Unofficial English Translation * China Banking Regulatory Commission Order [2011] No. 1 The Resolution of the China Banking Regulatory Commission Amending the Interim Measures on the Administration of Derivatives Business of Financial Institutions, being adopted at the 101 st Chairman s Meeting of the China Banking Regulatory Commission, is hereby promulgated and shall come into force as of the date of its promulgation. Chairman: LIU Mingkang 5 January 2011 RESOLUTION OF THE CHINA BANKING REGULATORY COMMISSION AMENDING THE INTERIM MEASURES ON THE ADMINISTRATION OF DERIVATIVES BUSINESS OF FINANCIAL INSTITUTIONS The China Banking Regulatory Commission adopts the resolution to amend the Interim Measures on the Administration of Derivatives Business of Financial Institutions as follows: [Amendments 1 to 36 are omitted in this unofficial English translation.] The Interim Measures on the Administration of Derivatives Business of Banking Financial Institutions, as amended pursuant to this resolution and with sequence of the provisions rearranged, are hereby re-promulgated. INTERIM MEASURES ON THE ADMINISTRATION OF DERIVATIVES BUSINESS OF BANKING FINANCIAL INSTITUTIONS Chapter One General Provisions Article 1 Article 2 These Measures have been formulated according to the PRC Banking Regulation and Supervision Law, the PRC Commercial Banking Law and other relevant laws and regulations in order to regulate the administration of banking financial institutions derivatives business and effectively control the risks involved in the conduct of derivatives business by banking financial institutions. For the purpose of these Measures, a banking financial institution means any duly established commercial bank, urban credit co-operative, rural credit co-operative and other financial institutions engaged in taking * While every effort has been made to ensure the accuracy of our translations, it is not possible to guarantee an exact English translation of Chinese legal and regulatory provisions since each language has its own grammatical structures, embodies different legal and cultural concepts and is open to different interpretations.
deposits from the general public and policy banks. These Measures shall apply to the derivatives business conducted by a duly established financial asset management company, trust company, corporate group finance companies, financial leasing company, or other banking financial institutions established under the approval of China Banking Regulatory Commission ( CBRC ). Article 3 Article 4 For the purpose of these Measures, derivatives means a kind of financial contract, the value of which is determined on the basis of one or more underlying assets or indices. The basic types of such contracts include forwards, futures, swaps (exchanges) and options. Derivative products also include hybrid financial instruments having one or more features of forwards, futures, swaps and options. For the purpose of these Measures, derivatives trading business conducted by banking financial institutions can be classified into two types based on the purposes of the transaction: (1) Derivative transactions for hedging purposes are transactions initiated by a banking financial institution and conducted by it for hedging the credit, market or liquidity risks in respect of its own assets and liabilities. This type of transaction is subject to the accounting rules for hedging and managed as a banking book item. (2) Derivative transactions for non-hedging purposes are derivative transactions other than for hedging purposes, and include: transactions for clients which are initiated by clients and provided by a banking financial institution to meet the needs of clients, and transactions conducted by such banking financial institution to hedge the risks in relation to the aforementioned transactions; transactions with other market participants based on applicable prices in the continued provision of bid and offer prices by a banking financial institution in discharge of its market-making obligations; and transactions initiated and conducted by a banking financial institution, using its own funds, relying on its judgment of market trends and for the purpose of making profit. This type of transaction is managed as a trading book item. Article 5 Article 6 For the purpose of these Measures, clients mean individual and institutional clients other than financial institutions. Wealth management products sold to clients by a banking financial institution, which have the characteristics of derivatives, shall be subject to these Measures in relation to its product design, trading and management; client access and sales process shall be subject to the relevant regulations of CBRC in respect of wealth management business. Risk assessment and sales of derivative products for individuals shall be subject to the relevant regulations in respect of wealth management business for individuals. The launch of derivatives trading business by a banking financial institution shall be subject to the prior approval as well as the supervision and inspection of the CBRC. 2
