How China’s Interbank Foreign‑Exchange Payment System Works: Architecture & Settlement Process

1. Overall Payment Architecture

On April 28, 2008, the China Foreign Exchange Payment System (CFXPS) was launched as a nationwide, inter‑bank, multi‑currency, real‑time, gross‑settlement system. It is one of the four major payment systems of the People’s Bank of China, alongside the large‑value, small‑value, and online inter‑bank clearing systems.

The system’s core is the Clearing Processing Center, which receives, stores, clears, and forwards foreign‑exchange payment instructions. After real‑time clearing, instructions are classified by currency and session and then sent to the designated settlement bank for final settlement.

The settlement banks are commercial banks authorized by the People’s Bank of China. They open foreign‑exchange settlement accounts for direct participants and handle the settlement of inter‑bank foreign‑exchange funds. Currently, the system supports eight currencies: HKD, GBP, EUR, JPY, CAD, AUD, CHF, and USD.

2. Transaction Generation and Confirmation

Foreign‑exchange transactions are analogous to commodity trades: one currency is the “product” and the bank providing it acts as the “seller”. The China Foreign Exchange Trading Center serves as the platform for matching and confirming these trades.

Traders submit either a price‑inquiry or a competitive bidding request. After a trade is agreed, both parties must confirm the transaction because of the large amounts involved. Confirmation includes verification (one‑sided record sent for checking) and matching (both sides exchange records and a matching engine validates them).

Two confirmation modes exist:

Centralized confirmation : each participant compares its data with the exchange’s data; the process completes only after both sides have confirmed.

Bilateral confirmation : participants directly compare their data with each other; once matched, the trade is confirmed.

3. Clearing Instructions and Accounts

Foreign‑exchange settlement relies on settlement accounts, clearing instructions, and the clearing relationships among counterparties. Settlement accounts are held at the foreign‑exchange agency banks and function as inter‑bank deposit accounts.

Each participant must maintain information about the currencies it handles and the associated settlement accounts. This data is recorded, published to counterparties, and updated promptly when changes occur. Management of this information can be performed in the CFETS FX 2017 system.

Three message standards are commonly used in China’s foreign‑exchange market: the Large‑Value Payment System specification, the RMB Cross‑border Payment System specification, and the SWIFT standard.

4. Transaction and Settlement Modes

Two primary trading modes exist: inquiry (price‑inquiry) and bidding. The inquiry mode is dominant and enables PVP (price‑value‑pair) synchronous settlement, reducing risk from asynchronous information.

5. Inquiry Transaction Process

The inquiry workflow consists of four stages: transaction & confirmation, payment‑information confirmation, payment processing initiation, and PVP settlement completion.

Transaction stage : buyer and seller match and confirm via the foreign‑exchange trading center.

Payment‑information submission : on the agreed settlement date, both sides submit PVP payment information to the foreign‑exchange payment system and the large‑value payment system (or delegate to a direct participant).

Matching and confirmation of payment information : the large‑value system forwards received payment data to the foreign‑exchange system for matching.

Foreign‑exchange fund pooling and instant transfer : matched payment information triggers a fund‑pooling operation for the selling institution, followed by an instant‑transfer instruction to the large‑value system, which moves RMB between settlement accounts and notifies the foreign‑exchange system.

PVP settlement completion : upon receiving the instant‑transfer success notice, the foreign‑exchange system transfers the foreign‑exchange funds from the payable to the receivable settlement account and informs both parties.

6. Bidding Transaction Mode

After market close, the foreign‑exchange trading center generates a bidding settlement list and sends it to participating members for confirmation. On the agreed settlement date, the center creates an instant‑transfer instruction for each member’s net payable/receivable per currency and forwards it to both the large‑value and foreign‑exchange payment systems.

7. Accounting Example for Foreign‑Exchange Business

When a customer exchanges currency A for currency B and initiates a cross‑border payment, the bank’s internal accounting follows several steps.

1) Customer foreign‑exchange fund debit
   借：存款账号或内部账号（外币A）
   贷：实盘外汇买卖（外币A）

2) Exchange of foreign‑exchange A to B (or equivalent USD)
   （使用实盘外汇买卖‑兑换子科目）

3) Foreign‑exchange conversion
   借：实盘外汇买卖‑兑换子科目（外币A）
   贷：实盘外汇买卖‑兑换子科目（外币B）

4) Transfer of foreign‑exchange B into the outbound account
   借：实盘外汇买卖（外币B）
   贷：外币支付业务往账（外币B）

5) Settlement of foreign‑exchange B
   借：外币支付业务往账（外币B）
   贷：外币支付业务‑已清算（外币B）
   借：外币支付业务‑已清算（外币B）
   贷：外汇存入他行存款（外币B）

If the net exchange result W equals zero, no gain or loss occurs; otherwise, a foreign‑exchange gain or loss is recorded. These transitional accounts are cleared at day‑end.