A regulatory breakthrough is expected to slash costs for investors trading over-the-counter derivatives in China, the latest step in opening up the nation’s capital markets to foreign investors, reports Bloomberg.
A Chinese law that takes effect Monday enforces a mechanism used around the world for determining payouts if a derivative counterparty defaults, bringing the standards there in line with those used in other major markets. This recognition of so-called close-out netting is seen lowering the cost of trading by reducing the funds that would need to be set aside to protect against credit risks.
The development, which follows decades of lobbying by the finance industry, will remove a major barrier to international participation, according to Bloomberg Intelligence. While there’s set to be some adjustment as market participants shift to the new system, it holds the promise of eventually revolutionizing cross-border trading in an economy that still remains significantly cut off from international markets.