London FX Market Connects to Shanghai
Shanghai Clearing House has formed R5-SHCH Connect, a joint venture emerging markets foreign exchange trading marketplace R5 to provide connectivity for Chinese banks to directly trade foreign exchange in London.
Shanghai Clearing House was established in 2009 by the People’s Bank of China as a qualified central counterparty and one of the central securities depositories in China. In March this year the Shanghai Clearing House opened a representative office in London, adding to the 30 Chinese financial institutions in The City of London, in order to develop financial cooperation and partnership between the two countries.
R5 and The Shanghai Clearing House at the Cross – Border FX Seminar announcing the R5-SHCH Connect pic.twitter.com/Ukmpc9T6cA
— R5 (@R5FX) November 29, 2017
Jin Mei, chief representative of the People’s Bank in Europe, said at a conference in London last week that the UK in the second largest offshore market for Chinese renminbi and the government wants to develop foreign exchange infrastructure.
Jon Vollemaere, chief executive of R5, said at the conference that the firm has spent the spent the last few years moving emerging market FX trades from telephones onto screens through the use of APIs, algorithms and aggregators.
“The joint venture will speed up electronification of FX in domestic China, and firms will not only catch up with, but will overtake the West,” he added.
Shen Wei, deputy general manager at Shanghai Clearing House said the CCP chose to launch the venture with R5 because the electronic platform is authorised by the Financial Conduct Authority, the UK regulator, and it accommodates existing market practices.
She said: “Clearing will reduce settlement risk. There is increasing demand from Chinese firms who cannot access the offshore RMB market as they who do not have the necessary credit lines.”
Chen Leilei, general manager of the product development department at Shanghai Clearing House, said at the conference that the joint venture will accelerate international use of RMB, especially with the financial needs of China’s One Belt, One Road initiative to develop trade infrastructure across Asia. Institutions already trading in London will benefit from additional counterparties and deeper liquidity provided by new Chinese entrants, and Shanghai Clearing House will gain from both international clients and global expansion
R5 will stream prices for anonymous spot trading and the SCH becomes the central counterparty, reducing the need to use credit lines.
Chen continued that the venture will launch on 18 December with an initial group of eight Chinese banks trading spot Hong Kong dollars, euros, sterling and US dollars. “We will then widen the currency pairs and eventually add other FX derivatives,” she added.
There are a further 17 banks in Shanghai who could also join Connect and an additional 30 financial trading institutions which are slated to be added in a second phase.
Expansion plans for the future include extending access to new products such as forwards, swaps and bonds, and adding the offshore RMB markets in Hong Kong, Singapore and New York. R5 said it expects around $2bn in RMB transactions per day when Connect launches.
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Pre-allocation of block orders and indicative pricing will be introduced.
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The minimum variance approach aims to address volatility concerns.