Interdealer brokers turn to China as reforms gain pace

Tullet Prebon blazes trail after forming money broking venture with Sitico

The world's leading interdealer brokers, which serve as middlemen in the currency and fixed-income markets, are expanding into the mainland in the hopes of tapping into what many think will become a significant new market.

Until now, the mainland's capital markets were neither big nor sophisticated enough to offer much of an opportunity for the big brokers. But recent moves by Beijing to allow foreign firms to play a bigger role have set international firms scurrying to line up local partners and set up mainland dealing rooms.

Tullet Prebon, the interdealer brokerage unit of Britain's Collins Stewart Tullet, late last year became the first money broker in the mainland when it launched a joint venture with Shanghai International Trust & Investment Corp (Sitico).

Tullet Prebon is not alone.

Industry sources said Icap, the world's largest interdealer broker, hoped to launch a money broking business with the China Foreign Exchange Trade System & Nation Interbank Funding Centre. The two sides, which have been in talks for more than a year, hope to wrap up an agreement in two months.

It is a somewhat curious alliance since the centre's basic job is operating the mainland's foreign-exchange market. How it will square that role with being a partner in a leading interdealer broker remains to be seen.

Both Icap and the centre declined to comment.

The prospect of establishing a beachhead in a promising new market is luring players from all over. Market participants expect interdealer Nittan Capital Group of Japan will also enter the market, joining leading United States government bond dealer Cantor Fitzgerald, which opened an office in Beijing six months ago. Meantime, Swiss-based Tradition opened its second mainland office in Shanghai three months ago.

'We're planning a joint venture with a mainland financial institution, but it's still in the planning stages,' a source at Tradition said.

However grand their ambitions, tight restrictions on foreign involvement in the mainland's nascent capital markets mean the brokers will have to start small.

Peter Pao, a managing director for Greater China at Tullet Prebon, said his firm was only allowed to deal in foreign-currency cash products such as foreign-exchange swaps and deposits.

Its joint venture, Tullet Prebon Sitico, is capitalised at US$4.95 million, although its revenues have grown 25 to 30 per cent each quarter since start-up.

Mr Pao is optimistic that the company will be dealing in yuan-denominated government bonds by the end of the year and an interest-rate swap market will be operating and open to foreign participants by late next year.

So far, the forward yield curve was not liquid enough to warrant much of a broker presence, but opening the market to more foreign firms would change this, he said.

'All of these markets are interrelated of course, but before we can start dealing in the interest-rate swaps, we need to have an established benchmark yield curve.'

Mr Pao said Tullet's clientele was mostly top-tier state banks and foreign institutions.

While the regulators remain focused on controlling risk as they open up the capital markets, Mr Pao said the government clearly intended to press ahead with reforms. 'The central bank is pushing financial institutions to go further, which is the exact opposite of what was happening a few years ago.'