From June 15, mainland-based institutions will be allowed to trade agreements to buy or sell bonds for delivery at a future date on the interbank market.

Under new rules, the maximum amount of outstanding bonds held by a single overseas player through such forwards must not exceed the value of its operating capital in yuan.

``Interest rate risks have grown in recent years,'' said the People's Bank of China on its Web site. ``The launch of the forwards will pave the way for bond markets to develop.''

Beijing raised interest rates for the first time in nine years in October, the strongest step to cool an economy that grew 9.5 percent last year.

Yields on treasury and other bonds had seen sharp volatility in the six months leading up to the rate rise, sparking an outcry from investors lacking hedging tools, and exacerbating market volatility.

``This is a hugely important step for a banking sector that is bond heavy and up until now has had no means of hedging the risks associated with future interest rate moves,'' said Standard Chartered economist Stephen Green in a research note Monday.

``Because of the likely influx of participants, this move will likely serve to help build the yield curve, a necessary precondition for further interest rate reform and freeing up the currency regime.''

Bond forwards could be a small step toward reintroducing exchange-traded financial derivatives, banned since 1995 after a treasury bond scandal that brought down the country's most prominent securities broker.

Beijing is trying to expand and deepen its fledgling debt markets. The gradual introduction of bonds beyond mainstay central bank offerings offer better benchmarks as Beijing shifts to market-driven interest rates.

Among other steps, Beijing has greenlighted yuan bond issues by international agencies, including the Asian Development Bank and International Finance Corp.

The new rules out Monday specified that forward agreements between buyers and sellers must be based on treasury bonds and on debt issued by the central bank or financial institutions.

Forward agreements, unlike futures which have fixed contracts, must not last longer than one year and bonds must be delivered physically when the forward contracts expire, said the central bank.

A single institution must not sell or buy more than 20 percent of the publicly traded portion of a single bond issue in forward agreements.