China’s capital markets, one of the largest in the world, have experienced significant growth and development over the past decade, with Chinese regulators introducing multiple measures aimed at developing stable, liquid and efficient capital markets that support the domestic real economy and attract foreign investment.

The development of a safe, robust and efficient derivatives market in China is an integral building block in achieving this policy objective.

In recent years, the Chinese government has taken major steps to support the development of the derivatives market through implementing regulatory and legislative reforms, broadening derivatives use cases and market access, and enhancing market infrastructure. Of particular significance is the Draft Futures and Derivatives Law, which was introduced for second reading at the Standing Committee of the National People’s Congress in October 2021. The draft legislation introduces a comprehensive legal framework for the operation of futures and over-the-counter derivatives markets in China.

Crucially, the Draft Futures and Derivatives Law represents a seminal milestone for the derivatives market as it represents the first step in China’s legislative history to expressly acknowledge the enforceability of close-out netting at a national law level. This is an important step forward for China’s derivatives market, as close-out netting is the single most important mechanism for the reduction of credit risks associated with derivatives contracts, and netting enforceability is an indispensable foundation for safe and efficient derivatives markets.

As China continues to liberalize its financial markets, recognition of netting will remove a major barrier to international participation, supporting the development of liquid and efficient capital markets. If the legislation passes – with provisions clarified to provide for legal certainty of close-out netting and enforceability of financial collateral – the next step will be for key policy-makers and market participants to consider the further developments that are necessary or beneficial to promote a robust and efficient derivatives market in China.

To that end, ISDA has commissioned the Boston Consulting Group to develop this whitepaper to provide insights and recommendations for further development of China’s onshore derivatives market.

Click on the attached PDFs to read the whitepaper (English and Chinese translation available).