Commercial Banking Business Supervision Of Financial Derivatives

Financial Derivative Instrument(FDI)is one of the most important financial innovations from 1970s.With collapse of Bretton Woods System, impact of financial liberation and financial innovations, the quantity of risks in financial market increase quickly, which impels the bank and investment institution to e search of new tools for deal risk. The outcome of FDI meets the need of all these market participators. At the same time, with increasing competition in financial institution, commercial banks develop new profit channels from FDI. After that, financial futures,options,swaps, Derivative securities and asset securitization appear one by one ,which led to a big bang in financial filed. Almost all big banks and investment institution are engaged in creation and transaction of FDI. In china, commercial banks are engaged in FDI from 1990s. Comparing with banks in developed countries, the scale and kinds of FDI in Chinese bank are in elementary stage. With the opening and reforming of financial system, commercial banks will face more and more financial risk and competition ,which will impel the need for so all kind of FDI to improve bank management. FDI is two-edge sword because it provide new opportunities for banks to defend risks and develop new business, at the same time it bring new risks to banks .From 1990s,FDI involved many financial institution failure such as bankrupt of Bank Barings, event of National Westminster and big loss of Bank Unite Ireland .So how to make effective supervision on FDI is one of the most important problem in international theory field. With the issue of 《Provisional Administrative rules governing derivatives activities of financial institutions 》by China Banking Regulatory Commission(CBRC) on 1st March 2004, the using of FDI in Chinese banks come into a new and full development stage .so the research of FDI supervision in Chinese banks has important theory and practical meaning. In this paper, the using of Information Asymmetry Theory and finance frangibility theory create new viewpoint in research on necessity and importance of FDI supervision at first, and then the principle of FDI supervision in bank issued by Basel Commission are sum up .At last, according to our country conditions ,the suggestion about improvement of FDI supervision in Chinese banks is brought forward, which want to do some help for improvement of FDI supervision in china. This paper has four chapters. Chapter1 is overviews of FDI. First , the definition and character and the development of FDI will be introduced, at same time ,FDI shall mean the financial contracts that derive their values from the pieces of one or a number of underlying assets or indices. Second ,the function and classify are introduced, the basic classify is forwards, futures ,swaps and options. The basic function of FDI is risk shift and price discovery. At last, the benefits of using FDI in bank are risk management ,new channels for profit and client scale. cost of using of FDI in bank are market risk ,credit risk ,liquidity risk etc. Especially, risks of FDI have the characters of vastness, abruptness and internationalism. Chapter2 is economic analysis of FDI supervision in bank regulation. First, the summary of bank regulation pays more attention on the framework of financial frangibility theory. Second, there are three kind of information asymmetry in FDI business: owner and manager (dealer),bank and other market participant ,bank and bank supervision. These information asymmetry result in risk overload and risk cumulation in the FDI business ,which have huge impact on solidity of bank ,and increase the frangibility of financial system. The third is positive research on event of National Westminster and big loss of Bank Unite Ireland, which make more clear that the necessary and importance of strengthening FDI supervision in banks .