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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II MANAGEMENT OF MARKET ENTRY CHAPTER III RISK MANAGEMENT CHAPTER IV PROVISIONS ABOUT PENALTIES CHAPTER V SUPPLEMENTARY PROVISIONS CHAPTER I GENERAL PROVISIONS Article 1. In order to regulate the management of the dealings of derivative products of financial institutions, to effectively control the risks of the financial institutions engaged in the transaction of derivative products, the present Measures are formulated in accordance with the Banking Supervision Law of the People's Republic of China, the Commercial Banking Law of the People's Republic of China and other relevant laws and administrative regulations. Article 2. The term "financial institutions" mentioned in the Measures refers to the banks, trust & investment companies, financial companies, financial leasing companies and legal persons of auto financing companies established within the territory of the People's Republic of China, and branches of foreign banks set up within China (hereinafter referred to branches of foreign banks). Article 3. The term "derivative products" mentioned in the present Measures refers to a kind of financial agreement, whose value depends on one kind or a number of basic assets or indicators. Such agreements are classified into deferred futures, futures, swaps and options. In addition, derivative products include the structuralized financial tools with features of one or more of the deferred futures, futures, swaps and options. Article 4. The dealing of derivative products of financial institutions mentioned in the present Measures may be classified into two categories: (1) The derivative product transactions conducted by financial institutions for the purpose of avoiding risks of their own assets, owing debts or seeking profits. The financial institutions engaged in such operations are considered the end users of derivative products; and (2) The dealing services of derivative products provided by financial institutions to their clients (including financial institutions). The financial institutions engaged in such operations are considered brokers of derivative products, among whom those can provide quotation of derivative products and dealing services to other brokers and clients are considered market manipulators of derivative products. Article 5. The China Banking Regulatory Commission (hereinafter referred to CBRC) is an institution authorized to supervise and regulate the financial institutions engaged in derivative product transactions. Where a financial institution is to carry on derivative product transactions, it shall be subject to the examination and approval of the CBRC and accept the supervision and check of the CBRC. Any non-financial institution shall not provide dealing services of derivative products to clients. Article 6. Where a financial institution carries on derivative product transactions related to foreign exchange, stocks and commodities, and transactions of derivative products in an Exchange, it shall abide by the regulations of the state governing the management of foreign exchange and other relevant regulations. CHAPTER II MANAGEMENT OF MARKET ENTRY Article 7. Where a financial institution applies for carrying on derivative product transactions, it shall meet the following requirements: (1) It has a perfect risk management system and an internal control system for derivative product transactions; (2) It has a perfect operating system for derivative product transactions with automatic links of the foreground, mid-ground and background and a perfect real-time risk management system; (3) The person-in-charge of the derivative product transactions shall have 5 or more years of experiences of direct participation in derivative product transactions and risk management, and has no bad record; (4) It shall have 2 or more dealers who have dealt with derivative product transactions or other related transactions for at least two years and have accepted a special training for dealing skills of derivative products, one or more risk management person(s), one or more risk model researcher(s) or risk analyzer(s); any person who takes any of the above-mentioned posts shall have no bad record and shall not hold concurrent posts; (5) It shall have proper transaction site and equipment; (6) Where a branch of a foreign bank applies for carrying on derivative product transactions, the regulatory authorities of its mother country shall have a framework for supervising and regulating the derivative product transactions and have corresponding abilities; and (7) Other requirements prescribed by the CBRC. Where a branch of a foreign bank applies for carrying on derivative product transactions doesn't meet the requirements mentioned in Items (1) through (5) of the preceding Paragraph, it shall satisfy those prescribed in Items (6) and (7) of the preceding Paragraph and the following Items: (1) It shall be subject to the formal authorization of its parent bank (regional head office) on the type and quota of the derivative product transactions; and (2) All the derivative product transactions of this branch shall be conducted through the parent bank (regional head office) in real time, which shall balance the transactions, conduct risk exposure management and control the risks. Article 8. Where any of the policy banks, Chinese-funded commercial banks (excluding city commercial banks, rural commercial banks and rural cooperative banks), trust & investment companies, financing companies, financial leasing companies and auto-financing companies applies for carrying on transactions of derivative products, it shall file an application to the CBRC via its legal person, and the application shall be subject to the examination and approval of the CBRC. Where a city commercial bank, rural commercial bank or rural cooperative bank applies for carrying on derivative product transactions, its legal person shall submit the application materials to the local banking regulatory bureau, upon examination and approval of which, the application materials shall be submitted to the CBRC for examination and approval. Where a foreign-funded financial institution applies for carrying on derivative product transactions, it shall submit the application materials to the local banking regulatory bureau, upon examination and approval of which, the application materials shall be submitted to the CBRC for examination and approval. Where a foreign-funded financial institution is to have two or more branches to carry on derivative product transactions within China, it may submit the application materials to the local banking regulatory institution via the head office of the foreign-funded legal person institution or the major reporting bank of the foreign bank. Article 9. Where a financial institution applies for carrying on derivative product transactions, it shall submit the following