Latest Progress on the Market Making Regime in China
The State Administration of Foreign Exchange will continue to guide market makers to strengthen their competitiveness in spot，forward，swap，and option transactions. The goal is to facilitate liquidity in the foreign exchange market and improve the market-based exchange rate mechanism.
In 2005，SAFE issued the Guidelines for Inter-bank Foreign Exchange Market Makers (for Trial Implementation) (hereafter referred to as the “Guidelines”)，which was revised in 2010 and again in 2013 to adapt to the development of the foreign exchange market.
In recent years，with the steady progress in the two-way opening-up of the financial market， the need for an improved market-making regime is urgent. In light of this fact，SAFE has made new revisions to the Guidelines based on in-depth research and broad consultation. The latest version was released in January 2021.
In the interview with Qiao Linzhi，director of the Exchange Rate and Market Division，SAFE's Balance of Payments Department，he explained the context and key points of the revision and pointed out the direction for the development of the regime.
China Forex: The Guidelines issued in 2005 officially brought a CNY-USD market-making regime to the inter-bank foreign exchange market. What was the purpose of building such a regime at that time?
Qiao Linzhi: In 2002，the SAFE piloted EUR-USD and HKD-USD market-making regimes. In the first half of 2004，we started to work on the CNY-USD market-making regime. After the 2005 exchange rate reform，we issued the Guidelines to support the bilateral inquiry transaction pattern launched in the inter-bank market and officially introduced the regime to the market.
At that time，the introduction of market making regime was aimed to the aspects as follows. Firstly，improve the services and functions of the foreign exchange market. The market-making regime is a mature trading system in the financial market，and market makers play an important role in price discovery and liquidity supply， which provide the most importment resourcs of liquidities to the market. The regime provides more options for market transactions，enabling stronger development and better services in China’s foreign exchange market.
Secondly，perfect the market-based renminbi exchange rate mechanism. An efficient foreign exchange market is a very important condition for the mechanism formation of renminbi exchang rate. Establishing market-making regime is a critical link for foreign exchange market itself，which can enable an effective relation and transmission mechanism between exchange rate fluctuations and market supply and demand. Through incremental steps，the market-making regime can increase the resilience of the renminbi exchange rate and help to form a market-based exchange rate mechanism.
Lastly，enhance the market competitiveness and coping capacity of market participants. The market-making regime and trading models require market-makers to have a solid market-based foundation，good reputation，strong pricing power，and risk management ability. After the accession to the WTO，China opened up more to the world. With a higher level of opening-up，the need for broader and deeper market growth and competitiveness of market participants is much urgent. Building the market-making regime and fostering a batch of market makers with high qualities can deliver a synchronized development of market-makers and the market.
China Forex: In addition to revising the Guidelines，what rules and management measures did SAFE take to support the operation of market makers?
Qiao Linzhi: To adapt to the demands of the market in different stages of development，SAFE made adjustment in a set of rules to give full play to market makers.
First，we expanded the range within which the exchange rate fluctuates. When we first put the market-making regime in place，the range was narrow，which made it difficult to quote bilateral prices，increased costs，and dampened the market-making sentiment. Starting in 2007，the People’s Bank of China and SAFE expanded the range of the trading price from 0.3% to 2% above or below the mid-price. Since then，market makers can quote bilateral prices based on their positions，and analyses and forecasts of the exchange rate. This move boosted the renminbi foreign exchange market making.
Second，we improved the management of positions in foreign exchange surrendering and settlement. In 1994，a national foreign exchange market was set up in China. For quite a long time afterward，positions of foreign exchange，managed with positive exposure limit，were mainly reserved for customer needs in foreign exchange surrendering and settlement. After the 2005 exchange rate reform，SAFE pressed ahead with the reform in the management of positions in foreign exchange surrendering and settlement. The goal was to let market makers better adjust bilateral positions，have flexible pricing and risk control. In 2012，a positive and negative range of the management was put in place，giving market makers more leeway to manage their positions.
Third，we guided the China Foreign Exchange Trade System (hereinafter referred to as the “System”) to improve its electronic trading system and reduce transaction and clearing costs. As to system construction，the System drawed on the experience of international financial market and consistently improved trade system.
In 2006，the System launched electronic bilateral inquiry trade pattern，while retaining centralized bidding and matching trading and other existing trade models. Market makers could thus quote bilateral prices on the foreign exchange trading platform，and banks could thus make requests for quotations. Since 2007，the electronic centralized bidding had been led by market makers quotations and market maker-ordinary bank matching，however mainly quotations. We launched CFETSFX2009，CFETSFX2017，and other new trading platforms to improve the trading mechanism，enhance market-making efficiency，and facilitate price discovery.
Furthermore，in the aspect of lowering trade and settlement cost，market makers have to continuously buy and sell and offer to provide liquidity to the market. To this end，they must have a much larger volume of transactions than their needs to close positions. In light of this fact，SAFE provided “more support for transaction costs” and guided the System to improve the efficiency and lower the costs of transactions and foreign exchange clearing.
Fourth，we maintained a stable foreign exchange market. In recent years，with a faster pace of opening up in its financial market，China has witnessed more balanced international payments. The unilateral trend of the foreign exchange rate has been reversed and the two-way fluctuations of renminbi exchange rate have been strengthened. Meanwhile，thanks to SAFE’s efforts to deepen the reform and increase the opening up of the foreign exchange market，the market experienced a boost in transactions and entity diversity. A good foreign exchange market substantially reduced the pressure of market makers to provide liquidity and manage risks of positions.
China Forex: Why do the SAFE make the latest revision to the Guidelines? What are the key points of this revision?
Qiao Linzhi: In order to deepen the development of foreign e