China Derivatives War: Legal avenue discovered?

Opening Salvo in a Brutal Derivatives Battle

What's worthy of attention is that these 31 licenses only let SOEs trade commodities on overseas exchange markets; none authorized derivatives trading.

And contracts between foreign investment banks and SOEs on the matter of derivatives trading are flawed. Some transactions took place before contracts were signed. A knowledgeable source said if SOEs find evidence of unauthorized trading, they can seek legal protection. Any transaction settled before a contract is signed can be nullified the rest.

Yang Xusheng, a lawyer and partner at the firm King & Wood, said a standard agreement called an ISDA (International Swaps and Derivatives Association) agreement is required for any derivatives trade on an exchange market. In addition, the two parties must sign a schedule and confirmation.

A source close to the SASAC investigation said ISDA agreements were not signed for a large number of the Chinese transactions at the root of the dispute because SOEs could not agree on deal details with investment banks.

"Our judgment is that if there is a lawsuit" over SOE payment defaults "each side has a 50 percent chance of winning," said a source at one SOE.

Caijing cites a Wall Street Journal article that claims the derivatives losses amount to $2 billion, split across several firms.