Inspirations of China’s financial derivative market-中國的金融衍生市場的啟示

 

. However, the U.S. futures exchange’s functions include: examination and approval membership to engage in financial derivatives trading; supervision and management of various types of derivatives contracts; monitor compliance with trade laws and regulations and enforcement, and arbitration to resolve disputes arising from transactions; processing the illegal activities of transactions members. This multi-regulatory model of the United States stemmed from 1929 ~ 1933 years of the Great Depression. The purpose is to deal with the devastating impact of the crisis, to help the U.S. financial markets and even the entire national economy recover slowly from the Great Depression, towards the long-term virtuous cycle track. In view of agency-based supervisory approach in the United States was a great success, it has quickly become the world's nations the best choice when to build the regulatory system.

 

4.3.2 Japan's administrative control mode

 

While Japan's financial regulatory practice, there are not several regulatory bodies’ coexistence, but its regulatory approach is still very different from the United Kingdom and U.S.A, the most prominent financial regulation in Japan attaches particular importance to the administrative authority of the Ministry of Finance. As the banking sector played an important role in promoting the development process of the Japanese economy, thus gradually formed a unique regulatory system which the Bank of Japan (the Central Bank) set monetary policy, and the Ministry of Finance set all other financial policy. As Japan's unique financial industry regulator, the Ministry of Finance, from the macro and micro levels to control the Japanese economy, leaves the supervision of the Central Bank of Japan very little space.

 

In the early process of managing the economy, Ministry of Finance achieved remarkable results, helping Japan's economy leap-forward development, has remained the world's second largest place of the economy, but with the financial markets appear increasingly complex, it became not flexible enough. Particularly in early 90’s of 20th century, the “compensation” scandal, as well as the largest securities firm--Nomura was also involved in the scandal, which making the voice to reform the Ministry of Finance and to manage the financial system grow ever louder. In June 1998, Japan has finally set up a single regulatory body - the Office of Financial Management, the agency enjoys formulating monetary policy, management of securities, derivatives, banking and other powers. However, from the Ministry of Finance to the Office of Financial Management, the Japanese government still followed the traditional regulation and control of economic; the power of administrative supervision is still very strong. On derivative financial transactions, Financial Management Office has the authority to keep check the financial background of banks and other financial institutions, to introduce derivative financial measures for internal risk management for derivatives markets, and to prevent and treat the illegal fraud incidents in derivative markets.#p#分頁標題#e#

 

4.3.3 The British model of a single regulatory

 

British regulation of the financial derivatives is a single-system-regulatory approach; all regulations are carried out through the Financial Services Authority, which is the only financial markets regulatory body. In October 1997, the original SIB formally changed its name to the Financial Services Authority; it was fully responsible for the UK financial sector regulation (Ross Levine, 2006, Rethinking Bank Regulation (Till Angles Govern: Cambridge University Press)). According to “Financial Services Act”, the Financial Services Authority would not only absorb many of the existed self-regulatory organizations and other regulatory bodies into their own organization to take over its supervisory functions, but also, in June 1998 received the Bank of England’s banking supervision functions, insurance regulation functions as well as the review functions listed on the stock exchange, then the Financial Services Authority has become the sole regulatory body which has banking, insurance and securities and futures regulatory functions. From December 1, 2001, the Financial Services Authority has begun to exercise the right of financial regulation, to take charge of the regulation of domestic banks, insurance companies, housing associations, unions, credit associations, Lloyd, pension advisers, securities brokers, investment services, professional company, derivatives traders, mortgage lender and the professional engaged in investment business (Ross Levine, 2006, Rethinking Bank Regulation (Till Angles Govern: Cambridge University Press)). Although such a regulatory model is not for the British first, but Britain is the first country in the world's financial center that chose this model of a single national regulatory body.

