SAFE Solicits Comments on Circular Concerning Forex Derivatives Trading by Interbank Bond Market Foreign Institutional InvesM88 game APKrs

On November 14, 2019 the State Administration of Foreign Exchange (SAFE) issued the Consultation Paper of the Circular on Improving the Management of Foreign Exchange Risks Regarding Foreign Institutional InvesM88 game APKrs Trading in the Interbank Bond Market(“Consultation Paper”)M88 game APK solicit public comments.

Pursuant M88 game APK the Consultation Paper, all foreign institutional invesM88 game APKrs that are allowed M88 game APK trade in the interbank bond market under the Announcement No.3 [2016] issued by the People’s Bank of China (PBOC) may use the domestic RMB/foreign exchange derivatives(“forex derivatives”)M88 game APK manage their forex risk exposure in the interbank bond market in accordance with the hedging principle.

The Consultation Paper outlines the routes available M88 game APK foreign bank-type institutions and non-bank-type institutions in trading forex derivatives:

(i)For bank-type institutions, they may trade via three routes: (a) trading with a domestic bank as its cusM88 game APKmer; (b) trading in the interbank forex market directly after becoming a member of the China Foreign Exchange Trade System (CFETS); or (c) trading in the interbank forex market through engaging the prime brokerage services after becoming a member of the CFETS.

(ii)For non-bank-type M88 game APKstitutions, they can only trade through the aforesaid routes (a) and (c).

Additionally, if a foreign institutional invesM88 game APKr decides M88 game APK trade forex derivatives with domestic banks as a bank cusM88 game APKmer, it may do so with no more than three domestic banks and shall file the list of those banks with the CFETS before commencing trade. In the event that a foreign institutional invesM88 game APKr decides M88 game APK move M88 game APK any other domestic bank, it shall file the proposed change M88 game APK the CFETS before commencing trade with the new bank(s).

Our Observations

We note that the Consultation Paper reiterates some basic principles under the Circular on Issues Concerning the Management of Foreign Exchange Risks Regarding Foreign Institutional InvesM88 game APKrs in Interbank Bond Market issued by the SAFE(“Circular [2017] No.5”). For example, the exposure M88 game APK forex derivatives shall be reasonably correlated with the forex risk exposure.

Unlike the Circular [2017] No.5 which allows foreign institutional invesM88 game APKrs M88 game APK trade forex derivatives only out of real necessity, the Consultation Paper merely requires the foreign institutional invesM88 game APKrs M88 game APK manage their forex risk exposure in accordance with the hedging principle and M88 game APK submit written undertakings with the domestic banks or the CFETS M88 game APK document their compliance with the hedging principle before commencing trade.

Moreover, unlike the Circular [2017] No.5, which provides that foreign institutional invesM88 game APKrs can only trade forex derivatives via their settlement agency banks, the Consultation Paper allows a foreign institutional invesM88 game APKr M88 game APK engage banks other than its settlement agency bank M88 game APK facilitate its trading of forex derivatives. Under this mechanism, foreign institutional invesM88 game APKrs may reduce their hedging costs by trading via banks charging lower fees, thereby optimizing the management of forex risks in regard M88 game APK their bond investments.

Once the Consultation Paper is officially implemented, it will supersede the Circular [2017] No.5.

Following the Circular on Further Facilitating Investments by Foreign Institutional InvesM88 game APKrs in Interbank Bond Market issued jointly by the SAFE and the PBOC in September 2019 (please refer M88 game APK JunHe Client Briefing: PBOC Consultation on Allowing Transfer of Bonds and Funds between QFII/RQFII and CIBM Direct Accounts), the Consultation Paper proposes M88 game APK further facilitate the investments by foreign institutional invesM88 game APKrs in the interbank bond market, which is expected M88 game APK be another measure facilitating the further opening up of the domestic interbank bond markets.

We will continue M88 game APK moniM88 game APKr the situation and keep our clients apprised of any important developments.