Shenzhen Exchange Reins in Derivative Investments

飞雪寒冰

Companies listed on the Shenzhen Stock Exchange should avoid trading over-the-counter derivatives, while strictly controlling the type and scale of their exchange-traded investments, the bourse said Aug. 28.

In a statement considered stronger than a guideline but without the force of an official ruling, the Shenzhen bourse said it did not encourage listed companies trading complex derivatives that exceed operational requirements, or for speculation.

The bourse also asked listed companies to set up risk control mechanisms for derivative investments, monitor and evaluate changes in derivatives' value and make timely disclosures on the state of their investments.  

"The Shenzhen Stock Exchange has the right to regulate listed companies' corporate governance. Trading derivatives carries great risk, so strict regulation will protect investors' interests," an official with the exchange told Caijing.

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Tighter rules will have some positive effects since listed companies' disclosure on derivatives has often been ambiguous and the public has remained unaware of the scale of their losses, Ping An Securities analyst Ye Guoji said.

But Guosen Securities analyst Peng Bo said the Shenzhen bourse does not have any right to intervene in how listed companies manage their derivatives trade. "The rule may just be preparation for the launch of stock index futures," he said.

Listed companies must reveal as soon as possible if losses or book-value losses from derivative investments exceed 10 million yuan and account for 10 percent of net assets in the latest audited report, according to the statement.

Companies are also required to evaluate changes in risk exposure and report them to their board of directors, as well as impose stop-loss orders on their derivatives contracts, the statement said, without providing specifics.

The move comes following a similar ruling by banking regulators to ban domestic banks from trading derivatives attached to overseas financial institutions as they are deemed too risky and complicated to manage effectively.

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Caijing also reported Aug. 28 that the State-owned Assets Supervision and Administration Commission sent notice to six foreign financial institutions, informing them that some state-owned enterprises supervised by the commission may cancel commodities contracts, in a major blow for the investment banks that handle the SOEs' international commodities hedging operations.  

Chinese SOEs have suffered massive hedging losses since the onset of the global financial crisis. At the end of 2008, China Eastern Airlines booked fair-value losses of 6.2 billion yuan from jet fuel hedging contracts, while Air China booked 7.4 billion yuan in fair-value losses on similar contracts.

Average net profit of the 487 listed firms on the Shenzhen main board fell around 40 percent in 2008 primarily due to asset writedowns and lower investment income, Caijing reported earlier.

Derivatives include exchange-traded and over-the-counter securities portfolios such as futures, options, forward and swaps. Underlying assets comprise securities, indices, interest rates, foreign exchange rates, as well as currencies and commodities.