 

5. Regulatory issues of China’s financial derivative market

5.1 Effectiveness of government regulation

The first appearance in China's offshore derivative financial transactions began in the early 80s, 20th century, but because of the lack of appropriate financial regulatory support mechanisms, there have been such prevalence phenomena that underground derivatives rampant speculation, the risks are enormous. To this end, the People’s Bank in June 1995 issued a notice, prohibiting the illegal domestic financial institutions involved in offshore derivatives trading business. On the other hand, the domestic derivative financial transactions are starting to get late. First launched in 1997 the Bank of China released the long-term exchange settlement and sales, to today’s gold futures, financial derivatives, the pace of our development is still not fast enough. Derivatives combined with the development of our country’s financial situation, we find that it must speed up the development of the financial derivatives market and to manage the risk now. The market economy is the legal economy; we must first make sure that market economy requires a market-regulated, government regulation subsidiary. Government regulation of financial derivatives market, primarily through legislation or authorized by law, by the specialized agencies and by the regulation, supervision and management trading conducts of financial derivatives market. Government's most important responsibility is to the financial derivatives market regulation and create a legal basis, rules-based market conditions, create the establishment of a fair competitive market environment and a sound trading system, safeguarding the legitimate rights and interests of parties in the transaction, to ensure that transactions activities are in an orderly manner, thereby it can contribute to the development and stability of the financial derivatives market (Congleten, RD 2009).#p#分頁標題#e#

 

However, how is the effectiveness of government regulation in China? From the current situation of the banking sector, despite the massive of China's banking industry, but fragile, many basic statistical data reflect this reality. Before the absence of state funding and the shareholding system reform, the adequacy ratio of the four state-owned bank’s capital was less than 8%. In mid-2007, Shenzhen Development Bank's capital adequacy ratio was only 3.88%, well below the 8% requirement; such as Pudong (SPDB), HXB, etc. the two banks’ capital adequacy ratio is both only less than 8% or in hover this level (Congleten, RD 2009). In recent years, though non-performing asset ratio of China's banks has a downward trend, are still relatively high, according to latest statistics from China Banking Regulatory Commission show that, far to the end of Feb., 2009, as to China's banking and financial institutions, though the ratio of non-performing loans continue to decline, the non-performing loans are still up to 1.5334 trillion RMB, and non-performing loan rate was 4.5% (Congleten, RD 2009). In addition, in recent years, banks have endless cases; nevertheless, China has not a systemic crisis, and maintains the stability of the banking industry in the longer term. However, this stability is based on: a large number of regulatory inputs of resources, and the Central Bank re-lending support, and mistaken allocation of financial resources, and the huge cost of moral hazard. From the strength of the realization of the effectiveness of government regulation point of view, the framework of China's government regulation organization has been formed, but the institutional arrangements still has a substantial wide gap between the core principles & the prudential regulation advocated by effectively monitor. Regulatory loopholes, regulatory and corruption issues still exist in varying degrees; and banks self-restraint, the market constraints and other market forces are relatively weak. Overall, the current situation of the effectiveness of banking supervision, especially government regulation in China is not optimistic.

 

5.2 Industry self-regulation

Emphasis on industry self-regulation, in the early stage of the development of financial derivatives we should attach importance to the role of industry self-regulatory organization. To play in the following industry self-regulatory functions of the organization: the provision of non-members of the legal and informal business advisory services; developing on-site and off-trading operations and rules; to market participants, building harmonized standards for code of ethics, practice level, compensatory measures; building the implementation of education programs for training members and the supervising officer. Industry self-regulatory organization’s regulation of financial derivatives is an important supplement of financial derivatives regulation. It continues to strengthen macro-regulation of the national regulatory authorities (Ross Levine, 2006, Rethinking Bank Regulation (Till Angles Govern: Cambridge University Press)).#p#分頁標題#e#

 

5.3 Inner control system of market transaction

 

Emphasis on corporate self-regulation is too important. Strengthening enterprise its internal risk control, we must give full play to the Exchange's regulatory functions of derivatives trading. Derivatives exchange, as the main site in the regulation of derivatives play an important role. As national regulatory agencies, the direct executor needs to formulate policy, as the market transactions and information feedback from supervisors, the national regulatory agencies and the general inter-dealer played a bridges role. Exchange of self-management is the core content of the entire derivatives market regulation, it protect the market open, fair and just competition principles, maintaining the efficiency and liquidity of the market has a very important position. The exchange consists mainly of institutional investors, thus giving full play to the internal control functions exchange risk, we must emphasize corporate self-discipline. If each one can be good business control risk, then the risk of the financial derivatives market will have greatly reduced.

