Clearing & Settlement of RMB
Since 2010, customers of Clearstream, the Luxembourg-based international central securities depository (ICSD), can hold renminbi directly and settle bonds with each other for their trading activity. Clearstream was the first ICSD to support full RMB settlement. Since then, the company has seen an unprecedented development in its RMB issuance and volume.
"Even before 2010, we had the renminbi as a denomination currency, which meant that issuers could have RMB-denominated instruments, typically investment funds or in our case more fixed income instruments", Robert Somogyi, Senior Vice President Business Strategy at Clearstream says. Being part of the RMB Products and Infrastructure working group chaired by the Ministry of Finance and dealing with IT systems for RMB clearing and settlement, he is very familiar with the topic. "At the time, the instruments had to settle in another currency, typically the US dollar or euro. In 2010, following the liberalisation of the People’s Bank Of China allowing so-called offshore renminbi settlements, those same instruments have been able to settle directly in RMB."
As a result, in the first half of 2013 the volume of RMB security settlement exceeded the total volume of the previous year. Currently, 40 Dim Sum bonds are listed in the Luxembourg Stock Exchange with a volume of 24,5bn RMB. Clearstream, in turn, through its global activity in 2012 has supported the issuance of more than RMB 84 billions of international bonds spread over 579 new issues, an increase of more than 71% compared to 2011.
The role of Clearstream
Clearstream’s role is to secure the final settlement between intermediaries on Clearstream’s books. "What we are doing in Luxembourg is commercial bank money settlement, which means that we are holding cash accounts against which the securities are settled. We do that in a multi-currency environment", Mr Somogyi explains.
In order to ensure an effective way to access foreign currencies, Clearstream has cash accounts in banks holding those currencies. In the case of RMB , Clearstream has a Cash Correspondent Bank in Hong Kong.
Both BoC and Industrial and Commercial Bank of China (ICBC) have been appointed cash clearing banks by the People’s Bank of China (PBOC) in Hong Kong and various other markets around the world. Clearstream is planning to maintain the settlement via Hong Kong, but would appreciate adding Luxembourg activity. The fact that the three major Chinese banks, BoC, ICBC and CCB (China Construction Bank) have their European headquarters in Luxembourg, certainly helps Luxembourg’s case.
"We have opened an account with BoC in Hong Kong and currently settle our RMB flows via Hong Kong", Mr Somogyi explains. "What we would like to see is one or more cash clearing banks appointed in Luxembourg. As they build up deposits via their own network, we could then source the liquidity that our European customers need here in the European time zone, respectively through Luxembourg."
Thus, the overall aim is more than that. "What we are targeting in Luxembourg is to do the post trade with Clearstream and to build up banking services around that. In order to have adequate liquidity on the market for the investment funds and the bond market, banks have to build up a deposit base, retail products, private banking products and merchant banking services here, and also a flow from trade finance", Mr Somogyi says.
Securing the RMB cash flow in times of market uncertainty is a challenge that has been resolved in October 2013, when ECB (European Central Bank) and PBOC launched a swap line of a maximum size of 350bn RMB.
Between 1999 and 2002, Clearstream has already experienced the introduction of a new currency with the Euro. The situation is different this time. The opening up of the renminbi is combined with a renminbi qualified foreign institutional investor scheme (RQFII), which allows investors to buy mainland stocks and bonds using offshore yuan (CNH) and whose quota recently increased to 270 bn RMB, meaning that clearing banks will have to deal with very large flows in a currency that has both a high demand and restrictions, and thus, also have to secure liquidity.
To ensure the latter, Clearstream is working on a model different from a Central Bank swap line. "We aim to provide sufficient liquidity in commercial bank money: similar to our settlement activity in Clearstream today and our work with BoC and others. What we would like to develop is a repo market, working in commercial bank money. This will yield similar benefits as the swap line and facilitate further growth in the RMB bond and fund markets." Mr Somogyi is confident that in the long-run and with a market driven increase in volume, the central banks will put a Euro-RMB swap line in place.
The further opening up of the renminbi and the business evolving from this will certainly remain a hot topic over the coming years. Regarding Clearstream’s international expertise, Mr Somogyi gets to the heart of the matter: "One of the advantages of being in Luxembourg is that it is so small that you immediately look across the borders."