PBOC Clarifies Rules on Oversea Institutions’Access to FX Market

China has taken a significant step towards opening up its interbank foreign exchange market (“Interbank FX Market”) to overseas institutional investors. The People's Bank of China (“PBOC”) is putting in place all of the rules to facilitate the entry of Overseas Central Bank-Type Institutions (i.e., overseas central banks, monetary authorities, other official reserve management agencies, international financial organizations and sovereign wealth funds) into the interbank foreign exchange market. After the PBOC issued the Circular 220 on July 14, 2015 regarding Overseas Central Bank-Type Institutions’ investment in the Chinese interbank market by utilizing RMB, the PBOC subsequently issued a series of rules, namely: (i) the Announcement No. 31 on September 30; (ii) the Circular 227 concerning RMB settlement account opening for Overseas Central Bank-Type Institutions on November 2, and (iii) the media Q&A on November 6 (“PBOC Media Q&A”), which clarifies further details for access to the Interbank FX Market. The State Administration of Foreign Exchange (“SAFE”) also issued the Circular 43 on October 28 concerning foreign exchange account opening.
The Circular 220 provides that the relevant overseas investors have the discretion to determine the scale of their investment, which means that there is no need to seek approval of any quotas for such access. However, the PBOC requires the overseas investors to conduct trades as long-term investors and based on their reasonable needs of maintenance and appreciation of asset value. In addition, the PBOC will supervise their trading behaviors in accordance with the principle of reciprocity between countries and the requirement of macro-prudence. The Circular 220 also requires the relevant overseas investors to engage domestic settlement agencies for trading and settlement.
The documents subsequently issued by the PBOC revise certain details in the Circular 220. First, the Announcement No. 31 expressly specifies three methods available for Overseas Central Bank-Type Institutions to access the Interbank FX Market: (i) using the PBOC as an agency; (ii) using an Interbank FX Market member as an agency (“Agent Model”); and (iii) directly becoming an overseas member of the Interbank FX Market (“Direct Access Model”). An Overseas Central Bank-Type Institution is free to select one or more methods to access the Interbank FX Market. In order to select the Direct Access Model, the Overseas Central Bank-Type Institution must complete the technical preparation work for trade system access via the China Foreign Exchange Trade System (“CFETS”). Notably, this is the first time the PBOC has offered direct membership access to overseas institutions. Second, the Announcement No. 31 specifies that: (i) the scope of trading shall include spots, forwards, swaps and options; (ii) the trading methods shall include bilateral and anonymous methods; and (iii) there is no quota limit for the trading activities. Third, the subsequent PBOC Circular 227 and the SAFE Circular 43 provide respectively detailed operational guidelines for Overseas Central Bank-Type Institutions to open RMB special deposit accounts and domestic foreign exchange special accounts for the relevant businesses. Fourth, on top of the above rules, the PBOC Media Q&A further clarifies the relevant issues in connection with the scope of participation, Agent Model, clearing and post-trade confirmation, and provides more flexibility for Overseas Central Bank-Type Institutions to access the Interbank FX Market.
Scope of Participation
Overseas Central Bank-Type Institutions may conduct bilateral trading or anonymous trading; the latter is actually a bidding method. All listed products are available for trading by Overseas Central Bank-Type Institutions, including spots, forwards, swaps and options, among which swaps shall include both foreign exchange swaps and cross currency swaps.
Agent Model vs. Direct Access Model
Any financial institution with membership of the Interbank FX Market may become an agency. An Overseas Central Bank-Type Institution may select one or more agencies, open multiple trading accounts and allocate them to different agencies for operation, but proprietary trading accounts shall be segregated from accounts operated by any agency, and accounts operated by different agencies shall also be segregated. The agency agreement may be negotiated and determined by both parties, and can be executed either in Chinese or English. Under the Agent Model, all trades are executed in the name of Overseas Central Bank-Type Institutions, not the agencies. Under either the Agent Model or the Direct Access Model, an Overseas Central Bank-Type Institution must become a member of the Interbank FX Market, and shall obtain a credit facility from its counterparty. If an Overseas Central Bank-Type Institution conducts derivatives trading, both parties shall sign either the NAFMII or the ISDA Master Agreement. The PBOC Media Q&A also clarifies that the main distinction between the Direct Access Model and the other two models is that the Direct Access Model requires a direct connection to the trading system of the CFETS, while the other two models do not. Under the Direct Access Model, the methods of system connection include connection through a dedicated line or VPN.
Clearing and Settlement
The PBOC no longer requires mandatory clearing and settlement through agencies. Overseas Central Bank-Type Institutions may either use their agencies to do clearing and settlement of RMB or foreign currencies, or conduct clearing and settlement independently. For any transaction under the bilateral trading method, an Overseas Central Bank-Type Institution may clear and settle with its counterparty bilaterally or apply for netting clearing and settlement by the Shanghai Clearing House. For any transaction reached under the anonymous trading method, an Overseas Central Bank-Type Institution shall clear and settle through the centralized netting clearing and settlement of the Shanghai Clearing House. With regard to post-trade confirmations, Overseas Central Bank-Type Institutions may either use the post-trade processing platform provided by CFETS to confirm the concluded trades with counterparties' back offices or use other methods agreed by both parties.