Mastering cross-border derivatives in China — the new 2022 NAFMII Master Agreement "Cross-border Version"

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China's National Association of Financial Market Institutional Investors "NAFMII" recently published a new cross-border version of the NAFMII Master Agreement, which is designed to promote the further opening up of China's derivatives market. This significant development comes shortly after the PRC Futures and Derivatives Law "FDL" went into effect on 1st August 2022.

01. 2022 NAFMII vs 2009 NAFMII

This article provides a high-level comparison between the existing 2009 version of the NAFMII Master Agreement ("2009 NAFMII") and the new 2022 NAFMII Master Agreement (Cross-Border Version) ("2022 NAFMII"), as set out in the table below.

02. Swap Connect and the 2022 NAFMII

The 2022 NAFMII not only reflects China's desire to promote the internationalisation of its derivatives market and related standard derivatives documents, it also paves the way for the upcoming Swap Connect scheme, which was announced by the People's Bank of China, the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority in July 2022. 

Significantly, the "Northbound" leg of Swap Connect is designed to allow foreign participants in the China Interbank Bond Market "CIBM" to hedge their interest rate and other risks in China's derivatives market through infrastructural links between onshore and offshore financial market infrastructures such as (i) trading facilities (e.g., the China Foreign Exchange Trading System Center "CFETS" and certain international electronic trading platforms) and (ii) central counterparties (e.g., Shanghai Clearing House "SHCH" and HKEX OTC Clear). 

Swap Connect is expected to be particularly beneficial for Bond Connect investors' hedging activities because these investors do not hold onshore accounts and are not otherwise onboarded by CFETS or SHCH.  

The 2022 NAFMII helps market participants prepare for Swap Connect by enabling them to enter into cross-border derivatives in China's onshore market using a more flexible, modern and internationalised version of the NAFMII Master Agreement.

03. Other significant developments

In addition to the 2022 NAFMII, NAFMII has recently published the following standard documents:

  • the 2022 version of the NAFMII Interest Rate Definitions; and

  • the 2022 version of the Basic Terminology and Application Rules for OTC Credit Derivatives.

In light of these developments, there is no doubt that the FDL has ushered in an exciting new era for China's derivatives market, which offers tremendous opportunities to domestic and international market participants. 

We at KWM are here to help you.  KWM regularly assists international and PRC-based financial institutions and corporates with preparing and negotiating bilingual derivatives documents, as well as with designing and documenting innovative and complex cross-border derivatives and structured products.  

We are familiar with the unique issues faced by PRC-based financial institutions and their counterparties as well as the latest developments relating to Swap Connect. We would be pleased to share our insights with you. Please feel free to contact our core team members below.

*Any reference to "Hong Kong" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".

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