3 April, 2017
Regulators do not want the downward turn in the exchange rate of the Chinese yuan to set back the drive of foreign institutional investors (“FIIs”) to enter the China’s Interbank Bond Market (“CIBM”). The Circular of the State Administration of Foreign Exchange (“SAFE”) on Allowing FIIs of the CIBM to Handle the Business of RMB-to-Foreign-Currency Derivatives released early last week is offered as a countermeasure. This access policy still sticks to the “Principle of Actual Necessity”, the purpose of which is limited to allowing FIIs to hedge the foreign exchange risk of their bond positions held in CNY, rather than granting them access to enter the Interbank Foreign Exchange Market.
On February 27, 2017, the SAFE issued the Circular on the Relevant Issues of Foreign Exchange Risk Management of FIIs of the CIBM (Hui Fa [2017] 5 Hao, “Circular”) and the associated Media Q&A (“Media Q&A”), under which FIIs of the CIBM are allowed to apply for the business of RMB-to-foreign-currency derivatives at the qualified onshore financial institutions to hedge their foreign exchange risks. The Circular opens the so called foreign exchange over-the-counter market to those mid-and-long-term FIIs that have entered into the CIBM, i.e. such FIIs in the capacity of client may conclude a foreign exchange derivatives transaction with its settlement agent. The types of the foreign exchange derivative transactions available for a settlement agent to deal with a FII include forwards, swaps, cross-currency swaps and options, and such FII and the settlement agent may at their discretion choose the type of master agreement to be concluded.
Any settlement agent handling the business of RMB-to-foreign-currency derivatives for the FIIs shall abide by the “Principle of Actual Necessity” – i.e., the foreign exchange derivatives traded by a FII are limited to hedging the corresponding foreign exchange risk exposures arising from its inbound remittance of funds for investing in the CIBM, and the exposures of the foreign exchange derivatives shall have reasonable relevancy with the foreign exchange risk exposures under the underlying bond investment. In case of any change of the foreign exchange risk exposures due to the change of an FII’s investment in the CIBM, it shall within five working days adjust the corresponding exposures of foreign exchange derivatives held by it to comply with this principle.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