A banking financial institution which has received approval for conducting derivative transactions shall conduct business in line with its own risk management capability. Article 7 To transact in derivative products linked to foreign exchange, commodities, energy and equities, and exchange-traded derivatives, a banking financial institution shall obtain the qualification for derivatives trading business granted by the CBRC and comply with the State s foreign exchange administration regulations and other relevant regulations. Chapter Two Market Access Control Article 8 The qualifications for banking financial institutions to launch derivatives trading business shall fall into the following two categories: (1) basic qualification, which permits only derivative transactions for hedging purposes; and (2) ordinary qualification, which permits, in addition to the derivative transactions permissible under the basic qualification, derivative transactions for non-hedging purposes. The regulatory authorities may, depending on a banking financial institution s risk management capability, impose differentiated qualification administration in respect of its specific business model, product types and others. Article 9 A banking financial institution applying for the basic qualification shall meet the following conditions: (1) having a sound derivatives trading risk management system and internal control system; (2) having no less than 2 traders who have received no less than 6 months dedicated training in relevant derivatives trading skills and have no less than 2 years experience in derivative products or relevant business; having no less than 1 relevant risk controlling personnel and no less than 1 risk model researcher or risk analyst and no less than 1 personnel proficient in the operational procedures and rules of hedge accounting; each of the above posts shall have a dedicated personnel and shall not be held by the same person concurrently. None of such personnel shall have any record of misdemeanour; (3) having suitable trading premises and equipment; (4) having a dedicated department and relevant professionals for handling legal matters and compliance and internal control; (5) meeting the requirements of the CBRC s prudent supervision standard; and (6) any other conditions prescribed by the CBRC. 3
Article 10 A banking financial institution applying for the ordinary qualification shall meet the following conditions in addition to the above conditions for the basic qualification: (1) having a business management system automatically linking its front, middle and back offices for derivatives trading and a real-time risk management system; (2) the personnel in charge of derivatives trading business having 5 years or more of direct experience in derivatives trading activities and risk control, and shall have no record of misdemeanour; (3) having a strict business separation system to ensure the effective separation of hedging business from non-hedging business in respect of their respective market information, risk control and loss/profit accounting; (4) having a sound risk-management framework for market risks, operational risks, credit risks and others; and (5) any other conditions prescribed by the CBRC. Article 11 A foreign-funded bank intending to launch derivatives trading business shall submit application documents signed by its authorised signatory to the local regulatory authority. After the local regulatory authority has reviewed the application documents and given its consent, the application documents shall be submitted to the CBRC for review and approval. In the case of a wholly foreign owned bank or a Chinese-foreign joint-venture bank, the application documents shall be submitted to the local regulatory authority by the head office of such bank. Where a foreign bank intends to launch derivatives trading business in two or more of its branches in China, the application documents shall be submitted to the local regulatory authority by its managing branch in China. After the local regulatory authority has reviewed the application documents and given its consent, the application documents shall be submitted to the CBRC for review and approval. Where the branch office of a foreign bank applies for the launch of derivatives trading business, it shall obtain a formal authorisation from its head office (regional headquarters), its home country must have the legal framework for the supervision of derivatives trading business and the regulatory authority in its home country must have the competence for such supervision. If the branch office of a foreign bank applying for the launch of derivatives trading business is unable to meet the conditions in Article 9 or 10, its head office (regional headquarters) shall meet the above conditions and such branch office shall meet the following additional conditions: (1) the official authorisation for derivative transactions from its head office (regional headquarters) shall set out specifically the types and quota of derivative transactions to be conducted; 4
(2) unless the head office specifies otherwise, all derivative transactions of such branch are to be squared through a unified system of the authorising head office (regional headquarters) on a real-time basis, and such head office (regional headquarters) will be responsible for squaring, exposure management and risk control of such transactions. Other banking financial institutions subject to territorial jurisdiction of the local regulatory authority shall submit application documents to the local regulatory authority. After the local regulatory authority has reviewed the application documents and given its consent, the application documents shall be submitted to the CBRC for review and approval. Other banking financial institution under CBRC s direct administration shall submit application documents directly to the CBRC for review and approval. Article 12 To apply for the launch of derivatives trading business, a banking financial institution shall submit to the CBRC or its agency the following documents and materials (in triplicate): (1) an application report, a feasibility report and business plan or business development plan in respect of the launch of derivatives trading business; (2) internal control rules and regulations for the derivatives trading business; (3) accounting rules for the derivatives trading business; (4) a list of the personnel in charge and the principal traders and their curriculum vitae; (5) a risk