Sept 3 (Reuters) - China currently maintains tight control over its futures market, opening only a small window to foreign participation. Financial institutions are barred from participating, and brokers cannot take positions.
Following are some questions and answers about the issue:
HOW CAN FOREIGN COMPANIES TRADE COMMODITY FUTURES IN CHINA?
All China-registered non-financial companies can apply for membership at the three futures exchanges in Shanghai, Dalian and Zhengzhou to trade for themselves as long as they also meet other criteria such as capital size and sound trading records.
A non-financial foreign firm can do so by setting up a locally-registered company
Some international trading firms such as Louis Dreyfus and
BP Plc
Foreign companies with physical trading operations in China
are also able to trade on the exchanges, and agricultural
giants like Wilmar
Due to cumbersome red tape procedures, many global trading firms choose to open trading accounts at futures brokerages, instead of applying for bourse membership.
Brokerage clients have to pay brokerage service fees and sometimes are subject to smaller holding ceilings than members.
ARE FOREIGN BANKS PERMITTED TO TRADE COMMODITY FUTURES DIRECTLY?
As China still has a segregated regulatory framework for its financial industry, the securities, banking and futures operations are separated by strict firewalls.
That means financial institutions such as banks, securities firms, mutual funds and insurance companies are banned from entering the commodity futures market without special regulatory approval.
The only exception granted thus far was in April, when four domestic commercial banks got approval to trade gold futures in Shanghai as authorities moved to inject more liquidity into the newly launched product.
Banks and other financial institutions, domestic and foreign, are not allowed to become members at futures bourses or clients of futures firms.
SO CAN BANKS ACCESS THESE MARKETS INDIRECTLY?
Yes. A few banks, especially those with multiple business types, set up local non-financial firms in China, through which they become futures firms' clients.
For example, Wall Street bank Morgan Stanley
A handful of foreign banks, such as HSBC Holdings Plc
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WHAT OTHER AVENUES EXIST FOR BANKS TO GET A FOOTHOLD?
Chinese regulators are reluctant to open the domestic futures market to foreign players. Only since August 2005, when Beijing worked to cement business relationships with Hong Kong and Macau, have foreign firms had a chance to enter China's futures market to offer brokerage services.
Under the Cooperative Economic Partnership Agreement (CEPA) between the mainland and the two regions, a Hong Kong or Macau-registered firm can buy no more than a 49 percent stake in a Chinese futures brokerage. Foreign banks and futures firms can do so through their Hong Kong or Macau subsidies.
Since then, three joint venture futures firms have been launched: JPMorgan Chase teamed up with Zhongshan Futures in January 2008; France's Credit Agricole Indosuez teamed up with Citic Futures in April 2007; and Dutch bank ABN Amro joined with Galaxy Futures in December 2006.
Since January 2008, the process has been frozen and no more new joint-ventures approved.
WHAT'S THE TIMELINE FOR OPENING UP THIS MARKET FURTHER?
China is under no pressure at all to open its futures markets, as unlike its securities, banking and insurance sectors, Beijing made no specific commitment to open its futures market when it entered into the World Trade Organisation in 2001.
The year-old global financial crisis, as well as numerous scandals of Chinese firms suffering huge losses from trading derivatives overseas, will make Chinese regulators more cautious than ever. (Reporting by Eadie Chen and Chen Aizhu; Editing by Jonathan Leff) (eadie.chen@reuters.com; +8610 6627 1268; Reuters Messaging: eadie.chen.reuters.com@reuters.net))