 

5.4 International cooperation

 

To seek international cooperation, financial derivatives are a product of financial innovation, from anther aspect; it is also the product to evade regulation. Regulation of the financial derivatives market is a worldwide problem; it not only needs a good job for each of their respective countries and regions in their own regulatory region, but also the international community in a wide range of regulatory cooperation. In particular, our country's financial derivatives market is an emerging market, in order to reduce the risk effectively, but also should attach importance to cooperation with other developed countries. When we are vigorously developing the financial derivatives market, it is important to do well the above two aspects work, so that we can provide security for a virtuous circle to the derivatives market, can find one best balance among the stable, equitable and efficient. It can be said that China's financial derivatives market is still in its early stage, improving the regulation of the financial derivatives market needs much work to be done, but the most important thing is the work of these above three aspects.

 

6. Policy suggestions in development of financial derivative market

6.1 Raise the effectiveness

6.1.1 Enlightenment of subprime mortgage crisis

 

The enlightenments of subprime mortgage crisis to China are so profound that it is necessary to perfect China's financial derivatives market. Some effective measures should be taken, as follows:

 

Further strengthen the coordination of financial supervision and government regulation (Prosperetti, L 2009). The sub-prime crisis has amply demonstrated that, with the increasing globalization of financial markets, and financial innovation has become increasingly active today, the financial products have become increasingly more and more complex, and the traditional boundaries between the financial sub-market has been diluted. What’s more, financial products for cross-market also become increasingly more common, as a result that supervision coordination of intersectoral and supervisory co-operation have become increasingly much more important. According to the international experiences and domestic practices, no matter how the changes in the financial regulatory system, the Central Bank are always in the financial system, because of its central position and for the enormous influence to the financial regulatory system. The Central Bank plays an important role in the enormous and complicated financial regulatory system. Therefore, to further promote the financial regulatory system, it needs to take full account of the relationship between monetary policy, financial regulation, Banking, Securities and Insurance supervision and, under the existing sub-sector regulatory framework, to strengthen the coordination responsibilities and leading role of Central Bank, to straighten out the relationship between the People's Bank of China and other financial regulatory agencies and their respective collaborative relationships.#p#分頁標題#e#

 

In response to this aspect, our country can attempt to establish a financial regulatory coordination agency, such as the Coordinating Committee, between the Central Banks, finance ministries and other relevant institutions or departments of financial regulation, to meet the integrated operation and development trend of the financial industry needs. The agency could lead by the State Department, and Central Bank, China Banking Regulatory Commission, Securities Regulatory Commission, China Insurance Regulatory Commission and the Development and Reform Commission, Ministry of Finance and other ministries should take participate in this agency, which aims to promote the cooperation between the regulatory bodies from the temporary arrangement into a regular, and programmed with actual decision-making or practical arrangements content. These bodies’ position can be similar to the relationships between financial holding company and subsidiary. Financial holding company in the head office level is diversified, but the subsidiary level is separate operation, so that financial holding company both meets the Mixed and also adapt to sub-operators. Therefore, the financial regulatory coordination committee is a key to play the role of a higher level of integration, it is necessary to prevent regulation offside, but also to prevent the regulatory vacuum. To this end, its functions should primarily include the existing level of financial holding company groups’ supervision, industrial type of financial holding company’s regulation, and the regulation of cross-financial businesses and innovative products as well as some regulatory vacuum in the regulatory area (Prosperetti, L 2009).

 

The modern financial regulation should be more enhanced and regulated in advance (Prosperetti, L 2009). The sub-prime crisis shows that at the face of increasingly complex and frequent market innovation and increasingly complex, innovative products, relying solely on disclosure of information to protect the interests of investors, has been inadequate. With the complexity of modern financial products, investors have become increasingly hard to identify their potential risks. Therefore, regulators simply do to ensure that information is really disclosure, or fully rely on the supervision of information transparency have been inadequate.

