Banks welcome launch of CNH fixing

A new USD/CNH spot fixing launched today by the Hong Kong-based Treasury Markets Association (TMA) will mark a step forward in satisfying the growing demand to trade offshore renminbi, or CNH, according to market participants.

"This is a major step. On the basis of these fixings you can possibly derive new derivatives instruments, which then further helps to grow the market. The fixing is more or less a reference rate for these kinds of derivatives," said Heiko Cassens, global head of treasury desktop at Thomson Reuters in London.

The TMA announced on June 23 that Thomson Reuters had been appointed calculating agent for the computation and dissemination of the new spot fixing. As such, it will compile and publish the rate on the basis of quotes from 15 banks globally.

The fixing will be calculated by averaging the middle quotes after excluding the highest two quotes and the lowest two quotes from the rates provided by contributing banks. "The availability of a representative fixing for the spot USD/CNH exchange rate will be conducive to further development of renminbi products in Hong Kong," said Lawrence Lam, chair of the TMA's market practices committee.

The new fixing will be published at 11.15am Hong Kong time on every local trading day and will appear on the TMA website as well as being disseminated to the market through Thomson Reuters' systems.

Demand to trade offshore renminbi has been steadily increasing over the past year since Chinese authorities took steps to liberalise the currency in June 2010. Some participants expect USD/CNH could become the main Asian trade in time, but had been waiting for the introduction of a fixing rate to bolster the derivatives market in the currency.

"This is a positive development as it helps establish offshore renminbi as an international currency, and this is good news for customers," said Mark Johnson, global head of FX cash trading at HSBC in London.

According to Cassens of Thomson Reuters, the new fixing rate is likely to be particularly popular with buy-side firms seeking standard pricing as a means of gaining greater confidence to trade CNH.

"What we increasingly see in the market is that buy-side firms in particular like to trade forex based on some kind of benchmark of fixings rather than on a request-for-quote basis. They would rather do that business on an officially independent, accurately fixed basis. You could argue this fixing opens the currency pair up to more of the buy side, as they are interested in these fixed rates," Cassens said.

Despite the popularity of CNH, some participants have argued the market for the currency is still fairly illiquid. The emergence of a fixing rate should help to drive greater liquidity, they hope.

"This will generate more liquidity and more flows in the CNH market by opening it up to more participants. The biggest challenge is liquidity over a full 24-hour day. This fixing should help but it is by no means a silver bullet to solve this problem. I would expect any increases in liquidity to happen slowly," said Clive Ponsonby, executive director in the currencies emerging markets team at JP Morgan in London.