UPDATE 1-China includes foreign banks on list to trade govt bond futures

* Banking regulator has selected 24 banks for trading

* They may be queued two groups to enter new market

* Include top Chinese lenders and 3 foreign banks

* More banks to be approved if market proves success

By Hongmei Zhao

HONG KONG, July 11 (Reuters) - China's banking regulator isconsidering including three foreign banks among a list of twodozen domesgtic banks that could be permitted to trade in a newgovernment bond futures pilot programme expected to be launchedin September, three sources with direct knowledge of the mattersaid on Thursday.

The chosen three, HSBC Holdings , CitibankNA and Standard Chartered, have all been activein China's markets since the 1990s.

As part of the country's wider financial reforms, China hassaid it will relaunch trading in government bond futures in theShanghai-based China Financial Futures Exchange after an 18-yearban, starting with a five-year contract.

The Chinese commercial banks on the regulators' list includethe big four state-owned banks; Industrial and Commercial Bankof China , China Construction Bank , Agricultural Bank of China and Bank of China .

The regulator is still deciding how to phase in trading.

It is likely a dozen banks will be permitted to trade whenthe market opens, and the remaining dozen would make their entrylater. Alternatively, all 24 could be involved from the start,according to sources.

More banks will be allowed to participate if initial tradingproves a success and the market operates smoothly, the sources.

"Commercial banks will surely play a main role at theinitial stage of the government bond futures trading," one ofthe sources told Reuters.

"Currently, there are two plans, with the one that banks bequeued into two groups more likely to be selected in the name ofrisk mitigation."

The China Banking Regulatory Commission is likely toannounce the choice before the end of July, the sources said.

The Commission did not immediately Reuters' request forcomment.

The fledgling futures exchange, established in 2006,currently trades only stock index futures. Aside from addinggovernment bond futures, it is also said to be preparing tobegin trading in stock options.

Authorities scrapped government bond futures trading in 1995after a major trading scandal on the Shanghai Stock Exchangecaused heavy losses to a state-controlled securities brokerage.

The reintroduction of a government bond futures market hasbeen expected since the securities regulator began simulatedfutures trading in February 2012.