Lured by enormous market potential for derivatives, France's BNP Paribas is poised to tap the market, according to the bank's senior officials.

It will apply for a derivatives licence this month, to offer local clients fixed income and treasury products through its new dealing room in Shanghai.

The move will come in the wake of the China Banking Regulatory Commission's new regulation on derivative transactions, which took effect on March 1.

The Interim Rules on Derivatives Business of Financial Institutions is China's first regulation on derivatives and gives banks legal reference to handle derivative business.

Both domestic and foreign banks offered derivative products before the regulation was announced. But foreign banks can only conduct transactions for Chinese clients via local banks.

"With the creation of the dealing room and under derivative regulations, we will enhance this part of direct services to onshore corporates, while continuing to enlarge our product and service offers to onshore financial institutions," said Eric Nicolas, head of fixed income in Asia Pacific.

Xie Haitao, chief executive officer of BNP Paribas (China) Ltd, said the bank will submit the application for derivative trading this month.

Upon approval, the bank will offer a series of fixed income and treasury products to the domestic market.

The product line includes spot, forward, derivative and structured products on foreign currencies and spot products on the renminbi. It is also ready to offer forward rate agreements and complex hedging derivative products for foreign currencies, as well as credit related products.

"Most of the products we will launch will be hard currency derivatives. The renminbi products we can offer at the moment are very limited," Xie said.

Looking ahead, Xie plans to add futures, commodity and equity derivatives into the bank's portfolio.

Nicolas says China's derivative market has huge potential.

"We strongly believe in the future of this market because of the progressive opening of the renminbi market," he said, adding that hard currency derivatives will build a solid foundation for future local currency business.

"My feeling is that interest rate swaps will start to develop in the next two years."

Xie said as Chinese enterprises are more exposed to the international market, there will be an increasing demand for derivative products to hedge rate risks and manage foreign currency.

"As a foreign bank, we have good IT infrastructure, strong product development and risk control capabilities. However, Chinese banks' large client base is something we can't compete with," he said.

BNP Paribas will adopt a cross-selling strategy to sell its derivative business to existing clients.

"We are also considering buying into local banks," Xie added.

But he also pointed out that it will take time to cultivate the local market as many Chinese enterprises do not fully comprehend derivatives.

Xie estimated that Chinese companies will account for one-third of its derivative clients, while the remainder will be multinationals or regional companies from Hong Kong, Japan and South Korea.

Earlier reports said that Credit Suisse First Boston, Deutsche Bank, Hong Kong and Shanghai Banking Corp and JP Morgan have applied for licences to trade derivatives on behalf of local clients.

But big derivative players including Morgan Stanley and UBS are kept away from China's fledgling derivative market as they do not have mainland branches.

(China Daily May 10, 2004)