 

In response to this aspect, the regulatory system is necessary to have a transition from the previous emphasis on regulating agency to the regulatory models of agency’s function (Prosperetti, L 2009). Namely, to various types of financial institutions, which have the same type of business, take unified regulation and supervision at a unified standard, in order to reduce the blind spot, monitoring to improve the regulation efficiency. At the same time, regulators in the prior regulation should have a better in-depth study about innovative products, and on this basis to create an effective risk assessment of products, especially for the products which may cause the systematic risk, it should take the appropriate chain of custody forward, analyze in-depth and evaluate the hidden danger could bring about which financial products to the regulatory system (Congleten, RD 2009).#p#分頁標題#e#

 

Not only regulate on the Chinese-funded financial institution's overseas investments and assets, aim to prevent its overseas exposure is too large, in China must also strengthen supervision of foreign financial institutions. May take the following measures: First, the proper control of enter the speed of foreign financial institutions to China. At present, China's banking is opening up faster than many developed countries in the world. In contrast, China's financial institutions, in the international financial market development, market access was very slow. China's financial regulatory authorities need to consider the openness of China's financial institutions outside, and need to apply principle of equivalence to the openness of foreign financial institutions, proper control of the entry speed of foreign financial institutions. Then, as to improve the regulation of foreign financial institutions, China’s “anti-monopoly law” was August 1, 2008 formally implemented, to take various measures to try to curb transnational corporations acts of unfair competition and monopoly, according to the law of regulating the market order, so that competition is being standardized and legalized (Congleten, RD 2009b) .

 

6.2 Enact relative rules and laws

 

With the continuous development of financial derivatives, the relevant laws and regulations have gradually built up. In view of the reality that the frequent bankruptcy incidents due to speculation, in 80s, 20th century, the world's largest OTC derivatives market trade associations - the International Swaps and Derivatives Association (ISDA), promulgated in 1992 “ISDA Master Agreement” (the International Swaps and Derivatives Association Master Agreement), and into the new century, it has promulgated the “2002 Moderator agreement” revision. The agreement now has been signed as the main basis for a variety of financial derivatives agreements. European Banking Federation, European Savings Bank Group and the European Cooperative Bank Association had also in 2001 and in 2004 promulgated the "financial transactions in the main agreement." These documents include foreign exchange, securities and other financial derivatives, including transactions in a standardized protocol model, which are aimed at regulating financial derivatives transactions, control the risk of financial derivative transactions

 

. These agreements provide a valuable reference for China to develop financial derivatives related to the legal system.

 

Learning from foreign experience, the management departments of China has released documents that related to laws and regulations. However, it should be noted that the relevant legislation of China's financial derivatives market is still in its infancy, there are a lot of shortcomings. Mainly in the following three aspects:#p#分頁標題#e#

 

First of all, lack of legislative uniformity and consistency in the major thinking. So far from derivatives appeared on the market, China has always been the lack of a uniform standard in the relevant laws throughout the derivatives market transactions, the corresponding banks in the law is filled by some temporary legal requirements or documents. This not only enables the relevant legal provisions derivatives with a temporary and non-consistency, but is also often likely to lack the appropriate legal protection when a particular derivative products business appears, and always after problems, the relevant department promulgated temporary rules and regulations, it is not effective. For example, 2004, China Banking Regulatory Commission issued the “Financial Institutions Derivatives transactions Interim Measures,” but because of subsequent events in the outbreak of the CAO in 2005, China Banking Regulatory Commission had to re-issued “overseas Chinese-funded banks to handle the risks of derivatives products business tips.”

