PBOC gives OTC foreign exchange trading go-ahead

The People's Bank of China (PBOC) has opened up the country's spot FX market to over-the-counter trades, and authorised the China Foreign Exchange Trading System (CFETS) to determine the daily central parity rate for the RMB against foreign currencies.

Thirteen market-makers will provide liquidity in the renminbi, including ABN Amro, Citigroup, Standard Chartered, Bank of Montreal and HSBC, as well as domestic institutions Bank of China, China Construction Bank, Citic, China Merchant Bank, ICBC, Chiao Tung Bank, Agricultural Bank of China and Xinye Bank.

The launch of the market effectively means trades can be conducted via authorised bilateral credit lines and settlement in addition to the automatic price-matching system. It comes at a time when the PBOC is looking to kick-start onshore FX derivatives trading, slow the increase in the headline figure of its FX reserves, and mop up excess liquidity.

Gerrard Katz, head of FX trading for Northeast Asia at Standard Chartered in Hong Kong, was upbeat over business prospects resulting from the developments. Katz said, while it is early days, the bank has already seen demand for OTC prices and trading coming from foreign and domestic banks. It was the first to conduct an OTC FX trade, confirmed CFETS, although details of the trade size and cross were unavailable.

Markets also opened last week with a new way of calculating the central rate for the renminbi. CFETS began publishing the central parity of the renminbi's exchange rate against the US dollar, euro, yen and Hong Kong dollar on January 4.

The central parity for the renminbi versus the US dollar is calculated using a weighted average of prices from CFETS market-making banks, excluding the highest and lowest offers. The weights are based on each market-maker's transaction volumes and indicators such as quoted prices. The USD/RMB rate then serves as a reference for the calculation of the RMB exchange rate against other foreign currencies, which also uses the currencies' US dollar cross rates.

Previously, the central parity rate was determined using the closing price of the automatic price-matching transactions the day before.