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Industry roundup: 13 October 2020

Deutsche Bank approved for China’s SAFE foreign currency trade payments pilot scheme

Deutsche Bank has announced that it has become the first European bank to be approved for China's State Administration of Foreign Exchange (SAFE)’s pilot scheme for the facilitation of foreign exchange receipts and payments for trade. The aim of the project is to simplify and improve foreign currency payments for cross-border trades.

Under the scheme, eligible clients of Deutsche Bank China (Shanghai Branch) will be exempt from providing supporting documents for foreign currency trade payment up front, allowing a straight-through payment processing upon the client’s e-banking instruction. Compared with the traditional payment procedure, this cuts the foreign currency payment process time to just a few minutes from days. The bank completed its first foreign currency payment under the pilot scheme for global automotive technology company Aptiv on September 30.

“Cross-border foreign exchange payments have been a lengthy process for corporates," commented Jerry Chen, Asia Pacific chief financial officer of Aptiv. "With Deutsche Bank’s pilot scheme services, we see the direct benefits with faster and easier payments. As Aptiv’s banking partner, Deutsche Bank has provided us with a tailor-made pilot solution, which improved the overall process throughout the payment cycle and it is testament to Deutsche Bank’s professionalism and commitment.”

“The successful approval for the foreign currency trade payments pilot scheme is solid testimony to our local market expertise and commitment," said Alvin Ho, head of Corporate Cash Management at Deutsche Bank China. "Deutsche Bank in Shanghai is one of only a few banks that offer clients both capital account and trade account pilot solutions. We will continue to leverage our information technology capabilities to provide convenient, efficient, and secured one-stop cross-border payment solutions to our clients.”


SEC reports on US credit market interconnectedness and the COVID-19 crisis

The Securities and Exchange Commission (SEC) has published a staff report titled 'U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock'. The report focuses on the origination, distribution and secondary market flow of credit across US credit markets. The staff report also addresses how the related interconnections in credit markets operated as the effects of the COVID-19 pandemic took hold. 

In the U.S. credit markets, banking and non-banking entities and intermediaries are intricately and inextricably interconnected. These interconnections are essential for the functioning of the markets, the provision of credit and the distribution of risk. These interconnections can also transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic shock reverberated through the credit markets in March and April 2020. The principal purpose of the report is to identify and place in context key structural and flow-related interdependencies in the US credit markets as well as areas of stress revealed by the COVID-19 shock, with an eye toward informing policymakers as they seek to improve the functioning and resilience of our financial markets. 

Key takeaways from the report are:

  • The US credit markets, in size, structure and function have changed significantly since the 2008 global financial crisis.
  • The credit markets are highly interconnected, which can both accelerate risk transmission and facilitate risk absorption.
  • The ability of intermediaries (e.g., "market makers") to absorb significant, rapid shifts in investor sentiment (e.g., a "dash for cash") is limited in absolute terms and may become more limited as spreads widen and volatility increases during periods of stress and uncertainty.
  • Due to the interconnected nature of our credit markets and the size and scope of the COVID-19 shock, it was insightful, prudent and, perhaps, essential that the actions of the Federal Reserve and the CARES Act were multi-faceted and immediate.  Those actions were instrumental in ameliorating stress in the credit markets, particularly the short-term funding markets.
  • The combination of the Federal Reserve’s intervention and the CARES Act also was extremely important in stabilising prices (e.g., housing prices) and sustaining economic activity (e.g., consumer spending), which in turn added stability to the credit markets.
  • Banks and the banking system have been resilient to the COVID-19 shock to date notwithstanding their exposure to several trillions of dollars of residential and commercial mortgages and leveraged loans to corporations.


Standard Chartered completes USD/HKD cross-currency swap referencing HONIA and SOFR

Standard Chartered Bank says it has successfully completed the first USD/HKD cross-currency basis swap referencing the Hong Kong Dollar Overnight Index Average (HONIA) and the USD secured overnight financing rate (SOFR). It has also completed the first USD/HKD cross currency basis swap referencing the three-month HIBOR and SOFR. The bank says that the conclusion of these transactions provides a foundation for the USD LIBOR transition to SOFR at the end of 2021 and provides market participants with additional hedging instruments as LIBOR-based instruments fade out.

“Standard Chartered is pleased to take a leading role in the development of the interest rates derivatives market in Hong Kong in connection with the new interest rate benchmarks, HONIA in HKD and SOFR in USD," said John Tan, global head, Financial Markets Regions at Standard Chartered. "The rapid expansion in the capital markets in Hong Kong in recent years has led to growing hedging demand on interest rate risks. We are committed to providing innovative financial products for our clients to meet their evolving needs as the industry undergoes the transformation into new benchmarks.”

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