The absence of China's yuan from the CLS system used to settle deals in major currencies is a growing problem for banks and will hamper efforts to trade the currency more if it is not resolved, a senior China-focused banker said on Thursday. David Pavitt, who heads emerging market currency trading and the development of renminbi business in Europe for HSBC, said HSBC, the single biggest foreign bank in China, had already raised the issue with Chinese regulators.
The market in yuan has surged in value over the past year, taking it into the top 5 traded currency pairs on Thomson Reuters and EBS platforms and encouraging Beijing to apply for inclusion in the IMF's basket of major reserve currencies.
"Market participants in CNH are seeing this as a hurdle for growth, or for potential growth," Pavitt said. "There's a lot of headroom. But this hurdle could make transacting offshore RMB increasingly difficult as volumes increase."
Senior currency market managers who spoke to Reuters on condition of anonymity said it can take several years from the moment a government or central bank asks for a currency to be added to CLS for the process to be completed.
CLS, which provides settlement services for the foreign exchange market, declined to comment on the yuan but said it was holding discussions with authorities in several new markets. It said last year that bringing the yuan on board was a priority.
"The rate and pace of on-boarding a currency to the CLS system is determined by the individual central banks and authorities with responsibility for the currencies in their jurisdictions," a spokesman for the company said in an emailed response to Reuters questions.
"Taking a currency live is also subject to the satisfaction of CLS's eligibility criteria and internal governance requirements, in addition to securing the necessary regulatory approvals."
Settlement risk, the possibility a counterparty never pays up, was a problem in the forex market until the creation of CLS just over a decade ago. Without it, banks have to carry the risk of the other parties in any transaction defaulting, effectively using up more of the risk they are allowed to take under the restrictions on capital imposed since the 2008 financial crisis.
"I can only imagine there's a dialogue (between CLS and Chinese authorities) going on," Pavitt said.
"We have mentioned it on several occasions to the Chinese regulators. We have said that it is a hurdle to growth in the market because it increases bilateral credit between market participants. So they are well aware of that."
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