 

And secondly, in the relevant laws and regulations of the derivatives, the restrictive and prohibiting provisions are in the majority, the encouraging provisions are less, reflecting management’s cautious attitude toward the development of derivative markets. Management tend to be some support in the early stage of development of the market, but once there are problems, immediately issued a highly restrictive document to prohibit and correct, although this could play a defensive role when the risk increased, but it really does slow down, to a certain extent, and does limit the overall development of the related derivatives markets. For example, in 1995, “3.27 treasury bond futures incident” occurred, the relevant management departments had continuously issued a document, then following the final suspension of Treasury bond futures trading, Until now Treasury bond futures trading has not be restored, resulting in China's futures trading can only be carried out within in commodity futures. For another example, before the events of 2004, China Aviation Oil, China Banking Regulatory Commission for commercial banks to participate in derivatives trading holds a certain degree of support and encouragement of attitudes, and then with the outbreak of the incident, “Chinese-funded banks to handle the risks of offshore derivative products business tips,” the introduction, restrictive provisions of the mainstream once again.

 

Finally, at the legislative level, many laws and regulations have temporary features, leading to its effectiveness affected by the implementation less effective. At the same time, due to a number of departments have the right to appropriate regulation, leading to the relevant provisions of the various departments issued no shortage of room for conflict with each other, but also easy to form the fuzzy area on the legal concept, then the effects of the implementation of laws and regulations adversely affected. Moreover, in the actual implementation process, all departments are often introduced a variety of temporary notice, require such additional loopholes in the original legislation, leading to the seriousness and authority of the relevant laws is being undermined.#p#分頁標題#e#

 

6.3 Advance comprehensive risk management

 

A comprehensive risk management is the core and key to build world-class commercial banks. China's banking sector is less competitive, and there are large-scale emergence of non-performing loans, because of the inherent factors in its history and the external objective factors. But the risk identification, management, control and disposal capacity is not strong; this is also a very important factor. We can say that the future competition of commercial banks, must not just the size of the competition, or even not simply effective competition, but on including credit risk, market risk and operational risk, and so on, the overall banking risk management capability of competition. Comprehensive risk management ability and its level directly the core and key to determine the success or failure of banks to build world-class commercial banks. Faced with international competition, commercial banks must change their ideas and establish the scientific development concept, to develop and launch world-class commercial banks with the corresponding risk management objectives and risk management tools, and constantly strengthen risk management and risk management system construction and cultural construction of risk management throughout the business decision-making, resource allocation, product pricing, performance evaluation and other management of the entire process. Must concentrate on the development and promotion of risk quantification system, and risk information management system, as the important technical support of the implementation of a comprehensive risk management strategy.

 

First, on system and structure, forming a trinity risk management organizational system that risk management committee is the core, the risk management department is coordinating body and the major business units is the implementation bodies. Take the real risk management changes from practical realized risks to potential risks, shift from the subsequent risk to pre-disposed risk, from asset risk management to a comprehensive risk management.

 

Second, in the coverage of management, take the assets, liabilities and intermediate businesses, tables, balance-sheet business, currency, foreign currency business, front, middle and business operations and management in background etc. under the overall risk management scope. Risk management will be gradually covered from the various branches of commercial banks, various businesses to a variety of products, throughout the pre-monitoring, incident management, and after the disposal of the whole process.

 

Third, in the technology of risk management, establish a three-dimensional comprehensive risk management system that can comprehensively, accurately monitor, prevent and control, including credit risk, market risk, operational risk, the whole process and quantification of all types of risk. Establish and improve risk management system, significantly enhance the risk information management, and comprehensively improve the level of portfolio risk management level, so that the level of asset quality and profitability remain healthy development.#p#分頁標題#e#

 

Finally, from risk culture; foster the concept of risk management and value creation, train and establish compliance in accordance with law, prudent, honest and responsible risk management culture and atmosphere. Take risk prevention knowledge and management skills into the front-line post test examination and qualification management positions at all levels competitive selection, allowing every staff of commercial banks to grasp the basic knowledge and skills of the corresponding risk assessment and prevention and control.

 

6.4 Strengthen self-regulation

 

“Water can carry a boat, but can also overturn it.” Financial derivatives can hedge the risk of evasion, and increase the liquidity of financial markets, improve investment efficiency, and optimize resource allocation. However, the failure of financial derivatives transactions can cause horrifying catastrophe and an endless stream. In fact, the losses, generation of bankruptcy and the emergence of market volatility are not the faults of their derivatives, but because of derivative products caused by misuse and poor regulation, therefore urgent need is to take practical measures, from different areas, different levels way to manage the control of those risks.