management system for derivative transactions, including without limitation, rules for quantifying risk exposure or a system for the administration of authorisation of risk limits; (6) a security and stability test report in respect of the trading premises, equipment and system; and (7) any other document and information required by the CBRC. If the branch of a foreign bank applying for the launch of derivatives trading business is unable to meet the conditions set out in Article 9 or 10, in addition to submitting the above documents and materials to its head office (regional headquarters), such branch shall also submit the following documents to the local banking regulatory authority: (1) the official written authorisation from its head office (regional headquarters) in respect of the specific types and quota of derivative transactions to be conducted; (2) unless its head office specifies otherwise, a letter of undertaking from its head office (regional headquarters) which undertakes all derivative transactions of such branch are to be squared through a unified system of the authorising head office (regional headquarters) 5
on a real-time basis, and that such head office (regional headquarters) will be responsible for the squaring, exposure management and risk control of such derivative transactions. Article 13 Article 14 Article 15 The accounting rules for derivative transactions submitted by a banking financial institution shall comply with the accounting standards of the People s Republic of China. To the extent relevant standards are not available in China, such accounting rules shall comply with the relevant international standards. Local branch of a foreign bank may comply with the accounting standards of its head office or its home country. The security testing report with respect to the premises, equipment and system to be provided by a banking financial institution in accordance with these Measures shall, in principle, be issued independently by a third party. The internal control rules and regulations for the derivatives trading business to be launched by a banking financial institution shall include at least the following: (1) the guiding principles and business operating procedures (which procedures shall reflect the principle of the separation of its front office, mid-office and back office) for derivatives trading business, and contingent plans to deal with emergencies; (2) approval system and procedures of the new business and new derivative products; (3) transaction types and their respective risk control system; (4) risk model specifications and quantified management specifications for derivatives trading business; (5) risk management system and internal audit system; (6) management system and post-assessment system for research and development of derivatives trading business; (7) code of conduct for traders; (8) post responsibility system for personnel in charge of trading and accountability system and incentive and restraint mechanism for management personnel at various levels and traders; (9) training plans for its front, middle and back office management personnel and staff; (10) other contents required by the CBRC. Article 16 Article 17 The CBRC shall give its approval or response within 3 months upon the receipt of a complete set of application materials submitted by a financial institution in accordance with these Measures. Where a banking financial institution intends to authorise a branch office to conduct derivatives trading business, it shall carry out a strict review of the risk management capability of such branch office, and shall issue formal 6
written authorisations in respect of relevant transaction types and quotas. Derivative transactions conducted by branch offices within China shall be squared through a unified system of its head office (headquarters) on a real-time basis, and such head office (headquarters) shall be responsible for the squaring, exposure management and risk control of such transactions. The branch office referred to above shall report to the local banking regulatory authority and produce the written authorisation from its head office (headquarters) within 30 days upon the receipt of such authorisation from its head office (headquarters) or upon any change in such authorisation. Local branch of a foreign bank shall take the initiative to promptly report to the CBRC of any change in its authorisation. Chapter Three Risk Control Article 18 A banking financial institution shall determine the appropriateness of its conducting derivatives trading business and the types and scale of derivative transactions to be conducted having regard to its business objectives, capital strengths, management ability and characteristics of the risks involved in derivative transactions. A banking financial institution engaged in derivatives trading business shall submit a written inquiry to the regulatory authority before it develops a new type of products, ventures into new markets or engages in other innovations. A banking financial institution shall gradually improve its capability in independent innovation, transaction management and risk management and shall engage in derivative transactions which it is not capable of valuing after exercising great care. A banking financial institution shall not hold for its own account, or sell to any clients, derivative products involving naked short-selling with potentially unlimited loss or derivative products which underlying assets are derivative products or which are linked to derivative products. Article 19 Article 20 A banking financial institution shall, according to the classification of derivatives trading business in Article 4, establish a complete and reliable risk control system in relation to market risks, credit risks, operating risks and legal compliance risks, an internal control system and a business processing system commensurate with the nature, scale and complexity of the derivatives trading business to be conducted, and shall be staffed with personnel with the relevant business knowledge and skills to operate the said risk control system, internal control system and business processing system referred to above. The board of directors or the authorised special committee of a banking financial institution shall assess the existing business status and risk control policies and procedures with respect to derivative transactions on a regular 7
