City commercial banks, agricultural commercial banks and agricultural co-operative banks wishing to conduct derivatives business shall submit the application through their head offices to the local office of the CBRC and, upon the approval of CBRC local office, make submissions to the CBRC for renewal and approval.
Foreign-capital financial institutions wishing to conduct derivatives business shall submit the application materials to the local office of the CBRC and, upon the approval of CBRC local office, make submissions to the CBRC for examination and approval. Foreign-capital financial institutions proposing to conduct derivatives business in more than two branches within China may submit the application materials to the local office of the CBRC through their head offices in the case of foreign-capital institutions with legal person status or the reporting offices in the case of foreign banks, and upon the approval of CBRC local offices, make submissions to the CBRC for renewal and approval.
Article 9. Financial institutions applying to conduct derivatives business shall submit the following documents and materials (in triplicate) to the CBRC or the local offices of CBRC:
(1) an application report, a feasibility study report and a business plan or a trading proposal for conducting derivatives business;
(2) internal management rules and system governing the derivatives business;
(3) accounting system for derivatives transactions;
(4) name lists and resumes of personnel in charge of, and the main dealers of, derivatives transactions;
(5) the management system regarding authorization for the purposes of quantifying or limiting risks;
(6) safety and testing report of the premises and facilities for transactions; and
(7) other documents and materials required by the CBRC.
Article 10. The internal management rules and system for financial institutions conducting derivatives business shall as a minimum requirement contain the following:
(1) guiding principles and business operation procedures for conducting derivatives business (these procedures should reflect the principle of the division of front office, middle office and back office of the transactions);
(2) indices for the risk mode and parameters for quantifying the management of derivatives business;
(3) types of transactions and their risk control systems;
(4) business risk reporting and internal auditing system;
(5) research, development management system and post evaluation system of derivatives products;
(6) conduct rules for dealers; and
(7) other information required by the CBRC.
Article 11. The CBRC shall issue a reply within 60 days after receipt of the application materials and documents submitted by a financial institution in accordance with The Rules.
Where a financial institution that has been approved to conduct derivatives business intends to conduct derivatives transactions in respect of equity, commodity or exchange traded products, it shall submit applications to other relevant regulators for examination and approval.
Article 12. When authorizing a branch to conduct derivatives business, the head office of the financial institution must verify the risk management capability of such branch and issue formal written authorization including, but not limited to, transaction types and product restrictions. A branch of a financial institution (other than a branch of a foreign bank) conducting derivatives business shall carry out real-time transactions through the system of its head office and square the position and carry out exposure management through its head office.
A branch of a financial institution shall, within 30 days after receipt of the authorization from its head office, report to the CBRC office located in the place where it is registered and present to the CBRC local office the authorisation document from its head office.
Chapter IIIRisk Management
Article 13. A financial institution shall determine the types and scale of the derivatives business it shall involve in after considering its business goals, financial strength, management skills and the risks involved in derivatives transactions.
Article 14. Senior management of a financial institution shall understand the risks of engaging in derivatives business, review and approve the policies, procedures, organisation and authorisation of the business operation system and risk management system; they shall have access to information at any time in respect of the risks through an independent risk management department and a sound examination and report system; and shall supervise and direct derivatives business accordingly.
Article 15. Senior management of the financial institutions shall adopt the standard appropriate for such institution with which to measure the market risks, and shall periodically review and update risk limits, stop loss limits and contingency plans for derivatives business pursuant to the overall strength, amount of self-owned capital, profit-making ability, and the business operation policies of such institution as well as the market risks. There shall be a distinct separation between the groups of senior management in charge of trading and in charge of risk management.
Article 16. A financial institution should formulate relevant policies to assess the risk bearing capability of its counterparty. A financial institution should ascertain whether the derivatives transaction which its counterparty proposes to enter into conforms with the objectives of the counterparty; a financial institution should also assess whether its counterparty understands adequately the terms of the contract and its obligations under the contract; a financial institution should also review the transactional background and risk bearing capability of its clients when conducting derivatives transactions for domestic institutions and individuals; a financial institution should assess and manage the credit risks of its counterparties and clients and take appropriate measures to control these risks.
Article 17. When conducting derivatives transactions with domestic institutions and individuals, the relevant financial institution shall fully disclose the risks involved in derivatives transactions. The information to be disclosed shall include at least the following:
(1) the contents of the derivatives contracts and a summary of the risks involved;
(2) significant factors that may affect the potential loss arising out of the derivatives products.
Article 18. A financial institution shall provide the dealers and other relevant staff with training in accordance with the complexity of derivatives transactions and risk management systems. It shall also formulate precise qualification standard for dealers, analysts and other staff to ensure that they possess the necessary experience, skills and qualifications.
Article 19. A financial institution should use netting, collateral, a third party's guarantee, periodical contract settlement, margin, credit triggers, credit derivativess or other proper arrangements to reduce the credit risk of its counterparty and adopt proper measures and models to assess the credit risks.
Article 20. A financial institution shall choose and adopt proper risk assessment methods (risk assessment models) to assess the market risk and manage market risk based on market-to-market principles. It shall also adjust the scale, the type and the level of risk capital of the transaction accordingly.
Article 21. A financial institution shall, based on the scale and types of the derivatives transactions, make thorough arrangement for liquidity to ensure its ability to perform contractual obligations even under abnormal market conditions.
Article 22. A financial institution should set up and improve a comprehensive operational risk control mechanism and system to strictly control any operation risk.
Article 23. A financial institution should set up and improve the legal risk control mechanism and system, comply with the principle of "know your clients", and control and reduce speculative transactions. A financial institution should formulate a clear standard to assess its clients' suitability and strictly examine the legal status, trading qualification and risk bearing capability of its counterparty. With respect to high risk derivatives products, a financial institution should enact specific requirements concerning the qualifications and criterion of its counterparties. A financial institution should enter into world recognized legal agreements with the counterparty, and take proper measures to prevent the risks which may arise during the drafting, negotiation and execution of the relevant derivatives documentation, including master agreements and confirmations.
Article 24. The CBRC shall, in accordance with the risk management principles provided by The Rules, examine the risk management systems of financial institutions and assess their effectiveness and execution processes periodically.
Article 25. A financial institution shall submit to the CBRC accounting, statistical reports and related statements in respect of derivatives transactions. It shall also disclose the risks, losses, profit changes of its derivatives business and any extraordinary situation according to the disclosure requirement provided by the CBRC. The CBRC may at any time examine the materials and statements of the financial institution in relation to derivatives business.
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