Many of the world's biggest banks are in effect locked out of China's small but fast-growing derivatives markets after refusing to sign new trading agreements with the Chinese institutions that control the market.

The stand-off has caused foreign banks' share of local derivatives trading to plummet, undermining their ambitions to expand their Chinese interest rate, foreign exchange and credit derivatives operations.

China's four largest state-owned banks control the vast majority of the onshore derivatives markets.

They are requiring locally incorporated foreign banks to secure contractual guarantees from their global headquarters to guard against trading defaults before dealing with them in the derivatives market.

The request is unprecedented and “makes a mockery of the requirement that foreign banks incorporated locally in the first place”, according to one senior China-based western banker who asked not to be named because of the sensitivity of the subject.

The demands are the latest example of how mainland officials are taking a more assertive stance towards their western counterparts after the financial crisis toppled several European and US institutions.

“They've asked for guarantees that are very difficult to give,” said Keith Noyes, Asia head of the International Swaps and Derivatives Association. “You have a stalemate now.”

Market participants said that, largely as a result of the stand-off, the volume of trade in renminbi/foreign exchange swaps has tumbled in recent months from the $3.4bn average per day that it was trading as recently as July.

Until then, trading volumes in foreign exchange swaps had grown rapidly after China removed its long-standing currency peg to the dollar in 2005.

Mainland banks are making their demands through the use of China's new derivatives master agreement, which was introduced in March.