A key player in Shanghai's future success

Xu Zhen could accurately be described as the quarterback of "team Shanghai"- a key player, as the city bids to cement its position at the top of the world financial center league.

As chairman of Shanghai Clearing House, the specialized clearing institution founded in 2009, Xu shoulders the responsibility of keeping Shanghai's fast-expanding capital market functioning effectively and efficiently.

As such, he has probably gained a better knowledge and insight than anyone else about the needs and aspirations of all the country's main financial players, big and small, and the city's own financial community.

A major part of his job, he said, is to cater to the ever-changing demands of those players, by introducing new investment instruments aimed among other things, at hedging risk.

As a financial hub, Shanghai has seen significant changes over the past decade, said Xu.

"To respond to those, and to better serve the ongoing development of financial services and the systems within the country to manage them, we have striven for innovation, but still reacted sensitively to the trends of the financial world," Xu told China Daily.

Despite its short history, under his stewardship, Shanghai Clearing House has made great strides in innovation.

The market-oriented international clearing service provider has introduced two central counterparty clearing services, and has been instrumental in its goal of providing a centralized clearing structure for China's interbank market.

By Aug 15, total volume of the two business had reached 1.41 trillion yuan ($222 billion), and involved 333 member organizations.

Xu said that building an efficient financial system that's resilient to systemic risk, is key to China's own financial reform and development, to give it the necessary competitive edge in an ever-changing global market, and in addressing some of the issues exposed during the global financial crisis.

China's financial infrastructure needs to be developed, and promoting Shanghai's evolution to international financial center status, is a priority within the country's 12th Five-Year Plan (2011-15), said Xu.

He added that in the future, Shanghai Clearing House plans to introduce a net interest swap clearing business, which will be the first central counterparty clearing service of its kind in the Chinese mainland.

Globally, 95 percent of bonds, 90 percent of interest rate derivatives, and 99 percent of exchange rate derivatives are currently over-the-counter trades. The volume of ex-pit business transactions which occur away from the floor of an exchange has boomed in recent times.

Before the global financial crisis of 2008, bilateral clearing was applied in most OTC trades globally, but the financial crisis exposed the various risks of such clearing mechanisms, including credit risks, complexity and opacity of risk, and the infectious nature of default risk.

To improve monitoring, and reduce risk, within the global $600 trillion OTC trades market, G20 leaders met in Pittsburgh in the United States in September 2009 and reached agreement that central counterparty clearing should be applied to all standard OTC derivatives by the end of 2012.

In April 2009, the G20 agreed to introduce centralized clearing for credit default swap transactions, and efforts to introduce that are already under way in the United States and across Europe.

"Central counterparty clearing mechanisms have become a significant part of the global financial system's reform after the international financial crisis," Xu said.

The entire financial world is now making huge efforts to establish a united monitoring benchmark for central counterparty clearing institutions, he added.

With its comprehensive centralized clearing service, Xu said that Shanghai Clearing House provides a cost-effective clearing service along with other support services aimed at delivering the very best in financial innovation.

The organization is aiming to enhance market transparency and improve the availability of transaction information, while guarding against systemic risk and ensuring financial stability.

Its ability to issue, and offer registration and custody services have been developing fast in recent months.

SHCH focuses on financial derivatives, currency market tools, and other innovative services across eight product lines.

The balance of its custody services has reached 1.29 trillion yuan, with a face value of 4.95 trillion yuan, across 3,323 institutional investors.

"The next step in our development is to establish inter-market central counterparty clearing services," said Xu.

The central counterparty service upgrade has efficiently transformed the OTC derivatives market from a traditional full-amount bilateral pattern, to a central counterparty model, he added.

The services at Shanghai Clearing House closely link trading, clearing and settlement, realizing what Xu said improved financial market infrastructure.

The effort, he said, has managed to push forward Shanghai's effort in becoming a key center for renminbi asset pricing and clearing.

Shanghai's innovative business practices, have attracted some of the world's top financial institutions, some of which have brought some of the industry's best talented people.

"Central counterparty clearing and related management and regulations will attract more capital to Shanghai, and boost market efficiency and activities," said Xu.

wuyiyao@chinadaily.com.cn