China Foreign Exchange Trade System (CFETS) is a sub-institution directly affiliated to the People’s Bank of China.
Under the strategic objective of becoming the leading global trading platform and pricing centre for renminbi and related products, it provides a series of services covering issuance, trade, post-trade processing, information, benchmarking and training services for the interbank FX market.
The first phase of its new trading platform – known as CFETS FX 2017, which replaces the previous version CFETS FX 2009 – went live with a central limit order book (CLOB) platform for spot onshore Chinese renminbi (CNY) in December 2017.
An anonymous execution capability for the Chinese market, it provides market participants with access to a central pool of liquidity and a public reference point for spot renminbi pricing.
CFETS launched phase two of the new platform in early February, introducing a next-generation relationship-based platform for CNY trading of spot, forwards and swaps.
Through this disclosed, bilateral trading model, liquidity consumers can choose from a full range of bank and non-bank liquidity providers to access tailored executable streaming prices.
On the first day of trading, 480 institutions logged on to the new platform with 307 institutions conducting deals.
Expansion and evolution
The launch of the new trading platform has been described as significant as it supports the expansion and evolution of the domestic renminbi market. The technology offers a multi-execution, low-latency environment that should encourage a sustainable and healthy ecosystem for market participants.
“The new platform provides a huge improvement in terms of scalability and speed, which would suit the more active trading community and allow API [application programming interface] participants to trade,” says Paul Allmark, CIO of NEX Markets, who describes the credit-screened CLOB liquidity pool as a major change in terms of trading models.
“In addition, the flexible aggregation and algorithmic execution features of EBS Direct are built in to the platform, enabling consumers to tailor the aggregated liquidity pools to their needs, and liquidity providers to dynamically allocate price streams to consumers.”
He adds: “The end result is an optimal trading experience between consumer and provider, which is crucial to the success of a disclosed relationship trading platform.”
CFETS publishes overall transaction volumes across spot, forwards and swaps, but not the specific split across the CLOB and quote-driven trading models. However, Allmark says the release was received positively by the market.
The typical customer profile is the active trading community of interbank traders, he explains.
“There are fewer constraints on proprietary trading in China and the anonymous central limit order book matching model is the most efficient option for larger market makers to trade with each other,” he says.
“Therefore, the higher volume traders will gravitate to the central limit order book method of trading, which should increase the size of the liquidity pool, reduce top of book spreads and provide valuable market data for the domestic market.”
CFETS FX 2017 represents a milestone in the development of the domestic FX market, according to NEX group chief executive officer Michael Spencer.
“We will continue to support CFETS as it rolls out further phases and we explore further partnership opportunities in the future,” he says.
CFETS president Zhang Yi refers to the launch of FX 2017 as a major upgrade of China’s financial trading infrastructure, suggesting that it effectively ensures the safe, stable and efficient operation of the inter-bank FX market, enforcing the pricing power of the domestic Chinese market and opening it up to the global FX market.
CFETS has been particularly active in recent months. In January it announced that qualified overseas banks would be allowed to participate in interbank FX market regional trading.
According to NEX’s Allmark, it is hard to put a number on the potential size of the Chinese market, although he notes that financial markets in China have been growing in respect of participant firms and professionals during the past decade.
“A lot of the trading still has human interaction, so as the technology and appetite for algorithmic trading evolves, I would expect this to also have an effect on volumes,” he concludes.