Circular on Issues Relevant to the Engagement in Domestic Gold Futures Trading by Commercial Banks

(Issued by the General Office of the China Banking Regulatory Commission on March 7 2008.)

Yin Jian Ban Fa [2008] No.35

Banking regulatory bureaux, policy banks, state-owned commercial banks, share-system commercial banks and postal saving banks:

With a view to regulating the engagement in domestic gold futures trading by commercial banks and effectively guarding against risks, we hereby notify you of relevant issues as follows:

1. When a commercial bank engages in domestic gold futures trading, it shall abide by provisions such as the Banking Regulation Law, the Commercial Banking Law, the Regulations for the Administration of Futures Trading (Revised), the Tentative Measures for the Administration of Trading of Derivatives by Financial Institutions and the Guidelines for the Management of Market Risk by Commercial Banks.

2. To engage in domestic gold futures trading, a commercial bank shall satisfy the following conditions:

(1) having a capital adequacy ratio of at least 8%;

(2) having the qualifications to trade in derivatives;

(3) having the qualifications for the spot trading of gold;

(4) having sound market risk management capability satisfying relevant requirements of the China Banking Regulatory Commission, Circular on Further Strengthening the Management of Market Risk by Commercial Banks (Yin Jian Fa [2006] No. 89);

(5) having supporting documentation evidencing that its board of directors, or the body or senior management authorized by its board of directors has approved and agreed to the proposed engagement in domestic gold futures trading by the bank;

(6) having completed the relevant feasibility study and analysis report, which shall, at minimum, cover market trends, business objectives, business demand, the operational procedure, risk management methods, profit outlook, etc.;

(7) having sound internal methods for managing the gold futures trading business, which shall, at minimum, include internal control rules, risk management rules, margin management rules, daily settlement rules, position limit and stop-loss rules, rules for handling contingencies, etc.;

(8) having the business processing systems required to engage in the gold futures trading business, which shall, at minimum, include a trading system, risk management system, settlement system, accounting system, data backup system, contingency handling system, etc.; and

(9) having at least four persons who have passed professional qualifications examinations recognized by the futures industry in China, at least two of whom shall be trading personnel and two risk management personnel. The foregoing persons may not concurrently hold both positions and may not have a record of improper professional conduct.

3. A commercial bank that wishes to engage in domestic gold futures trading shall obtain membership qualifications from the futures exchange. Before formally applying to the futures exchange for membership qualifications to engage in gold futures trading, the commercial bank shall liaise and exchange opinions with the China Banking Regulatory Commission in respect of its preparations relating to and implementation of Article 2 hereof and completion of its self-assessment report, and obtain a No Objection Letter.

4. Within three days after formally applying to the futures exchange for membership qualifications to engage in gold futures trading, a commercial bank shall submit to the China Banking Regulatory Commission in duplicate and in writing documents and materials evidencing that it satisfies the conditions specified in Article 2 hereof and a corresponding self-assessment report attesting to its having the risk control capability and internal control capability to engage in gold futures trading.

5. After launching its domestic gold futures trading business, a commercial bank shall conduct a self-assessment of its risk control capability and internal control capability for such business at least once every year, and submit the assessment report in writing to the China Banking Regulatory Commission.

6. If a commercial bank wishes to engage in gold futures brokerage business, it shall obtain the relevant qualifications. It may not use its own gold futures trading qualifications to engage in gold futures brokerage for customers.

7. A commercial bank that engages in domestic gold futures trading shall establish the necessary Chinese wall system, and may not use its privileged access to information as a designated gold futures settlement bank and designated delivery depository to seek illegitimate benefits for its gold futures trading.

8. The requirements of this Circular shall apply to the engagement in domestic gold futures trading by other banking financial institutions. If a banking financial institution does not have a board of directors, its business decision-making body shall perform the relevant duties of the board of directors as specified herein.

Banking regulatory bureaux are asked to transmit this Circular to the banking financial institutions with legal personality and relevant banking financial institutions administered as legal persons that are in their jurisdictions.