Forex Trading Centers: Background and Functions

This article introduces the establishment process of the my country Forex Trading Center (CFETS) and its relationship with the National Interbank Lending Center; it also introduces in detail the background, business scale and main businesses of the Forex Trading Center.

The China Forex Trading Center and National Interbank Funding Center (CFETS, hereinafter referred to as the "Trading Center") was established on April 18, 1994. It is a public institution directly under the Head Office of the People's Bank of China.

The trading center is one of the important financial infrastructures in my country's financial market. It is mainly responsible for providing trading systems and organizing transactions for spot and derivatives markets such as the interbank Forex market, currency market, and bond market. It also performs market monitoring functions. To a certain extent, it is similar to the Shanghai Stock Exchange and Shenzhen Stock Exchange in the stock market.

This article will sort out the key points of the development of the trading center from the perspectives of development history, existing business, trading systems and processes.

1. Forex trading center

The establishment of the Forex Center can be traced back to December 25, 1993, when the State Council promulgated the "Notice on Further Reform of the Forex Management System" (Guofa [1993] No. 89), proposing

Since January 1, 1994, my country's Forex management system has undergone major reforms: the exchange rate has been unified, and a single, managed floating exchange rate system based on market supply and demand has been implemented. The RMB exchange rate is announced by the People's Bank of China based on the weighted average price of the Forex adjustment market on the previous business day.

However, at that time, the Forex swap markets in various places were divided from each other, and the official RMB price and the swap market exchange rate were very different. There was an urgent need to design a Forex market model that could ensure the smooth progress of the reform of the Forex management system.

On February 15, 1994, the People's Bank of China issued a document (Yinfa [1994] No. 44) notifying the establishment of the China Forex Trading Center, with Xiao Gang as the person in charge of the trading center. After a series of preparations, on April 4 of the same year, the China Forex Trading Center system was officially launched, marking the formal establishment of a unified and standardized inter-bank Forex market across the country.

2. National Interbank Lending Center

Before the establishment of the national interbank lending center, bank head offices did not implement unified position management, and each province had its own capital adjustment center. A fragmented market could easily lead to liquidity accidents. For example, take Bank A as an example. The head office of Bank A has an interbank lending quota of RMB 100 million. However, since each province has its own capital adjustment center, it was possible in the market at that time for the Beijing branch to borrow RMB 50 million, the Shanghai branch to borrow RMB 80 million, and the Shenzhen branch to borrow RMB 30 million. The lending quota far exceeded the head office's quota, and the quotas could not be uniformly allocated, which could easily lead to liquidity accidents.

In order to solve the above problems caused by the fragmentation of the market and the inability to be under unified supervision, on December 4, 1995, the "National Interbank Lending Market Preparatory Conference" was held in Shanghai, clarifying that from January 1, 1996, the interbank lending business of all financial institutions must be handled through the National Unified Interbank Lending Market Network.

Subsequently, on January 3, 1996, the national inter-bank lending market was officially launched based on the trading center system. The Forex trading center began to carry out currency business other than Forex business.

3. China Forex Trading Center and National Interbank Lending Center (one institution, two brands)

On January 27, 1997, the People's Bank of China issued the "Notice on the Centralized Management of the Business Work of the China Forex Trading Center and Related Issues" (Yinfa [1997] No. 37), which clarified that the China Forex Trading Center and the National Interbank Funding Center have one set of institutions and two brands, and they are bureau-level institutions directly under the People's Bank of China.

Since then, CFETS business types have continued to increase:

? Launched inter-bank bond trading business in June 1997;

? Launched foreign currency lending intermediary business in June 2002;

? In June 2003, the "China Bills" website was launched and the China Bills Quotation System was launched;

? In May 2005, inter-bank foreign currency trading business was launched;

? In June 2005, inter-bank bond forward trading was launched;

? Launched RMB/foreign currency forward transactions in August 2005;

? In April 2006, RMB foreign currency swap transactions were launched.

So far, CFETS has formed an infrastructure that provides trading, information and supervision services for the inter-bank Forex market, RMB lending market, bond market, bill market and derivatives market.

2. Main background of Forex Trading Center (CFETS)

The Forex Trading Center is a public institution directly affiliated with the People's Bank of China that is directly affiliated with the core government departments and does not have independent legal person status and financial and personnel management rights.

It can be seen that the biggest difference between CFETS and other infrastructures between banks (taking China Bond Securities Exchange and Shanghai Clearing Corporation as examples) is that CFETS is a directly affiliated public institution and does not have independent legal personality.

We can derive its real authority from CFETS’s financial rights, especially its personnel management rights.

Judging from the previous and current heads of the trading center, they were all appointed by the People's Bank of China, and most of them were eventually transferred to the People's Bank of China system. In addition, by further tracing back, it can be found that most of the heads of trading centers come from the People's Bank of China system. For example, Xiao Gang and Lin Yuli previously served in the People's Bank of China and the Shanghai Head Office of the People's Bank of China respectively. It can be seen that the People's Bank of China has the power to appoint and remove personnel of the trading center and is the actual competent department of the trading center.

3. Main Business of CFETS

1. Overview of the business scale of the trading center:

The business of CFETS consists of the Forex market and the local currency market. Where established, the trading center's main business focuses on the foreign currency market. Due to the impact of the Asian financial crisis, the trading volume of the inter-bank Forex market declined in 1998 and 1999. It was not until 2000 that the inter-bank Forex market began to resume growth.

At the same time, the interbank lending market and bond market developed very rapidly. According to statistics, the inter-bank lending market's lending transaction volume was 587.158 billion yuan in 1996. By 2003, the lending market transactions reached 2, 411.3 billion yuan, an increase of 99% over the previous year. From January to October 2017, the transaction volume of the lending market reached 63 trillion yuan.

In terms of the bond market, according to data from the Exchange, the cumulative trading volume of the bond market in the first seven months of 2017 was 55.5 trillion.

At present, the trading center’s local currency market business occupies an absolute dominant position. In July 2017, the annual cumulative transaction volume of the local currency market was 436.2 trillion yuan, approximately 6 times that of the foreign currency market.

2. Main business of the trading center:

In terms of trading varieties, the trading center provides 7 and 11 types of trading varieties for the Forex market and the local currency market respectively. The main contents are as shown in the following table:

Foreign currency market (7 categories)

Forex spot: Delivery within 2 trading days after the transaction is completed in the agreed foreign currency currency, amount, and exchange rate

Forex forward: Delivery in the agreed foreign currency currency, amount, and exchange rate more than 2 trading days after the transaction is completed

Forex swap: two exchanges of local and foreign currencies on two different delivery dates, one after the other, and in opposite directions.

Forex currency swap: a transaction that exchanges an agreed amount of RMB and foreign currency principal within an agreed period, and at the same time regularly exchanges interest on the two currencies.

Forex options: the right to buy or sell a certain amount of Forex assets at an agreed exchange rate on a certain future trading day

Foreign currency pairs: Forex-to-Forex transactions that do not involve RMB

Foreign currency lending: short-term foreign currency financing behavior

Local currency market (11 categories)

Inter-bank lending

Pledged repurchase

buyout repo

Cash coupon trading

Bond lending

Bond forward transactions

forward interest rate agreement

RMB interest rate swap

Interbank certificate of deposit

Loan transfer

Credit risk mitigation certificate

Compared with other financial functional institutions such as stock exchanges and Shanghai Clearing House, my country's Forex trading center is a public institution rather than a legal entity. It has no independent financial power and personnel management power and belongs directly to the People's Bank of China.