A working group comprising representatives from 24 financial institutions and led by SWIFT has developed a set of guidelines laying out best practice methods for the processing of offshore renminbi transactions. The collaborative effort follows concerns about limited convertibility between offshore and onshore Chinese currency (CNY) due to a lack of straight-through processing (STP), as the processing of payments, treasury and securities transactions using renminbi becomes more widespread outside its domestic market.
CNY has quickly grown as an international currency following the gradual easing of restrictions by the Chinese government on the renminbi (see Hello world! Summer Plus 2011, Global Custodian).
As a result, an offshore clearing market for renminbi developed, the working group explains in a preamble to its guidelines. Regulations pertaining to onshore versus offshore renminbi transactions are different, but no standard exists to identify whether a CNY transaction is onshore or offshore. Dealers developed an unofficial code of their own CNH to denote offshore renminbi transactions, but that is not an official ISO currency code, so it could not be communicated through SWIFT messaging.
Basically, the industry concerns were with straight-through-processing of offshore Chinese Yuan instruments, because there is only one settlement currency for the Chinese Yuan, whether it is onshore or offshore, and that is CNY, explains Patrick de Courcy, head of Markets & Initiatives Asia Pacific at SWIFT. Industry participants, however, need to differentiate onshore versus offshore settled CNY in their internal systems and between counterparties.
Offshore renminbi transactions particularly in Hong Kong, where 78% take place, according to SWIFT have grown significantly in the last 18 months. Until now, standard practices for processing these transactions have not been agreed upon by industry participants, and counterparties have processed offshore CNY transactions manually. That resulted in a lack of STP in the processing of offshore renminbi transactions.
SWIFT was asked to help industry participants to develop a set of guidelines to streamline the process, with the group ultimately concluding that SWIFT MT and ISO 15022 messages should be used to communicate offshore CNY transactions. The groups guidelines, released this week and available here (with free registration), contain practices and message codes it hopes will be adopted market-wide in order to achieve standardization and increase STP rates for offshore renminbi transactions.
The working group and the resulting document covered cash & trade, focusing on issues in trade finance, cash management and payment flow; foreign exchange, money markets and derivatives; and securities, covering issues for global custodians, local custodians, broker-dealers and fund accountants. It also addresses standing settlement instructions (SSIs) and cash reporting.
As CNY 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 the further growth of the market, says Michael Vrontamitis, head of Product Management, East, Transaction Banking, Standard Chartered Bank, Hong Kong. Vrontamitis chaired the working group on cash & trade.
Message types outlined in the document include delivery versus payment confirmations; corporate actions notifications; standing settlement instructions and a number of others.
Participants on the working group included: ANZ Bank; Asia Securities Industry & Financial Markets Association (Observer); Bank of America Merrill Lynch; Bank of China (Hong Kong) Limited; The Bank of East Asia Limited; BNP Paribas; Citibank, N.A.; CLS; Credit Suisse; DBS Bank Ltd.; Deutsche Bank AG; Euroclear Bank; Hong Kong Investment Funds Association (Observer); The Hongkong and Shanghai Banking Corporation Limited; Invesco Hong Kong Limited; ISDA (Observer); Janus Capital Asia Limited; JP Morgan Chase Bank, N.A.; JP Morgan Asset Management Limited; Macquarie Capital Securities Limited; National Australia Bank Limited; Nomura Asset Management Hong Kong Limited; Royal Bank of Scotland plc; Standard Chartered Bank; State Street Bank and Trust Company; The Bank of New York Mellon; UBS Global Asset Management (Hong Kong) Ltd.; Wing Hang Bank; Wing Lung Bank; and SWIFT.
(CG)