen to sell the products and raise funds for their clients.

Trading in bond futures does not directly help banks ward off risks from loan defaults. But it could be used to hedge against potential volatility in the bond market and interest rates.

In addition, Fang said the CSRC was now studying the taxation issues on allowing foreigners to trade crude oil futures.

The long-heralded crude oil futures is likely to start trading at a subsidiary of the Shanghai Futures Exchange within this year, Jin Xingming, a deputy secretary-general of Shanghai government, told the forum.

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