documents and materials (in triplicate) to the CSRC and its dispatched institution: (1) The application for carrying on derivative product transactions, the feasibility report and the business plan or the business expansion plan; (2) The regulations and rules concerning the internal management of derivative product transactions; (3) The accounting system of derivative product transactions; (4) The name list, resumes of the persons-in-charge and major dealers; (5) The management system for the quantification of risk exposure or quota upon authorization; (6) The report on the safety testing of the site, equipment and system used for transactions; and (7) Other documents and materials required by the CSRC. In addition, where a branch of a foreign bank that doesn't meet the requirements listed in Items (1) through (5) of Article 7, it shall submit the following documents to the local banking regulatory bureau: (1) The formal written authorization documents issued by its parent bank (regional head office) about the type and quota of the derivative product transactions that this branch may carry on; and (2) The commitment letter issued by its parent bank (regional head office) for guaranteeing that all derivative product transactions will be conducted through the transaction system of the authorizing parent bank (regional head office) in real-time, and which will be responsible for the balance of transactions, risk exposure management and risk control. Article 10. The internal management rules for a financial institution's carrying on derivative product transactions shall at least include the following: (1) The guiding principles of derivative product transactions, the operating procedures (which shall embody the principle of separating the transaction front office, mid-office and back-office from one another) and the plan for handling emergencies; (2) The risk model indicators and quantification management indicators for derivative product transactions; (3) The type of transactions and the risk control system; (4) The risk reporting system and the internal audit system; (5) The management system and post-assessment system for the research and development of derivative product transactions; (6) The rules for dealers; (7) The post-responsibility system of the persons-in-charge of transactions, the accountability system and the incentive & restriction mechanism for the persons-in-charge of all levels and the dealers; (8) The training plan for the persons-in-charge and workers; and (9) Other content required by the CBRC. Article 11. The CBRC shall give a reply to the financial institution within 60 days from the day when it receives the complete set of materials submitted by this financial institution in accordance with the present Measures. Article 12. Where the legal person of a financial institution within China authorizes its branch(es) to do derivative product transactions, it shall strictly examine the risk management capabilities of the branch(es), and shall issue formal authorization documents in writing regarding the type of transactions and the quota. All transactions of the branch(es) shall be conducted through the operating system of the parent bank (regional head office) in real time, and which shall balance the transactions, conduct risk exposure management and control the risks. Any of the above-mentioned branches shall report to the local banking regulatory bureau upon the strength of the authorization documents issued by the head office within 30 days from the day when it accepts the authorization of its parent bank (regional head office) or when the authorization is changed. CHAPTER III RISK MANAGEMENT Article 13. A financial institution shall determine whether it is able to engage in derivative product transactions and the type and scale thereof in light of its operating aim, capital strength, managerial ability and the features of the risks of derivative product transactions. Article 14. A financial institution shall, according to the categories of derivative product transactions listed in Article 4, establish a risk management system, an internal control system and an operating system matching the nature, scale and complexity of the derivative product transactions that it carries on. Article 15. The senior managerial personnel of a financial institution shall know about the risks of derivative product transactions that they deal with. They shall examine, approve and evaluate the comprehensive management framework including the business operations of derivative product transactions and the risk management principles, procedures, organizations and power. They shall be able to acquire the information related to status quo of the risks of derivative product transactions at any time through the risk management department and the perfect check and reporting system, and can conduct proper supervision and guidance on the basis of the information. Article 16. The senior managerial personnel of a financial institution shall decide the indicators and methods available for measuring the risk exposure of derivative product transactions, shall decide, regularly examine and update the quota of risk exposure, the quota of loss and the urgent plan for handling emergencies and shall formulate rules for monitoring and handling of the information about the quotas according to its overall ability, self-owned capital, its ability to make profits, business operating strategies and forecast of market risks. The senior managerial person in charge of the derivative product transactions shall properly separate from the one in charge of the control of risks. Article 17. A financial institution shall create definite standards for determining the professional qualifications of dealers, analyzers and other practitioners, shall provide trainings to the salesmen and other operating personnel in light of the complexity of derivative product transactions and the risk management, shall ensure that they have necessary skills and qualifications. Article 18. A financial institution shall create relevant policies to evaluate the appropriateness of the transaction counterparts, which include: to evaluate whether the transaction counterparts have good knowledge of the contractual terms and the obligations to fulfill them or not, to identify whether the to-be-conducted derivative product transactions are in line with the trading counterparts' own purposes for engaging in such derivative product transactions, and to assess the credit risks of the trading counterparts. With regard to the derivative transactions with primary risks, the financial institution shall formulate special rules for the qualifications and conditions of its trading counterparts. When implementing the provisions of the present Article, the financial institution may, under the principle of good faith, reasonably depend on the formal written documented submitted by its trading counterparts. Article 19. Where a