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Brokers Pull Out of Local Chinese Forward Market

Confusion reigns over the exact reasons why Icap and Tullett Prebon stopped providing quotes for onshore foreign exchange forwards and swaps in the Chinese interbank market on Thursday.

Regional sources suggest it was under the instructions of the State Administration for Foreign Exchange (SAFE), the nation's FX regulator.

Brokers at the inter-dealer brokers told Reuters that both CFETS-Icap International Money Broking Co. and Tullett Prebon SITICO (China) stopped providing the quotes last Thursday (21 February) for an indefinite period. Spokespeople at Icap and Tullett Prebon decline to comment on the development, although Reuters reports that both firms said it was "an internal decision".

The regional sources suggest the reported move by SAFE signals that it wants stricter compliance with its rules in general. They add that it also highlights one of the problems of building a business in China – several layers of regulation.

The China Banking Regulatory Commission (CBRC) gave the green light in 2005 for inter-dealer brokers to operate in the interbank FX market, although the sources point out that SAFE has long been keen to flex its muscles in the regulatory arena.

SAFE rules dictate that only members of CFETs may quote forward outright and swap transactions and CFETs membership is limited to major local and international banks. The inter-dealer brokers have apparently been operating with the tacit blessing of CBRC, but SAFE seems to have had enough.

While the major banks believe there will be limited impact on their business – the inter-dealer broking business is still in its very early days as far as forwards are concerned – there are concerns in smaller institutions who apparently find firmer prices with the broking firms than on CFETs.

The suspension of onshore trading is said to be "until further notice" according to broking sources in London, although one source in the emerging markets business of a major broker says the Chinese NDF market – which is offshore – remains unaffected, albeit with wider prices.

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