“As the renminbi is increasingly being used for settlement outside of China, it is important to have a clear set of market practice guidelines to assist market participants in straight-through rates and enable further growth in the market,” says Michael Vrontamitis, head of product management and transaction banking at Standard Chartered. The industry’s issue was that while a bank’s front office could execute an offshore transaction using the CNH currency code, the back and middle office could use only the official currency code, CNY, when processing the trade over Swift.
As a result, just by looking at the Swift interface, counterparties were unable to determine whether the trade was booked offshore or onshore, a potential problem when there were differences in spot exchange rates and yield curves, between offshore and onshore markets.
A group made up of 30 banks and financial institutions formed a working group with Swift to respond to this issue by facilitating industry agreement around a standardized approach towards counterparty communication and payment protocol.
Under the new system, bank’s trading staff can continue to use the CNH as a currency code, but the ISO 15022 messages for all offshore RMB transactions, will be CNY, followed by codes that allow the trade to be logged according to settlement location. For example, /PSET/HK would indicate settlement in Hong Kong, allowing all counterparties to the deal to know the transaction was conducted offshore.
By refining the messaging system in this way, trades will be able to apply the specific exchange rates or yield curves related to the offshore transaction.
Swift data show that renminbi-denominated payments are growing faster than any other currency, and that renminbi payments grew at a compound monthly rate of 14.8% in 2011 versus an average of 0.7% for other currencies. The renminbi rose from the 30th most-used payment currency in January 2011 to 17th by the end of December.