financial institution provides dealing services of derivative products to an institution or individual within China, it shall fully disclose the risks of the derivative product transactions to this institution or individual, from which (whom) it shall obtain a letter for confirming that it (he) has learnt of the risks of derivative product transactions and is able to bear all risks. The information disclosed by a financial institution to this institution or individual shall include at least the following: (1) The summary of the content in the contract on derivatives and intrinsic risks; and (2) The important factors that affect the potential loss of derivative products. Article 20. A financial institution shall properly and reasonably decrease the credit risks by adopting guaranties and other measures to decrease the credit risks, select appropriate methods and models to assess the credit risks and take corresponding risk control measures. Article 21. A financial institution shall adopt appropriate risk assessment methods or models to assess the market risks of derivative product transactions, and shall manage the market risks and adjust the scale of transactions, the categories and the level of risk exposure according to the principle of market price. Article 22. A financial institution shall, in light of the scale and categories of derivative product transactions, make good arrangement for changes, shall ensure that it be able to fulfill the contract under any abnormal circumstance of market transactions. Article 23. A financial institution shall establish and perfect the mechanism and system for controlling the operating risks, shall strictly control the operating risks. Article 24. A financial institution shall establish and perfect the mechanism and system for controlling legal risks and shall strictly examine the legal status and dealing qualifications of its trading counterparts. When it concludes a contract on derivative product transactions with a domestic counterpart, it shall take account of the factors such as the availability of taking legal means to protect its rights and interests if the trading counterpart breaks the contract, and shall take effective measures to hedge the legal risks in the courses of drafting, negotiating and signing a contract. Article 25. A financial institution shall, according to the regulation of the CBRC, report and submit the accounting, statistical and other statements to the CBRC. A financial institution shall, according to the regulation of the CSRC on information disclosure, disclose the information about the status of risks, losses and changes of profits and abnormalities in conducting derivative product transactions. Article 26. The CBRC has power to check the materials and statements related to derivative product transactions of a financial institution at any time, to regularly check if the risk management system, internal control system and business operating system fit in with the type of derivative product transactions or not. Article 27. Where a financial institution engaged in derivative product transactions incurs any serious business risk or loss, it shall actively report to the CBRC in time and shall submit the counter measures. Where there is any important change to the derivative product transactions, operating system or risk management system of the financial institution, this financial institution shall actively report the specific situation to the CBRC in time. Any of the above-mentioned matters relates to the management of foreign exchange and foreign payment shall be reported to the State Administration of Foreign Exchange simultaneously. Article 28. A financial institution shall properly preserve all the transaction records of the derivative product transactions and the documents, accounts, original vouchers and vocal records of telephone. The vocal records of telephone shall be kept for half a year or longer and other materials shall be kept for 3 years after the expiration of the transaction contract for the purposes of examination and verification, unless otherwise provided in the accounting system. CHAPTER IV PROVISIONS ABOUT PENALTIES Article 29. Where a dealer of derivative products operates in violation of the present Measures and the relevant requirements of the institution in which he (she) takes a position, thus results in serious economic loss to this institution or to its client, the financial institution shall give a disciplinary sanction, from a demerit in his archival files to even dismissal, to the direct liable person-in-charge of the business and other direct liable persons; where any crime is constituted, they shall be transferred to the judicial organ and be subject to criminal liabilities in pursuance of the law. Article 30. Where any financial institution conducts derivative product transactions without approval, it shall be subject to the punishment of the CBRC in accordance with the provisions of the Measures for the Punishments Related to Financial Offences. Any non-financial institution that provides to clients in violation of the present Measures shall be banned by the CBRC, which shall confiscate its illegal gains; if any crime is constituted, it shall be transferred to the judicial organ and be subject to criminal liabilities in accordance with the law. Article 31. Where a financial institution fails to submit the relevant statements and materials and disclose the information about the derivative product transactions in accordance with the present Measures or according the requirements of the CBRC, it shall be punished by the CBRC in light of the nature of the financial institution and in pursuance of the Banking Supervision Law of the People's Republic of China, the Law of the People's Republic of China on Commercial Banks, the Administrative Regulations of the People's Republic China on Foreign-funded Financial Institutions and other relevant laws, regulations and financial rules. Any financial institution that provides any false information about derivative product transactions or offers any information concealing important facts shall be punished by the CBRC according to the Measures for the Punishments Related to Financial Offences. Article 32. Where the CBRC finds any financial institution failing to effectively implement the risk management system and the internal control system necessary to derivative product transactions, it shall suspend or terminate its qualification for carrying on derivative product transactions. CHAPTER V SUPPLEMENTARY PROVISIONS Article 33. The power to interpret the present Measures shall remain with the CBRC. Article 34. The present Measures shall be implemented as of March 1, 2004. Where any provisions governing the derivative product transactions of financial institutions issued previously are contrary to the present Measures, the present Measures shall be followed. |
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