In March 2009, the National Association of Financial Market Institutional Investors (NAFMII), a trade body established by the People’s Bank of China, released a new master agreement governing activities involving onshore derivatives transactionsin the PRC interbank market. The new agreement consolidated and superseded the previous two master agreements published by NAFMII and the China Foreign Exchange Trading System (CFets).The previous agreements had covered only CNY-denominated foreign exchange and interest rate derivatives, while the new master agreement eliminates overlaps between its predecessors and broadens instruments covered to include credit, gold, bond derivatives, and any combination of these instruments. The inclusion of bond derivatives is aimed at giving PRC bond investors added flexibility in managing their investments.

Futures and Options

The Shanghai Futures Exchange (SHFE) trades diverse commodity futures. There are no futures for bonds currently operating. The SHFE homepage is linked below.

Interest Rate Swaps

On 9 February 2006, the People’s Bank of China (PBC) issued new rules allowing CNY-denominated interest rate swap transactions on a trial basis. The rules permit banks with derivatives licenses to enter into interest rate swap deals with each other or with their clients, but only for hedging purposes. The China Development Bank (CDB) and China Everbright Bank (CEB) completed the first yuan interest rate swap deal on 13 February 2006, with a nominal principal of CNY5 billion. CEB exchanged a ten-year fixed-interest rate of 2.95% for a floating rate linked to the one-year yuan deposit rate. The preliminary agreement was reached on 10 October 2005, but only came into force when PBC issued its rules. The PBC’s deposit and lending rates, as well as the rate on seven-day repurchase agreements, have been the benchmarks for interest rate swap deals. On 4 January 2007, the PBC introduced the Shanghai interbank offered rate (SHIBOR) as a new benchmark rate for the interbank market. Simultaneous to SHIBOR’s launch, two Hong Kong banks—Standard Chartered Bank (SCB) and Hong Kong and Shanghai Bank (HSBC)—traded the first non-deliverable yuan interest rate swap based on SHIBOR. The deal involved a notional amount of CNY100 million, with SCB paying a fixed rate of 2.90% and receiving three-month SHIBOR over a one-year tenor.

Cross Currency Swaps

A number of commercial banks in the People’s Republic of China (PRC) provide cross currency swap services. The Bank of China and China Construction Bank are among these banks. Please refer to the links below for more information on currency swap services.

Short Selling

The People’s Bank of China (PBC) amended its rules for the interbank market to allow borrowing and lending of bonds for a maximum term of 365 days. Effective 20 November 2006, the revision also paves the way for the short selling of debt instruments by banks. The short selling of securities on the Shanghai and Shenzhen stock exchanges is likewise possible.