27 July 2014

Real-time RMB settlement goes live in Sydney

Today, Australia's real time RMB Settlement Service for payments in China's currency (RMB, or Yuan) went live marking the completion of a joint project between the ASX (Australian Securities Exchange) and the Bank of China. In this Alert, we answer some questions about this new market architecture.

How does it work?

The RMB Settlement Service uses ASX's Austraclear settlement infrastructure, which is the primary securities settlement system in Australia's wholesale debt securities market. Cash records denominated in RMB are now able to be created in Austraclear (previously they could be created in AUD only). Participants in the service can transact payments between each other through their RMB cash records. The service has been designed so that these transactions take place in real time in the Austraclear system.

Do the payments in RMB have to relate to securities in Austraclear?

No. Payments in RMB are not related to securities in Austraclear. Payments made through the service could relate to trade, investment or other transactions between the participants in the service.

Does the service benefit from Austraclear's legal protections?

Yes. Austraclear is protected under Australian law as an approved Real Time Gross Settlement (RTGS) system under the Payment Systems and Netting Act. This protection (which is also granted to the ASX's CHESS system for share transactions and the RITS system of the Reserve Bank of Australia (RBA) which is used for AUD payments) protects the finality of settlements made in Austraclear. The protection applies to the settlements of RMB transactions made within Austraclear.

What is the role of the Bank of China?

The Bank of China is the approved Foreign Currency Settlement Bank for RMB cash records in the RMB Settlement Service. Participant's transactions through their RMB cash records in Austraclear are reflected in their bank accounts with the Bank of China which are held outside of the Austraclear System.

Has an official RMB settlement bank been announced for Australia?

No official RMB settlement bank for Australia has been announced by Chinese authorities. The announcement of an official RMB settlement bank will further promote the integration of the RMB into the Australian financial market by permitting a more direct link to the liquidity able to be provided by China's central bank, the People's Bank of China (PBC). It is hoped that such an announcement will be made later this year. However, the RMB Settlement Service's function is not dependent on this occurring.

What about the swap agreement between the RBA and the PBC?

The RMB Settlement Service is not linked to the bilateral local currency swap agreement between the RBA and the PBC. This swap agreement has been in place since 2012 and allows the RBA and the PBC to exchange AUD and RMB for agreed purposes. The intention of this swap agreement is to provide confidence that RMB liquidity can be made available to the Australian market through a 'backstop' channel in the event of a disruption in the RMB market. However, it is not intended to be a source of funding at times where the market is functioning normally.

How do participants join the RMB Settlement Service?

Existing Austraclear customers can join the RMB Settlement Service either by opening an RMB account at the Bank of China or by asking their Austraclear participating bank to do so. Other customers can join by becoming an Austraclear participant and opening an RMB account at the Bank of China or, by becoming an Austraclear participant and asking their Austraclear participating bank to open an RMB account at the Bank of China or, by becoming the customer of an Austraclear participating bank with an RMB account at the Bank of China.

Does the RMB Settlement Service facilitate clearing in RMB investments?

Although transactions in the service do not need to relate to investments held in the Austraclear system, it does facilitate RMB denominated investments being held in, and cleared through, the Austraclear system. This is a development being worked on currently and presents a considerable potential for issuers and investors alike.

What does this mean for RMB internationalisation in Australia?

The RMB Settlement Service provides a means of transacting real time in Australia using existing Australian market architecture. This removes a potential impediment to the use of RMB in Australia as a transaction currency. In this way, the creation of the service facilitates the internationalisation of RMB in Australia. As the RBA noted last week (link here) it is up to Australian market participants to identify and seize the opportunities to pay, receive, lend, borrow and invest in RMB in Australia. See our comments on this in relation to Australia's Financial System Inquiry here.

King & Wood Mallesons acted as legal advisor on the creation of the RMB Settlement Service.

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