Yuan forex options trading allowed – implications for the retail forex market

In another major sign that China is opening to forex trading, Chinese State Administration of Foreign Exchange (SAFE) has allowed Yuan

In another major sign that China is opening to forex trading, Chinese State Administration of Foreign Exchange (SAFE) has allowed Yuan options trading from April 1st, 2011. Ever since, several major banks such as Deutsche Bank have become market makers in this attractive but unchartered market. A few days ago BMO became the second North American bank to start participating in this market.

Chinese Yuan is a controlled currency. Although it was de-pegged last year it is still not a freely floating currency and is far from being volatile (it only appreciated around 3% against the Dollar in 2010). Spot fx Yuan trading is still severely restricted and hence almost no broker, even hard-core retail forex market makers, offer it yet. In our retail forex industry there’s much demand for CNYUSD and other CNY pairs trading but as the spot fx trading is restricted it is almost impossible to offer these pairs and even liquidate positions if such were available.

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Only Oanda is actually offering a spot fx trading in the CNY/USD pair. As there’s no way to liquidate spot fx CNY positions I imagine that Oanda extracts the prices using other, more freely, traded product such as a CNY option or a forward utilizing a sophisticated algorithm which also allows to hedge out spot fx options against these products.

Whatever is the case it is a positive development in the right direction. There are several foreign retail forex brokers who are well positioned to offer forex trading in China itself when and if it becomes legal to do so. Until then, no one would like to repeat what happened to brokers like Gain and Alpari. However once the gates do open up there’s going to be a massive assault on this huge mainland perpetrated by all retail forex worlwide – no one is going to be able to ignore this opportunity which will finally define who’s the world’s largest broker and who’s going to step out of the game. Best positioned for this to-come assault are retail forex brokers already operating in China (like most US/UK brokers) through network of local IBs (using a certain loophole in local regulations) and specifically brokers with offices in HK (FXCM, Gain, Saxo, HY Markets to name a few). The closer you are and the better you are already positioned in the country the easier it would be to make use of the opportunity once it presents itself.

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