The State Administration of Foreign Exchange (SAFE) has recently released the Circular of the State Administration of Foreign Exchange on Amending the Guidelines for Interbank Foreign Exchange Market Makers (Huifa No.1 [2021], hereinafter referred to as the Guidelines). The SAFE deputy administrator and press spokesperson Wang Chunying answered media questions on the Guidelines.

Q: In what context is the Guidelines amended?

A: As an important supporting measure of the reform of the renminbi exchange rate regime in 2005, the market maker system was established by the SAFE for the interbank foreign exchange market. To adapt to market developments, the system was amended in 2010 and 2013 respectively.

At present, market makers have become important participants in China’s foreign exchange market, making positive contributions to the stability of market. As the two-way opening-up of the financial market is advanced, it is pressing to further improve the market maker system. Therefore, on the basis of adequate surveys and opinions extensively solicited, the SAFE has amended the Guidelines again, with a view to improving the quality of market-based quotations and regulating trading behaviors to further boost the orderly development of the foreign exchange market.

Q: What are the highlights of this amendment?

A: The highlights of the amendment are as follows: encouraging dynamic competition, building a sound system of rewards and penalties, maintaining stability of scale, formulating transparent standards, and creating an open and fair environment.

First, optimizing the structure of market makers. To give full play to the advantages of integrated market makers, market makers will no longer be divided by products and will be encouraged to strengthen their capabilities of comprehensive product trading and market making.

Second, streamlining administrative approvals and delegating powers. The access and exist administration of trial market makers will be delegated to the China Foreign Exchange Trade System (CFETS), so as to lower the access thresholds and support more financial institutions to participate in quoting prices and provide liquidity.

Third, regulating the trading behaviors of market makers. Efforts will be stepped up to monitor, evaluate and assess the daily activities of market markers, guide them to rely less on trading volumes and shift their focus to the improvement of quoting quality and the provision of liquidity.

Fourth, emphasizing market makers’ responsibilities. Legal obligations of market makers are clarified, such as keeping quoted prices within the fluctuation range stipulated by the People's Bank of China (PBC) for the transaction prices of foreign exchange in the interbank foreign exchange market, complying with the codes of conduct and best practices in connection with the China Foreign Exchange Market Self-Regulatory Framework (SRF), and guiding customers to raise the risk-neutral awareness in relation to foreign exchange rates, with a view to raising their awareness of lawfully engaging in market making business and serving the real economy.

Q: What impact will the improvement of the market maker system deliver on the development of the interbank foreign exchange market?

A: First, the market structure will be more reasonable. The interbank foreign exchange market will be structurally optimized based on the competitive three-layer hierarchy of “market maker”, “trial market maker” and “common institution”. The first layer is composed of the integrated market makers that are in diverse forms and with strong market making capabilities. Given the current development of the foreign exchange market, the number of market makers is temporarily kept at 25, which will be adjusted going forward based on the evolution of the foreign exchange market. The second layer is made up of a large number of active product-specific trial market makers. The third consists enormous common institutions.

Second, market liquidity will be more adequate. With the market maker structure optimized, market making forces expanded, and market making behaviors regulated, market makers’ quoting quality and their provision of liquidity will be improved.