OTC Derivatives Regulation in China: how far across the river?

In 2011, China revised its prudential regulation on the derivatives activities of financial institutions as a result of the global financial crisis. This paper considers how prudential regulation, supervision of conduct and requirements that limit risk-taking are used to achieve policy objectives in the context of regulating derivatives in China. This is particularly pertinent in the case of China, where financial institutions were formerly state-owned enterprises. These objectives are closely related to defining the legitimate purpose of contracts which are used to hedge default risk of credit assets owned by financial institutions. The paper also considers the legal aspects of the executory contract arising from the legal transplant of the ISDA Master Agreement 2002 into China in the form of NAFMII Documents, and the way in which the Contract Law 1999 (CL) and the Enterprise Bankruptcy Law 2006 (EBL) interact to offer a solution to the issue. Finally, the paper offers an explanation of existing Chinese central counterparty (CCP) and finality orders in clearing and settlement systems for possible alignment with international recommendations on OTC derivatives regulation at Pittsburgh in 2009.