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China SOEs Directed to Rein In Unauthorised Derivatives Trading – Regulation Asia

SOEs are directed to ensure their subsidiaries are qualified and properly approved to trade financial derivatives, and able to manage the associated risk.

China’s SASAC (State-owned Assets Supervision and Administration Commission) has directed SOEs (state-owned enterprises) to ensure compliance with rules on managing derivatives trading at their subsidiaries.

Under rules released by the SASAC last year, SOEs and their subsidiaries are only allowed to engage in derivatives trading for hedging purposes. Speculative transactions are prohibited.

The rules also banned SOE subsidiaries from trading financial derivatives if they have reported losses for each of the previous three years, or if they have liquidity or asset-liability mismatch issues.

SOEs were also required to strengthen risk management and controls, establish monitoring and approval systems, and file financial derivatives business reports quarterly.

In a notice, the SASAC said some SOEs have not conducted comprehensive assessments to ensure their subsidiaries are qualified and properly approved to trade financial derivatives, or to ensure they are able to manage risk or absorb potential losses.

SOEs are directed to conduct a comprehensive review of the business qualifications of their subsidiaries for derivatives trading by 30 June 2021. Thereafter, reviews must be completed every three years.

SOEs are also directed to speed up progress to implement new information systems for monitoring financial derivatives trading activity. The construction of these new systems shall be completed within two years.

“If the information system is not completed and launched on time, the company will be required to increase the reporting frequency or the board of directors will be prompted to reduce the scale of the business,” the notice warns.

The SASAC said it will carry out special inspections from time to time and initiate further action if problems are found. Specifically, SOE subsidiaries that do not qualify should not be allowed to engage in derivatives trading activities.

The regulator will also explore the possibility of establishing a centralised data sharing mechanisms, and work to strengthen its daily monitoring and early risk warning mechanisms.