Proceeding Forward With Foreign Participation

1. Proceeding Forward With Foreign Participation Futures Industry Association - Asia Derivatives Conference 美国期货业协会 BEIJING 2005-8-9 Les Gee 朱励勤 Vice President – Commodities Asia 副总裁 – 亚洲区商品期货 Credit Agricole Cheuvreux Securities Ltd A Calyon Financial Company 东方汇理金融集团 www.calyonfinancial.com

2. FIA – Celebrates its 50th year anniversary in 2005 China – Completes its 10th FIVE YEAR PLAN (FYP) in 2005 Pattern shows once China’s FYP are made known to, and interpreted by, government bodies, major policies are determined and implemented, with lead time in about 24-36 months. Will we witness major changes in China’s futures industry during the implementation of the 11th FYP? Shanghai, Dalian, & Zhengzhou Future Exchange Established2nd year into the 8th FYP China Market Economy was adopted 3rd year into the 5th FYP Incidents Prompted the Industry and Regulatorsto Redefine the Rules Of the Game Source of Graph: FIA

3. China’s initial experimentation on futures activities lies with its traditional economic importance: Agriculture and Industry, referred symbolically as the “Hammer and Sickle” • Most of the commodities listed on Chinese exchanges are reliant on imports, thus domestic trade activities are mainly on the buy side, whether physical or futures. Sell side of the equation will most likely come from financial futures products – provide the global market with “China Exposure”. • In large, local futures exchanges act as conduits referring international price discoveries. However, China’s seemingly insatiable appetite for natural resources has greatly affected global prices thus at times taken the lead and influence certain price discoveries • Will the same phenomenon occur when China initiates its financial futures products, and what kind of impact will they have in the international financial futures markets?

4. China’s Achievements • Developed three major exchanges with astonishing growth • Promoted the futures industry with continuous education in an attempt to create quality market participants • Maintained low default rate after thirteen years in existence, but not problem free • Local regulators shaped the futures industry with, comparatively, minimum market interference, while maintaining their close orbits around central governmental policies • Gained international recognitions and established cooperation through MOU’s with major exchanges/regulators around the world China’s Challenges • Establishment of a centralized novation system, I.e. settlement and clearing • Accelerate common awareness in regulation, legal, and compliance • Financial strength of Chinese futures community is still within a distance to that of global players, thus can the they sustain from major market turbulence to maintain its nearly unblemished record? • Increase its domestic volume and liquidity through invitation of foreign participation • Promote new products to keep pace with its fast developing financial and economic system • CEPA was opportunistic, not pre-designed

5. Tough Questions: Both Sides Need to Increase Awareness and Seek Ways and Means for Foreign Participation in China’s Futures Industry • China’s economy and trade grew faster than its legal and regulatory system, will regulators be able to achieve and meet market expectations in a timely manner? • Educational system is designed for local talents in gaining entries into the industry. What about morality, responsibility, and compliance? Continuing education is expensive and has no tangible financial return. Where will the resources and motivations come from? • Global exchanges and products are becoming more sophisticated, can China afford to fall too far behind? What are the costs and sacrifices to keep pace? • Promoting industry interest to all levels of policy makers - currency conversions (SAFE); futures product supervisions: banking products (CBRC) vs. securities/commodities products (CSRC); tax authorities, etc.? • Are the overall infrastructures in place for international interests: mediation/arbitration bodies and expert panels in case of serious disputes; enforcement in local courts (different legal interpretations against arbitration ruling?), money laundering/RMB speculation preventive measures, etc.?

6. Tough Questions: Questions were raised to local bodies when China is ready to open its door to foreigners, but are its potential partners ready to enter into China? • Is there enough client appetite for the Chinese futures products to bring volume, liquidity, and benefits to the local industry? • Have foreign entities done a thorough Know-Your-Customer and due diligence and made their clients aware of the risks in trading in China? Furthermore, have all the risks been identified? • Even if the currency in/out flow concern is resolved, what about the RMB exposure if the currency basket window is widened to the anticipated level of 5-6%? • What are the Chinese tax structures of futures trading profits/corporate profits? Will there be a tax on profits on futures activities, which rumours are being circulated recently? • Cross border transactional risks? • What are the purposes of foreign interest in trading in China, and will excessive speculative activities give negative impact to the market? How will the industry overcome this, without alienating the smart money, and maintain an orderly market?

8. IN CONSIDERATION… • YES – THE MARKET APPETITE IS THERE, PERHAPS IN ABUNDANCE, WHEN THE RIGHT CONFIDENCE LEVEL IS REACHED AND SOUND PRODUCTS ARE INTRODUCED • IT IS UP TO THE INDUSTRY, IN A COLLECTIVE EFFORT, TO DEVELOP THE MARKET WITH KNOWLEDGEABLE AND RESPONSIBLE PARTICIPANTS – NOT ONLY BROKERS BUT ALSO CLIENTS; LOCAL AND FOREIGN IN BOTH CASES • GIVE NOT ONLY QUESTIONS, BUT THOUGHTFUL SUGGESTIONS

9. Chinese lead FCM Committee Foreign FCM lead Committee Regulators Exchange lead Committee • Ask not what the industry can do for you, ask what you can do for the industry… • ~~~ • Building global confidence for the China market: opening the door to foreign entities can wait, but the groundwork to design the door has to commence, in a transparent manner • A special working committee could be formed with representatives from the exchanges, the foreign FCMs, and local FCMs to discuss potentials, ideas, and concerns from all sides, and finally present a unified industry white paper to policy makers. Such committee members should be given no special consideration and status, thus widely gaining industry acceptance and consensus • The committee should also endeavor to arrange educational seminars taught by the industry’s in-house experts focusing on product/trading knowledge, risk management, and compliance inside China, and if budgets are allowed, overseas

10. Futures Industry Association - Asia Derivatives Conference 美国期货业协会 BEIJING 2005-8-9 Calyon Financial Global Services Les Gee 朱励勤 Vice President – Commodities Asia 副总裁 – 亚洲区商品期货 Credit Agricole Cheuvreux Securities Ltd A Calyon Financial Company 东方汇理金融 www.calyonfinancial.com