CLS Asia's Rachael Hoey: integrating Chinese yuan with global FX settlement system to take years

In her first interview since becoming head of FX settlement system CLS’s Asia office in 2013, Rachael Hoey described talks with Chinese authorities as “constructive” and “positive” and said that the business CLS does in the region had grown significantly in that time.

However Hoey told Reuters that actually integrating China’s yuan with global settlement system CLS will take years, despite a pressing need in the world’s $5 trillion a day foreign exchange market.

Senior managers at major global trading banks have said that the yuan’s absence from CLS is steadily becoming a concern for what is their biggest developing market. Several banks have already cast doubt on it being added to CLS within even the next two years.

Rachael Hoey, CLS Asia

Rachael Hoey, CLS Asia

Hoey acknowledged that CLS, which itself is owned by dozens of the world’s largest commercial banks and is a crucial and dominant piece of infrastructure in the global foreign exchange market, was making slow progress in persuading China to sign up.

“While the world wants things to move quickly, they can’t always,” Hoey said, asked whether she was disappointed by the company’s progress on an issue she identified as a “vital” priority three years ago.

“Our currency programme has three stages: engagement, diligence and implementation. The engagement stage can be multiple years.”

Trading in the renminbi, meanwhile, has soared to tens of billions of dollars daily, forcing banks to find other ways of offsetting settlement risk.

China’s own developing domestic CIPS system is one option, as well as existing settlement infrastructure in Hong Kong which bankers say is effective but would be unable to deal with ballooning volumes as onshore trade in the yuan is liberalised.

Hoey said Chinese officials understood well that FX market infrastructure needed to be developed to allow hedging and other operations which are integral to the development of the bond and other capital markets Beijing is seeking to expand.

“These are complex issues for any economy to manage, let alone the world’s second largest. So patience and collaboration is necessary. … The approach and timeline will be dictated by the Chinese authorities. A number of our currency programmes have had long engagement phases.”

The Hungarian forint last November became the 18th currency to be added to CLS, which works largely by netting off thousands of transactions done between banks, allowing parties to avoid having to insure transactions separately against default.

The system, in place since 2002, has been an important factor in the tripling of currency trading volume levels in the past decade.

But bankers in the main international trading hubs for the yuan, Hong Kong and London, say China may be considering going it alone and creating its own independent infrastructure.

Not surprisingly, the People’s Bank of China (PBOC) and China’s currency market supervising authorities all declined to comment on the issue.

Hoey played down any suggestion that CLS’s U.S. base was a factor that might encourage Chinese decisionmakers to look for their own solution.

In another clue to the timing of taking the yuan into its system, she also said CLS was not focused on finding a separate solution for the offshore market on which international players currently do most trade.

“We have directed our resources to thinking about the renminbi as a whole,” she said.

“Making a distinction between the onshore and offshore markets is not optimum as we settle the currency, wherever it is traded. We expect this, as with many currency development efforts, to be a multi-year programme and we have to divert our resources to the end-game and not to the short term.”

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