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Banks may have role in futures settlement

By Wang Bo (China Daily)
Updated: 2010-03-16 09:12

Banks may have role in futures settlement

An investor applies to open a stock index futures trading account at a futures company in Nanjing, Jiangsu province. The new financial tool is expected to be launched as early as mid-June. AN XIN / CHINA DAILY

Lenders could get nod to conduct trading as special clearing members

BEIJING - The nation's top banking regulator said on Monday Chinese banks' involvement in the settlement of stock index futures remains under discussion, but sources indicated that banks are unlikely to participate in such settlement at the initial stage.

"Banks are not allowed to invest in stock-index futures under the existing legal framework, but we are in talks with other regulators on allowing banks to clear futures trade as special clearing members," the China Banking Regulatory Commission said on Monday, adding that it has not issued any documents on banks' participation.

The remarks came as the nation is counting down to the launch of stock index futures, which is expected as early as the middle of June, as China Securities Regulatory Commission Chairman Shang Fulin said earlier this month.

"Banks may not be able to participate in index futures trading settlement in the short term, as trial operations between bourses and futures companies have already taken place many times without banks' participation," said industry sources with knowledge of the matter.

As special clearing members, commercial banks could gain from such deals with bourses on behalf of their clients, usually futures companies, but the regulator remains cautious on giving this the green light due to the unlimited risks that participating banks will face.

According to futures trading rules, if banks are granted permission to conduct clearance for their clients, they have to be prepared to assume the responsibility of refunding the huge debts that defaulting clients incur.

At the present stage, defaulting risks can be limited through lifting margin requirements, the initial minimum amount of cash that investors must deposit, when the delivery date of the futures contract approaches, the source said.

From futures companies' perspective, commercial banks are the ideal candidates for clearing futures trade thanks to their ample capital base, the source said.

China's securities regulator requires futures companies to own a net capital of no less than 6 percent of the total funds that their registered investors have.

With banks as the special clearing members settling trades for futures companies, futures companies will not be limited by such requirements, according to the regulatory rules.

With the expansion of futures companies' client base, sources said that they may seek capital infusion from shareholders in order to meet the regulatory requirements, as banks could not participate in settlement in the short term.

In another move, the China Securities Regulatory Commission on Monday issued draft guidelines for equity funds that want to trade index futures.

Equity funds should use index-futures for hedging purposes and bond and currency funds won't be able to trade the products, the regulator said.

The total value of index futures contracts held by an equity fund by the end of a trading day cannot exceed 10 percent of the fund's net book value, according to the guideline.