basis to ensure that they are in line with the institution s capital strengths and management capability. Where new derivative products are introduced frequently or the systems are significantly altered, the frequency of the assessment shall be increased accordingly. Article 21 Article 22 The senior management personnel of a banking financial institution shall be aware of the risks involved in the derivative transactions being conducted, shall review, approve and assess the comprehensive management framework, including the principles, procedures, organisation and authority, for conducting derivatives trading business and its risk control; and shall have ready access to information on the risk conditions of derivative transactions through an independent risk control department and a sound inspection and reporting system, and shall provide corresponding supervision and guidance. Based on the above, the banking financial institution shall also assess its own derivatives trading business on a yearly basis and submit the assessment report of the previous year (in duplicate) to the regulatory authority by the end of January of each year. A banking financial institution shall determine appropriate specifications and methods for measuring the risk exposure of its derivative transactions based on the institution s overall strengths, availability of its own funds, profitability, business operation principles, trading target of the derivative transactions and forecast of market trends. A banking financial institution shall establish and strictly enforce an authorisation and stop-loss system, formulate, regularly review and update risk exposure limits, stop-loss limits, contingent plans and rules and specifications for stress testing in relation to derivatives trading business, and formulate procedures for limit monitoring and over-limit treatment. When conducting a derivative transaction, a banking financial institution shall strictly enforce the policies for authorisation levels and risk exposure control. Any material transaction or new derivative business shall be subject to the approval of the board of directors or its authorised special committee or by the senior management. When unrealised losses have occurred due to market changes or wrong decision, a banking financial institution shall strictly enforce its stop-loss policy. A trader who acts outside the scope of its authorisation or commits an irregularity in trading and the relevant supervisor shall be held strictly accountable and subject to punishment. Article 23 A banking financial institution shall strengthen the authorisation and management of its branch offices in their derivative transactions. For the branch offices with relatively weak capability in operating derivative products, controlling risk and managing business, their authority to trade derivatives shall be withdrawn from them as appropriate. A banking financial institution shall specify the types and characteristics of the material risks in derivative transactions in the relevant risk control policies and set out the procedures for revoking trading authorisation; for the 8
branch offices where material risks in derivative transactions has occurred, their authorisation to trade derivative products shall be promptly revoked. Article 24 Article 25 Article 26 Article 27 Article 28 The personnel of a banking financial institution in charge of risk measurement, monitoring and control shall not hold concurrent office in derivatives trading or marketing and vice versa. Personnel in charge of risk measurement, monitoring and control may report on the risk situation directly to the senior management. A trader for derivative transactions for hedging purposes shall not hold concurrent office as trader for derivative transactions for non-hedging purposes (each as defined in Article 4) and vice versa. A banking financial institution shall also ensure that the relevant trading information in relation to the different types of derivative transactions is segregated from each other. A banking financial institution shall set out clear criteria for ascertaining the qualifications of employees such as traders, analysts and sales persons, and provide training to sales persons and other relevant employees according to the complexity of derivative transactions and risk control to ensure that they have the necessary skills and qualifications. A banking financial institution shall formulate reasonable cost and asset analysis and measurement rules and scientific and appropriate incentive and control mechanism. It shall not simply link the income of derivatives trade and risk management personnel to the current business performance to avoid excessive pursuit of profit and increased trading risk. A banking financial institution shall enforce regular shift mechanism and compulsory paid leave policies for its supervisors and traders engaged in derivatives trading. The internal audit department of a banking financial institution shall regularly review the implementation of the risk control policies for its derivatives trading business. Internal audit of derivatives trading policies and business shall have the following elements: (1) adequate internal auditors with relevant experience and skills; and (2) an independent reporting route to the board of directors from such internal audit department. Article 29 Article 30 A banking financial institution shall establish and perfect the mechanism and policies for the control of legal risk and strictly examine the legal status and trading qualifications of its transaction counterparties. When entering into a derivatives trading contract with a counterparty, a banking financial institution shall refer to international and domestic market practices, give full consideration to factors such as the enforceability of legal recourse in the event of an event of default, and take effective measures to address legal risks involved in the course of drafting, negotiation and execution of the trading contract. A banking financial institution shall formulate and improve rules for reviewing and managing contracts and other legal documents related to 9
derivative transactions. It shall review derivative transaction contracts and their validity and effect at least once every year according to the situations of the trading counterparty, so as to have a better understanding of the same and effectively address relevant legal risks. Article 31 Article 32 A banking financial institution shall establish relevant policies for assessing the suitability of its transaction counterparty, including whether its transaction counterparty fully understands the contract terms and its obligation under the contract and whether the derivative transaction to be entered into is in line with the purpose for which the transaction counterparty is entering into the derivative transaction. In satisfying the requirements under this Article, a banking financial institution may in good faith reasonably rely on the formal written documents provided by its transaction counterparty. A banking financial institution shall establish a sound credit risk control system in respect of its transaction counterparty selecting suitable methods and models to assess the credit risk of such counterparty, and adopting appropriate risk mitigation measures. A banking financial institution shall by appropriate means expressly inform the transaction counterparty of the impact the relevant credit risk mitigation measures may have on such counterparty. Article 33 Article 34 Article 35 Article 36 A banking financial institution shall use appropriate risk assessment methods and models to assess the market risk of a derivative transaction. It shall manage market risk according to the principle of market valuation (for this purpose, a third party s independent valuation and pricing may be properly adopted as the market valuation of derivative products) and accordingly adjust the transaction size, type and level of risk exposure. Decisions to initiate a derivative transaction for hedging purposes and relevant trading decisions shall be made by a banking financial institution s asset and liability management department according to the institution s genuine needs. A banking financial institution conducting derivative transactions for nonhedging purposes shall make provisions for the market risk capital for the risk exposure of such derivative products. Such market risk capital shall be calculated pursuant to the relevant provisions of the Administrative Measures for Capital Adequacy Ratio of Commercial Banks and the Regulatory Guidelines on Internal Model Approach for Market Risk Capital Measurement of Commercial Banks. In terms of a banking financial institution conducting derivative transactions for non-hedging purposes, its standard model market risk capital shall not exceed 3% of the core capital of such banking financial institution. Regulatory authorities may impose dynamic and differentiated restrictions within such capital ceiling based on the business conditions of a banking financial institution. The standard model market risk capital shall be 10
calculated pursuant to the relevant provisions of the Administrative Measures for Capital Adequacy Ratio of Commercial Banks. Article 37 Article 38 Article 39 Article 40 Article 41 A banking financial institution shall, according to the size and type of derivative transactions, establish complete monitoring and pre-warning systems for liquidity risks and make adequate arrangements to ensure liquidity so that it has sufficient capability to perform the contract in the event of unusual market movements. A banking financial institution shall establish and improve the system and rules for controlling operational risks and clearly define the duties for the operation and monitoring of derivative transactions, including without limitation, the generation and completion of the trading documentations, trading confirmation, netting settlement, review of trades, market value revaluation, abnormality reporting, accounting treatment, etc. Documentation and recordings generated in the course of derivative transactions shall be filed in a unified filing system and regularly reviewed by the department in charge. A banking financial institution shall clear the derivative transactions in accordance with the regulations of the CBRC, shall ensure the relevant settlement obligations are discharged, shall properly deal with events of default and termination events and shall recognise and manage operation risks on a timely basis. A banking financial institution shall establish or improve information management system for derivative transactions so as to ensure the completeness and validity of information as classified by product and trading counterparties, etc. A banking financial institution shall, pursuant to the requirements of the CBRC, submit to the CBRC the accounting and statistical statements and other reports relating to derivative