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China Rolls Out ISDA Agreements For Central Bank Forex Trades

ChinaChina has extremely strict fiscal policies in place and has always been hesitant to cross over to new policies and frameworks that was not its own.

The People’s Bank of China (PBoC) recently confirmed that central banks who wanted to use foreign exchange derivatives in China’s interbank market would now be able to use ‘ISDA agreements’ to conduct these transactions.

The International Swaps and Derivatives Association (ISDA) has published a ISDA master agreement which is considered a standard contract that is used for over the counter foreign exchange derivates that are followed by many nations across the globe and is also used by a number of central banks.

The old financial policies in China previously only permitted derivatives to be traded onshore via a domestic equivalent that worked within the framework of the National Association of Financial Market Institutional Investors (Nafmii). The PBoC had confirmed during the beginning of this month that this requirement would no longer be mandatory and central banks, multilateral institutions and sovereign wealth funds can trade derivates in China’s interbank forex market.

Jukka Pihlman, the MD in charge of central banks and SWFs at Standard Chartered in Singapore stated preparing a new agreement was a tedious and long procedure. The central banks have completed reviewing both the ISDA and Nafmii agreements and decided to go with the ISDA agreement as they were more familiar with the agreement.

In a statement, Pihlman said

The derivatives are most likely to be used for hedging purposes. Central banks typically use forex swaps, or forwards, but some also use longer-term cross-currency swaps to hedge their positions. They can use other currencies to come up with short-term dollar liquidity and vice versa, so it really becomes like any other currency in their portfolio

China decided to make its fiscal policies considering its interbank foreign exchange and bond markets a lot more flexible in an effort to get more foreign investment and to also provide an opportunity of investment to central banks who wanted to diversify their reserves. A number of central banks from around the world have shown interest in the past to invest in China’s derivatives market but have been reluctant to sign the Nafmii agreement.

The news to make ISA agreements available excited a number of foreign investors and central banks who termed the new change in policy as fabulous news.