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Liu Mingkang: Financial Derivatives Encouraged

China Banking Regulatory Commission (CBRC) takes a positive attitude toward the development of credit derivatives.

Credit risk, a major risk in banking sector, now poses the biggest threat during China's economic transition, and credit derivatives involve the following three risks:

--Whether the trading partner of credit derivatives can shoulder its obligations;

--Legal risk. The trading of credit derivatives has to comply with a standard promulgated by the International Swaps and Derivatives Association, but some newly developed derivatives are not regulated in the standard. As financial derivatives are developed quickly in many fields, the legal status of many trading partners is not guaranteed.

--Some deals and derivatives are rather to transfer disastrous risks or macro-economic risks than hedge credit risks, which make them much more complicated.

As for market risks or even losses triggered by large-scale financial derivatives, they can be attributed to the lack of effective market risk management. It is not necessary to give up derivatives to keep from possible risks, he warned, saying that “risks exist for their uncertainties.”

Three suggestions to strengthen risk control are:

First, set up a scientific and effective risk management system, including a risk identification, quantification, monitoring and control system and a relevant internal control system;

Second, have risk-transferring and hedging tools to rate and disperse risks;

Third, strengthen market supervision and ensure full information disclosure and explanations for possible risks.

Commercial banks are asked to further improve their risk management system and enhance its transparency. The commission will encourage banks to conduct financial innovation and develop more risk-transferring and hedging tools, so that they can control and adjust risks initiatively.

Renminbi-denominated derivatives will be put forward soon, and interest rate liberalization, which is being implemented step by step, paves the way for it.

(China.org.cn by Tang Fuchun December 21, 2006)

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