New China Derivatives Law May Slash Investor Costs

(Bloomberg) — 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.

A Chinese law that took effect Monday enforces a mechanism used around the world for determining payouts if a derivative counterparty defaults, bringing China’s standards in line with those used in other major markets. This recognition of so-called close-out netting is expected to lower the cost of trading by reducing the funds that would need to be set aside to protect against credit risks.