The People's Bank of China (PBOC) has released the Administrative Measures for the Foreign Exchange Purchase and Sale Business Provided by Banks (Measures) on 22 June 2014, which will come into force on 1 August 2014. The Measures will clarify the definition of Business and adjust the supervision and management model to provide banks with greater autonomy, and a simplified process to market entry and exit.
The Measures will repeal The Interim Administrative Measures for Foreign Exchange Purchase and Sale Business of Designated Foreign Exchange Banks (Interim Measures) and the Notice of the People's Bank of China on the Administration of Foreign Exchange Purchase and Sale Business (Notice).
Clear definition of Business
The Measures define Business by dividing it into 'spot foreign exchange purchase and sale business' and 'Renminbi and foreign exchange derivative business', for which separate management standards apply.
- 'Spot foreign exchange purchase and sale business' (Spot Business) means the foreign exchange purchase and sale business in which the clearing is completed within two working days after the trading day, and the clearing price is the exchange rate on the trading day.
- 'Renminbi and foreign exchange derivative business' (Derivative Business) includes business of forward foreign exchange purchase and sale, Renminbi and foreign exchange futures, Renminbi and foreign exchange swaps, and Renminbi and foreign exchange options and their combinations.
Clarification of market entry conditions and simplification of market entry and exit administration
The Measures prescribed the following market entry conditions for Spot Business and Derivative Business:
- An eligible bank to provide Spot Business shall satisfy the following conditions:
- it shall be qualified to provide financial services;
- it shall establish a sophisticated business management scheme;
- it shall be equipped with the software and hardware required for conducting such business; and
- the senior management personnel and business specialist shall have relevant working experience.
- An eligible bank to provide Derivative Business shall satisfy the following conditions:
- it shall be qualified to provide Spot Business;
- it shall establish sophisticated business management scheme;
- the senior management personnel and business specialist shall have relevant working experience; and
- it shall comply with the relevant regulations on trading of financial derivative products as specified by the banking supervision and management department.
The Measures also simplify the market entry and exit administration requirements, (compared to the Interim Measures), including:
- the market entry application will be examined and approved by the State Administration of Foreign Exchange (SAFE) or its local bureaus rather than examination and approval by both of SAFE and PBOC collectively as previously specified in the Interim Measures;
- the market entry application will be submitted by the head office of a bank, except for the branch office of a foreign bank;
- any branch of a bank qualified to undertake the Business will be authorised to provide the Business by its parent body and report to the local bureau of the SAFE, rather than applying separately to the competent authority for the approval of the Business; and
- the bank is only required to report to SAFE rather than obtain approval if the bank determines to cease to undertake the Business.
Transformation of supervision and management model and more autonomy for banks
The Measures represent the transformation of the supervision and management model for foreign exchange purchase and sale business. Several provisions under the Measures stipulate the autonomy of banks to motivate market players in foreign exchange business development.
Qualified banks can now:
- establish their own risk management scheme and ancillary regular assessment scheme;
- minimise risk by examining and verifying relevant certificates and commercial documents when dealing with clients; and
- comply with the overall foreign exchange position on sales and purchases.
While SAFE has traditionally monitored compliance in the approval process, the new Measures highlight that SAFE will be supervising the compliance of qualified banks on an ongoing basis, and we believe this trend will continue to be reflected in other areas of the foreign exchange control regime.