The oposite sex is the most dangerous and addictive drug out there, but the high is unlike anything else Your position:Home->china news-> China Ahead Of Curve On Derivative Oversight This week, the Obama administration proposed sweeping changes in the way certain derivatives are regulated, in particular by requiring that many trades be processed through a centralized exchange to improve transparency. Today, U.S. derivatives trade over the counter, meaning informally in deals settled between bankers speaking on the telephone. China, instead, requires banks to disclose to regulators details of each trade in yuan-denominated derivatives, either by funneling activity onto an exchange or electronically registering the deal afterward. That makes it unique among major economies, according to the International Swaps & Derivatives Association Inc., or ISDA. Having a trove of data theoretically puts regulators in a better position to monitor the scale of trading and clamp down on risky behavior. Last year, China drew on commodities futures data to unwind a messy set of copper trades, for instance. Even before the nudge from Washington, the derivative industry was bracing for more regulation. Debt-related derivatives pulled banks, securities firms and homeowners into massive, but poorly recognized, financial relationships that may have worsened what otherwise could have been a more benign downturn in U.S. real estate. A few years ago, when China began to permit derivatives trading, banks scoffed that Beijing was being 'big brotherly' by requiring them to register each transaction, Keith Noyes, ISDA's Asia director, said in a recent interview. Today, Mr. Noyes said, that's not seen as such a bad thing. 'What they have actually done is collect information that regulators in the West are wanting.' No doubt, China's financial-derivatives arena, at less than five years old, is worth only a fraction of the $531.2 trillion notional value ISDA put on derivatives world-wide at Dec. 31. Never comfortable with the often complex nature of derivatives and wary of how obscure products might affect official control over the yuan exchange rate, China has permitted banks to trade the products only with extreme caution. Policy makers, nevertheless, say they recognize the positive side of derivatives, a point made Thursday by a deputy director of the State Administration of Foreign Exchange, Deng Xianhong. The world's most actively traded derivative products, contracts that bet on the direction of interest rates, weren't permitted in China until three years ago. For all of 2008, just 4,000 interest-rate deals were done, with a value of $60.4 billion, according to central-bank data. That is 1.5% of the $403.1 trillion outstanding world-wide in the products at the end of last year, according to ISDA. Technologically, China's system involves registering on Shanghai's China Foreign Exchange Trade System & National Interbank Funding Center. It is considered relatively advanced. Bankers say that while China's market remains tightly regulated in terms of what products they can offer and how the derivatives products can be priced, registration is straightforward and has little bearing on how deals get done. China has been slower to embrace other foundations of the global derivatives business, namely a legal framework for dealing with bankruptcy and a standard for sorting out large positions, called netting. James T. Areddy / Denis McMahon 
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