(Yicai Global) Feb. 19 -- China is likely to adjust its financial market regulatory policy soon to grant commercial banks approval to participate in bond futures trading, and some domestic and overseas banks have started to gear up for this possibility, Yicai Global has learned from institutional investors.
Commercial banks need to hedge interest rate risks with government bond futures as they are the main participants in the inter-bank bond market, where they hold the most positions, but they have nonetheless been conspicuously absent to date from this financial derivatives market to which overseas banks have actively sought admission, barred by the restrictions imposed by the existing rules.
Regulators can adjust market rules to suit specific circumstances, professionals in banks and brokers told Yicai Global. For example, watchdogs can limit commercial banks' maximum exposure to the hedging of treasury bond futures and maximum speculative position building, and oblige them to report their positions to the China Financial Futures Exchange.
"Commercial Banks are indeed doing preparatory work, but account opening, trading and other matters will still need to await specific regulatory guidance," a staffer at a leading brokerage's futures business unit told Yicai Global. Various professionals in the banking sector also confirmed that their staff are preparing to take part in bond futures trading.
"Because of the strong convergence in the directions of bond trading, changes in account holdings of large holder commercial banks could significantly impact futures prices, thus posing the risk of the tail wagging the dog," one employee of an overseas bank explained, adding regulators may introduce some rules on commercial banks' account opening and positions to avert potential risks if the commercial banks get the nod later to ply the government bond futures business.
"Thus far, only domestic securities institutions have been able to participate in China's government bond futures trading," said George Sun, managing director and head of Global Markets in China at Paris-Based bank BNP Paribas. "Allowing commercial Banks and overseas institutional investors to trade government bond futures will help increase overseas capital's demand to allocate domestic bonds and greatly increase liquidity in China's treasury bond futures market."
Among the current main players in China's government bond future market are brokers, fund companies and other institutional investors, but large bond trustees like commercial banks and insurers have hitherto been missing from their ranks.
Editors: Tang Shihua, Ben Armour