(Yicai Global) Feb. 24 -- By allowing overseas investors to utilize the International Swaps and Derivatives Association master agreement, China's financial institutions will draw closer to their global peers, Chang Geng Lai, chief executive of BNP Paribas China, told Yicai Global.

New York-based ISDA is the author of a commonly used master service agreement used internationally for over-the-counter derivative transactions. It dictates the schedules, confirmations, definitions and credit support systems agreed to between the two parties that apply to all transactions between them.

Foreign investors will be able to choose to sign the ISDA master agreement or local master agreements offered by the National Association of Financial Market Institutional Investors and the Securities Association of China, according to a report released by the People's Bank of China and four other government bodies on Feb. 14. The central bank was looking in particular at ways to smooth connections between Shanghai and global financial markets.

Not many overseas investors have been willing to join the NAFMII deal, Lai said. This has meant that they have been unable to effectively hedge their risks. The ISDA agreement is more familiar to and accepted by them and will accelerate their entry into China.

China has been making a series of moves to open up its giant financial sector to overseas investors. This year it will completely lift restrictions on several investment quotas and allow foreign capital to fully own futures, securities, insurance and fund management firms in the country.

But while foreign investment in China promises to be a major trend, these are early days and the market is still being tested, Lai added.

Underwriting Permit

Paris-based BNP Paribas became one of the first two overseas banks to be granted a Type A debt underwriting license in China last September, allowing it to be the lead guarantor for all types of onshore corporate bonds. Previously, foreign banks could only apply for a Type B license which limited them to underwrite bonds issued by offshore firms, such as Panda bonds.

Overseas financial institutions that start businesses in China will tend to choose to operate as a sole proprietorship because of the great difference in risk management practices between Chinese and foreign investors, Lai said. In the beginning, they will also choose to work with high-quality corporate clients that they are familiar with, he added.

Foreign-backed banks will focus on offering their corporate services to well-developed economic hubs including the Yangtze River Delta, the Greater Bay Area, Beijing and other regions, he said.

Chinese banks still tend to regard bond underwriting as a form of lending, Lai added. This means that a firm's debt issuance and its loans are all attributed as leveraged credit. Chinese banks are also responsible for underwriting a large portion of corporate bonds.

Overseas lenders, however, prefer to sell as many bonds as possible to institutions to minimize their exposure as underwriters, Lai added. Chinese banks should reduce their risks so that debt underwriting is no longer a substitute for bond issuance, and to allow the bond market to fully realize its function as a form of direct financing.

Shanghai's financial courts also should become more innovative, he said. At present courts are more focused on protecting the end customer. But they should also develop more financial derivative-related contents, he said.

BNP Paribas's interest-rate options are ready for debut, Lai added.

Editors: Xu Wei, Kim Taylor