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How do you solve a problem like renminbi?

As discussed in previous blogs on the Chinese renminbi, trading the currency (or other products that use the currency) is no simple matter.

The Renminbi currency (the chinese yuan) has both an onshore and an offshore element, but only a single currency code in the market-wide standard settlement systems. When trading and settling offshore, the CNY currency code is used – but trade participants need to understand it actually represents the CNH currency.

So, how can firms who trade in dim sum products deal with this complexity? 

The problem could be addressed in two ways:


1. Do nothing! Firms could handle any internal and external reporting requirements via manual overrides in whatever process makes sense for their organisation, thus bypassing the need for systemic change. 

The trade will confirm and settle in CNY at the agent and in the cash nostros and this will not change until the currency is officially registered with the International Organisation for Standardisation (ISO). 

However, the true underlying currency is CNH and this should be reflected in Finance, Risk and legal regulatory reporting. 
The downside of this approach is that since reports and / or calculations are produced before the necessary adjustments can be made, it could lead to the reporting of inaccurate financial information.

2. Automate as much of the data flow between systems as possible for all feeds to Finance, Risk and reporting systems. Essentially, where it says CNY, change it to CNH where appropriate.

This solution may be conceptually simple but, as ever, the devil is in the detail!  Any inter-system messaging for traded products would require a change. All areas and systems that receive the data must understand the difference, and be able to process and work with the correct version of the currency. 

Also, at some point in the process firms will need to remember to manage the translation of the CNY currency from the settlement and nostro postings (which will remain as CNY) into the rest of the trade lifecycle. 

 

There is a lot to think about when deciding how best to support trades in the CNY currency.  Here is a ‘starter for ten’ of functions that may be impacted in your firm:

  1. Static data
  2. Trading
  3. Confirmation
  4. Settlement
  5. Cash reconciliation
  6. Trade and position valuation
  7. Market risk
  8. Credit risk
  9. Balance sheet reporting
  10. Regulatory reporting

Given the complexity arising from something that appears relatively simple, are you really ready to trade renminbi?

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