CHINA FINANCIAL FUTURES EXCHANGE NOT YET READY

UNCLAS SECTION 01 OF 03 SHANGHAI 000251 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM, EEB, AND INR/B STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY STATE PASS CFTC FOR OIA/GORLICK CEA FOR BLOCK USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN TREASURY FOR AMB.HOLMER, WRIGHT AND TSMITH TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN TREASURY FOR IMFP - SOBEL/MOGHTADER NSC FOR KURT TONG E.O. 12958: N/A TAGS: EFIN ECON PREL CH SUBJECT: CHINA FINANCIAL FUTURES EXCHANGE NOT YET READY REF: A. A) SHANGHAI 211 ¶B. B) SHANGHAI 247 (U) This cable is sensitive but unclassified and for official use only. Not for distribution outside of USG channels. ¶1. (SBU) Summary: In an April 19 meeting with Embassy Econ M/C, China Financial Futures Exchange (CFFEX) Deputy General Manager Hu Zheng and CFFEX Head of R&D Zhang Xiaogang provided a briefing on the status of CFFEX, obstacles it had overcome to date, and prospects for becoming operational. Since its September 8 inauguration, CFFEX focused on: developing a regulatory structure; establishing and testing operational systems; and preparing the market and determining criteria for membership. While the regulatory framework was falling into place and CFFEX itself was comfortable with its operating systems, potential member firms were waiting for more certainty about membership criteria and a launch date before investing in technology to connect with the CFFEX system. CFFEX's first product, likely at least another two months off, would be a stock index future. Hu also suggested CFFEX was better suited for cooperation with the Chicago Mercantile Exchange (CME) than the China Foreign Exchange Trading System. End Summary. -------------- Open, But Not For Business -------------- ¶2. (SBU) Hu said that CFFEX was inaugurated on September 8, 2006 with registered capital of 500 million yuan (about USD 62.5 million),with the Shanghai and Shenzhen Stock Exchanges and the Shanghai, Dalian, and Zhengzhou Futures Exchanges each owning 20 percent. Zhu Yuchen, aka Eugene Zhu, former head of the Dalian Commodity Exchange and Chairman of China Futures Association had been appointed President of CFFEX by the China Security Regulatory Commission (CSRC). Hu himself was formerly Deputy General Manager of the Shanghai Futures Exchange (SHFE). -------------- Laying the Groundwork -------------- ¶3. (SBU) Since its September 8 inauguration, CFFEX focused on laying the groundwork, including: developing a regulatory structure; establishing and testing operational systems; and preparing the market and determining criteria for membership. The regulations on futures trading, issued by the State Council on March 16 and taking effect on April 15, provided the legal foundation for the introduction of financial derivatives and would be followed by seven sets of more detailed operating regulations to be issued over the next month or two. (Note: CSRS released three of these regulations on April 22 -- ,