CIPS - China’s Hybrid Net Settlement Clearing System
by David Blair, Managing Director, Acarate Consulting
CIPS will replace the current arrangement for offshore CNY which uses designated clearing banks. CIPS does not replace SWIFT, but uses SWIFT messaging and formats. The net result is faster and more reliable cross-border CNY payments for all users.
What is CIPS?
We all thought CIPS stood for China International Payment System. But ever keen to keep us on our toes, China has apparently renamed it China Cross-border Inter-Bank Payment System. Thankfully they have kept the acronym CIPS. The new name does spell out some important aspects of CIPS: namely that CIPS is cross-border and interbank.
In essence, CIPS provides controlled cross-border access to the onshore CNY clearing system CNAPS2 (China National Automated Payment System version 2) for use in offshore and cross-border CNY payments, so that offshore CNY settlement can access onshore liquidity directly. It is modelled on USD CHIPS, i.e., it is a hybrid net settlement clearing system.
As such CIPS will gradually replace the nominated clearing banks in various financial centres (BOC in Hong Kong, ICBC in Singapore, CCB in London and so on) with controlled access to CNAPS2. (In the old model the designated clearing banks provided controlled and unstandardised access to CNAPS2.) CIPS is an important step in making CNY more useable globally and another step on the way to SDR and eventually full convertibility (but allowing the People’s Bank of China [PBoC] to keep things under control for now).
As its new name implies, CIPS is an interbank clearing system with final settlement onshore. Corporates will not join CIPS – we will use CIPS through banks just as we use FedWire or SEPA. CIPS has eleven Chinese and eight global direct access banks, plus hundreds of indirect access banks (who go through the direct access banks).
CIPS is not replacing SWIFT
For some reason the press have got hold of the idea that CIPS will replace SWIFT, probably because this makes for more exciting headlines. In reality, CIPS uses SWIFT messaging as well as SWIFT standards – specifically ISO20022 XML which supports Chinese and other extended character sets.
CIPS helps corporates
Despite being an interbank system which is primarily aimed at financial institutions (the implications are exciting fund managers and other investors), CIPS also helps corporates in several ways, including:
- Extending CNY cut-off time by three hours
- Partially resolving the problem with POP codes
- Improving STP
- Reducing manual repair at banks
- Eliminating float on CNY flows
Extending CNY cut-off time by three hours
CIPS extends offshore CNY cut- off time from the current 17:00 to 20:00 China time. This is later than the CNAPS2 cut-off time, so I am not sure how that will work. One commentator suggested that the CNAPS2 cut-off will probably be extended accordingly. This helps CNY settlement in far-off time zones – though 08:00 New York time is probably not enough to bring same day value to America’s CNY settlers.