China's foreign exchange regulator said on Tuesday that it is now allowing both physical and cash settlements in foreign exchange forwards to make such business fully market-oriented. All the foreign exchange forward contracts should be conducted under the premise of the principle of real needs, the State Administration of Foreign Exchange (SAFE) said in a statement on its website.
It added that cash settlement should be denominated in yuan with reference prices that are real and effective onshore market exchange rates. The SAFE allowed cash settlement in buying foreign exchange forwards in 2016.
Up till now, forex forwards in the yuan were settled on a physical basis, meaning there was an actual delivery of the underlying currencies under the contract upon maturity of the contract. The revised rules allow cash settlement, wherein the net cash flows are settled within the counterparties.
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