transactions. A banking financial institution shall, pursuant to the information disclosure requirements of the CBRC, disclose externally the risks, losses, changes in profits and any unusual circumstances in the conduct of derivative transactions. Article 42 A banking financial institution shall take prompt and effective measures to mitigate its losses when any material business risk or material business loss has occurred to its derivative transactions, and on its own initiative promptly report the relevant circumstances to the CBRC. A banking financial institution shall take the initiative to promptly report to the CBRC of the details of any material changes in its derivative transactions, operational system and risk control system, etc. Article 43 The CBRC may inspect the information and statements, risk control system, internal control system and business processing system of a banking financial institution in relation to its derivatives trading business to 11
see whether they are in line with the types of derivatives trading business being conducted by such banking financial institution. Article 44 Chapter Four Marketing and after-sale services of derivative products A banking financial institution shall attach great importance to the risk management of derivative transactions and formulate and improve a client suitability evaluation system. Taking into account the overall classification of derivative products and clients, a banking financial institution shall fully evaluate the appropriateness of derivative transactions: (1) classify derivative products into categories on the basis of evaluation of the risk and complexity of such products; take a dynamic approach by reviewing the appropriateness of such classification at least once every year; and (2) classify clients into different groups by evaluating the maturity of the clients according to the nature of their business and their experiences in trading derivatives; take a dynamic approach by reviewing the appropriateness of such classification at least once every year. Article 45 A banking financial institution shall, based on the client suitability evaluation results, conduct derivative transactions appropriate to the risk tolerance of such clients with clients who have genuine needs, and obtain from such clients letters of representations or undertakings or any other written materials which prove their genuine needs. The contents of such materials shall include but are not limited to: (1) the authenticity of the underlying assets or liabilities directly related to the derivative transaction; (2) the client s purpose or target for the derivative transaction; and (3) whether there is any unsettled derivative transaction exposure related to the underlying assets or liabilities mentioned in Item (1) of this Article. Article 46 Article 47 The major risk characteristics of the derivatives traded between a banking financial institution and its client shall have reasonable relevance to the major risk characteristics of the underlying assets or liabilities from which the genuine needs arise. In selling and trading derivatives products, a banking financial institution shall give priority to basic and simple derivative products which it is capable of pricing and valuing. A banking financial institution shall formulate or improve the internal training, qualification accreditation and authorisation management system for the salespersons of derivatives products. It shall strengthen the continuous professional training and professional ethics education, provide timely training and qualification accreditation for new products or business and establish a strict system for administration. Only salespersons with accredited qualification and valid authorisation can introduce and market 12
derivatives products to clients. In the course of introducing derivative products to clients, such salesperson shall by appropriate means expressly inform the client that he or she has been accredited internal qualification and received valid authorisation. Article 48 A banking financial institution shall provide its clients with written materials prepared in a clear, straightforward and concise manner to provide information relating to a derivative product and disclose relevant risks. Such disclosure shall be contained in separate chapters and in a clear and concise manner and may not be set out on the page margins or footers or as footnotes or in small font size. The contents of such materials shall include but are not limited to: (1) a full introduction to the structure and basic trading terms of the derivatives product, and a complete set of the legal documents in respect of such derivatives product; (2) an explanation of the indices, yield rate and other parameters to which the derivatives product is linked; (3) disclosure of the major risks contained in the transactions; (4) cash flow analysis, pressure test, hypothetical analysis of the worst case scenario and maximum cash flow loss on the basis of certain assumptions and level of confidence and analysis of the rationality of such assumptions and level of confidence; and (5) any other information that ought to be disclosed to the clients. Article 49 Article 50 Article 51 Article 52 In the process of selling derivatives products, a banking financial institution shall objectively and fairly represent the profitability and risks of a derivative product. It shall not mislead the clients as to their view on the market, nor shall it exaggerate the product s merits or play down its risks or guarantee profit to the clients by any means. A banking financial institution shall fully respect the independent discretion of the client, and may not make the derivative transactions as a precondition to conducting other business with the client. A banking financial institution shall establish a credit rating system for the clients and determine the relevant credit risk mitigation measures by taking into account the credit rating, financial status, profitability, net assets level, cash flow and other factors of the clients. It shall restrict derivative transactions with clients whose credit rating is below a certain level. Before entering into a derivative transaction with a client, a banking financial institution shall obtain a letter of representation or undertaking or any other form of written materials from the client. The contents of the written materials shall include but are not limited to: (1) the compliance on the part of the client to conduct the derivative transaction; 13
