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.

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Open, But Not For Business
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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 -- ,