RMB: ParFX offers USD/CNH trading
Offshore renminbi has passed another milestone, becoming the first non-CLS settled currency to be tradeable on ParFX – but China’s regime of exchange-rate controls still casts a long shadow over the market’s infrastructure.
ParFX, the wholesale electronic trading platform designed by Tradition and owned by a consortium of 14 banks, has added offshore renminbi (CNH) to its stable of tradeable currencies, with USD/CNH having gone live in September.
USD/CNH becomes the 21st pair available on the system, 13 of which include currencies paired with USD. It is also the fourth Asian currency added to the system, with the Hong Kong and Singapore dollars and yen already available.
The Chinese authorities have done a very good job of maintaining an orderly environment for the CNH market to develop
However, of these, only the yen can be traded against multiple currencies, with pairs against euros and sterling available, as well as against dollars.
The move can be interpreted as a sign of how important offshore RMB trading is to big banks and other institutional traders, a status it has achieved relatively quickly.
China introduced spot trading in the offshore market in 2010 and since then trading levels have grown significantly from a low base, with most of the action seen in the USD/CNH pair.
CLS settles trades in designated currencies for its members, thereby eliminating settlement risk. CNH has the distinction of becoming the first non-CLS currency to be available on the ParFX system, whose matching mechanism applies a randomised pause to all order submissions, amendments and cancellations, to create a level playing field for all its traders.
This gave users extra work to do ahead of the launch to ensure settlement processes were working properly ahead of the currency going live.
Roger Rutherford, COO of ParFX, says: “Adding a new currency or pair is relatively straightforward from a technical perspective. The technology is there to do it – it is just a matter of changing the parameters on the system.”
However, he notes that any changes to the ParFX system must go through a robust testing cycle to ensure its participants are ready.
“Around 95% of our trading is API driven and new pairs can have implications for their algorithms. So we open a window for testing, allowing our founder banks and customers – both bank and non-bank – to test not only their trading but also their back-office and settlement systems are working properly.
“Some of them can do this quickly but for others it takes more time.”
ParFX expects to see more currencies, or new pairs of existing currencies, made available in due course, as and when it sees demand from its members. However, the addition of CNH does not necessarily pave the way for the imminent inclusion of other non-CLS currencies. Rather, it can be seen as recognition of CNH having achieved a certain level of maturity.
Chris Morrison, portfolio manager at Omni Macro Fund, says: “CNH is simple to trade, it is available on most bank platforms and superficially at least USD/CNH looks like a normal currency pair.
“Prior to recent events it had generally seen low volatility, lots of liquidity and tight bid/offer spreads. But even now, because the People’s Bank of China (PBoC) is providing liquidity by aggressively selling dollars, you can still trade hundreds of millions of dollars in CNH in a matter of minutes.”
That would, of course, change quickly if the PBoC stepped back from its role as buyer, notes Morrison, but for now, the situation with CNH contrasts starkly with that for the rouble, for example, which has gone backwards in recent years, in terms of ease of trading.
Two years ago the rouble was viewed as an international currency with vibrant spot and forward markets, though there were issues around settlement, which scuppered attempts to add the currency on to the CLS system. More recently it has become difficult to trade the Russian currency other than via non-deliverable forwards.
For RMB, on the other hand, things have been on the up.
Chris Knight, head of e-trading (East) FX at Standard Chartered Bank, says: “Offshore renminbi trading was almost non-existent five years ago, but today ranks amongst the top-five most-traded currencies globally.
“Given China’s role as a regional and global business hub at the centre of economics and commerce, it has become critical for us to trade CNH in an orderly and fair environment.”
Despite the rapid growth of CNH, it still commands a relatively small share of global trading compared with the major currencies, but it has the potential to continue its growth trajectory.
However, offshore renminbi is unique because of the highly managed way authorities are moving towards internationalization – or full convertibility – of the currency.
ParFX’s Rutherford says: “The Chinese authorities have done a very good job of maintaining an orderly environment for the CNH market to develop, with very clear timelines, controlled access to funds and robust settlement procedures.
“They are setting the pace of evolution towards full convertibility and if they continue that process, growth is likely to maintain its current trajectory.”
However, Omni’s Morrison is more cautious in his assessment of China’s internationalization strategy.
“China’s increasing openness in its capital account could leave it vulnerable if it does not also increase the transparency of its data,” he warns.
“There is always the risk of that binary moment when the market loses confidence in its ability to tightly manage the economy, and that only increases as the capital account becomes more open. Two key ingredients of crises are deregulation and leverage, and China has both in spades.”
Therefore, Morrison says, the development of the offshore market and internationalization of the renminbi is of second-order importance to the PBoC’s handling of the exchange-rate regime itself.
“History is replete with examples of failed attempts to tether currencies between two disparate economies, so we believe that the current regime is both counterproductive and unsustainable,” says Morrison.
He believes China has created a considerable problem for itself, which could lead to an uptick in volatility and market dislocations.
“By intervening on such a large scale and for so long, the Chinese authorities have created a severe asymmetry in the market, as both domestic and external players have become accustomed to borrowing in USD and playing the carry trade directly, while not hedging CNY exposure,” says Morrison.
“This policy-conditioned behaviour leaves the CNY shorts highly vulnerable in the event of rapid depreciation. With that in mind, the PBoC must ultimately choose between the lesser of two evils, and we believe that the lesson from history is that it is the FX peg that will be jettisoned.”