(2) whether the signatory/signatories of the derivative transaction contract, trading instruction or any other document has/have been duly authorised; (3) whether the client has fully understood the terms and conditions and relevant risks of the derivative transaction and whether such transaction is in line with the purpose or target described in Article 45 (2); (4) whether the client has the tolerance for the worst case scenario of the transaction as described in Article 48 (4); and (5) any other matter that needs to be represented or confirmed by the client. Article 53 Article 54 Article 55 Article 56 A banking financial institution shall on a timely basis provide the clients with the market information of the derivatives products which have been traded and regularly provide clients with the re-valuation results in the form of written valuation reports or risk reminder letters delivered by letter, e-mail, fax or any other recordable means, and ensure that the relevant materials are delivered to the clients in time. When relatively substantial fluctuation occurs on the market, it shall increase the frequency of revaluation and timely provide revaluation results to the clients in writing. A banking financial institution shall review the frequency and quality of the said market value revaluation at least once every year. For derivative transactions which a banking financial institution is not capable of pricing or valuing, it shall acquire key valuation parameters and other information from the quote provider and, provide such information to the clients in writing by way of letter, e-mail, fax or any other recordable means so as to improve the transparency of the revaluation of the market value of derivatives products. A banking financial institution shall determine in a scientific and reasonable manner its profit targets for the derivatives trading business with clients, establish a performance evaluation system and a long-term effective incentive and control mechanism to guide the relevant departments and personnel to act in good faith and in compliance. It may not excessively pursue profits, or simply link the profits of derivative transactions with clients to the income of employees, profit targets of the relevant departments or the evaluation and incentive scheme. A banking financial institution shall establish or improve systems for making regular post-evaluations on the derivative transactions, including the regular post-evaluations on regulation-compliant sales, risk control, evaluation and incentive mechanism and other internal management rules. A banking financial institution shall establish or improve a regular client feed-back system and collect client feedbacks in respect of regulatorycompliant sales and risk disclosure by means of on-the-spot visits, e-mails, faxes, recorded telephone calls or other recordable means, and respond to such feedbacks in a timely manner. 14
Chapter Five Penal Provisions Article 57 Article 58 Article 59 Article 60 A banking financial institution which has launched derivatives trading business without approval shall be punishable in accordance with the PRC Banking Regulation and Supervision Law. A banking financial institution which fails to effectively enforce its risk control management system and internal control system for derivative transactions may be subject to suspension or revocation of its qualification to engage in derivative transactions and financial penalty. A banking financial institution which has failed to submit relevant statements, information or disclose details of its derivative transactions according to the requirements of these Measures or the CBRC shall, depending on its institutional nature, be punishable in accordance with the PRC Banking Regulation and Supervision Law, the PRC Commercial Banking Law or the PRC Administrative Regulations for Foreign-funded Financial Institutions and other relevant rules and regulations. If a banking financial institution or its clients suffer material financial loss due to the irregular acts of its derivatives trader (including supervisors, risk management personnel, analysts and traders) or the institution itself in breach of these Measures, the banking financial institution shall take disciplinary action ranging from the recording of a demerit to dismissal against the senior management personnel bearing direct responsibility, as well as the supervisors and people directly responsible for such loss. If the act constitutes a criminal offence, the case shall be handed over to the judicial authorities for prosecution of criminal liability according to law. Chapter Six Supplementary Provisions Article 61 Article 62 These Measures shall be interpreted by the CBRC. In the event of any conflict between these Measures and any relevant regulations previously promulgated on the derivatives trading business of financial institutions, these Measures shall prevail. Where laws or administrative regulations provide otherwise in relation to the content of these Measures, such laws and regulations shall prevail. 15