China Plans to Ban Banks and Insurers from Derivative Trading with Retail Clients

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China’s financial authorities plan to ban banking and insurance sector financial institutions from providing over-the-counter (OTC) derivatives trading services to retail clients or for non-hedging purposes.

On 3 December the Chinese central bank issued the draft version of the “Guidance Opinions for Expediting the Standardized Development of Derivatives Business” (关于促进衍生品业务规范发展的指导意见(征求意见稿)) for the solicitation of opinions from the public, following the drafting of the opinions in conjunction with China’s banking, insurance and forex regulators.

The draft places a heavy emphasis on the protection of retail clients, by placing restrictions on the counter-parties to derivatives transactions and stipulating that “financial institutions should uphold the principle of mainly engaging in derivatives operations with non-individual investors, and strictly implement standards for the inspection of qualified investors.”

The draft further stipulates that banks and insurers are “not permitted to directly engage in derivatives trading with individual clients over the counter” or “provide trading services to enterprises that are not for hedging purposes.”

Where other financial institutions “definitely need to provide derivatives trading services to individual clients,” the draft states that they should “formulate more prudent participation requirements.”