 

6.4.1 A financial institution internal self-regulation

 

Financial institutions, as principal investors, engage in financial derivatives transactions. First of all, top management should be made to clear purpose of the transaction is to reduce the spread risk, expand profitability, improve and deepen operational efficiency. Should establish the appropriate “from the macro to micro” control system, provides the type of transaction, trading volume and the principal amount, and carefully choose the type of financial derivative products; and secondly, we must strengthen internal control, strict control of transaction procedures, will operate the right to Settlement right to supervise the separation, there must be strictly structured operational authority to increase the punishment of unauthorized transaction; then, establish specialized risk management and regulatory authorities, the transaction records of personnel transactions, confirmed that pro forma market value, evaluation, measurement and prevention of financial derivatives trading process in the face of the credit risk , market risk, liquidity risk, settlement risk, operational risk and legal risks. The department should be responsible directly to the decision-making, should timely report on market conditions and the company’s transactions.

 

6.4.2 System control in Stock Exchange

 

Exchange is a derivatives trading organizer and market manager, through the development of place trading rules, regulates market business operations, to ensure that trading under the conditions of open, fair, competition, and played a vital role to resist the risk of financial derivatives. First of all, we must improve the trading system, to develop a reasonable and timely adjustment of margin percentage in order to avoid a chain reaction of default risk. According to the size of the actual capital of the agencies, to determine their position limits, to differ hedgers, speculators, arbitrageurs and the manipulators, encouraging hedging, appropriate curb speculation, to avoid insider trading, market manipulation happens; then secondly, to establish a rational and strict settlement system, the widespread practice of “mark to the market system” to strengthen the clearing, settlement and payment systems management, coordinate of cash and derivative markets, domestic and overseas markets, increased market liquidity in derivative products and response capabilities; again, strengthen financial supervision and information disclosure, according to the characteristics of derivative products, reform the traditional accounting methods and principles for the development of uniform rules and procedures for the disclosure of information so that management and users can master the clarity of the risk of exposure to develop countermeasures, to establish a rational and scientific risk-control systems to reduce and prevent risks from occurring.#p#分頁標題#e#

 

6.4.3 Central Bank’s macro-control and regulation

 

The central bank, as a country's monetary policy-makers and the principal actors of financial regulation, plays a pivotal role in the management of financial derivatives transactions. First of all, we should improve the legislation on financial derivatives to set up a special complete set of laws to develop uniform standards for the management of the transaction, to absorb the transaction into an effective internal control system; and secondly, to enhance supervision of financial institutions engaged in financial derivatives transactions, make provision of financial institutions involved in the transaction amount of minimum capital, to determine the risk-taking limits, give financial institutions on a casual or un-casual, on-site or off-site inspection, to format of effective control and restraint mechanism; again, regulatory guide financial institutions’ conduct of operations, do the strict distinction between banking and non-banking business, to control cross - degree of financial institutions operating. At the same time, when the central bank financial institutions are in a crisis due to unexpected events, should promptly take the appropriate remedial measures, a rapid injection of funds or temporary intervention in order to avoid excessive volatility of financial markets.

 

6.5 Enhance international cooperation

 

It is important to international supervision and international cooperation. Financial derivatives transactions carried out booming around the world, the transaction boundaries of super-national and ultra-governmental, so that a single country and the region go beyond the reach of financial derivative products regulation, the management can not effectively. So must conduct a comprehensive risk control system, to strengthen financial derivatives international supervision and international cooperation, these have become an international financial community and national financial authority’s consensus. After the events of Barings Bank, Bank for International Settlements (BIS) has embarked on a full regulation on comprehensive financial derivatives transactions; to strengthen the balance sheet operations of banks capital adequacy supervision. In the Basel agreement, it adds the balance-sheet financial derivatives market risk ratio, calculate of the potential risks of financial derivatives in the bank's capital, to increase the ability to prevent risks of the commercial banks. It can be expected that in the future, the control and monitoring of financial derivatives risk will become more comprehensive, effective and the financial derivative products can have a healthy development from then on if we do best.

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