Exclusive-China FX regulatory body proposes cap on banks’ prop trading

One of the sources said that the aim was to curb financial institutions from speculating on the yuan at a time when the Chinese currency has been strengthening.

China’s Foreign Exchange Market Self-Discipline Mechanism is a committee of central bank and commercial bank representatives and is supervised by the People’s Bank of China (PBOC).

It has told banks that if the volume of their proprietary trade rises 50% from a year earlier or exceeds 15 times the amount they execute on behalf of their clients, their businesses will be further analysed and investigated, said the sources, some of whom were told of the plan via email.

The sources from within some of the banks spoke on the condition of anonymity as they were not authorised to publicly discuss the issue. There was no mention of any effective date for this measure.

The regulatory body said in a statement late Thursday that Chinese financial institutions should actively provide currency hedging services for companies, but they should not help companies speculate in currencies.

China’s financial regulators have been cajoling companies to protect themselves against currency risks as the central bank gradually loosens its reins on the yuan, but are struggling to convince local businesses to hedge.

China’s tightly managed currency is up nearly 3% against the U.S. dollar since March and has stayed strong even as the dollar rose against most other currencies.

Market analysts and economists attributed the strength in the yuan to China’s growing trade surplus, steady capital inflows and a glut of dollars in the banking system.

(Reporting by Shanghai and Beijing bureauEditing by Vidya Ranganathan and Elaine Hardcastle)