icap logo.jpgICAP, the world's largest interdealer broker, is to set up a Chinese JV with the operator of China's interbank market.

Its rival, Tullet Prebon, opened China's first interdealer broker (pdf) last December — see our earlier story.

Chinese government has recognised that the development of an interbank
market is essential to its plans to expand and liberalise China's
financial markets. Lacking any domestic institutions up to the task, it
has turned to the two western firms to help out.

essentially act as middlemen for trades in derivatives and other
financial instruments between big banks. They play an essential role in
the workings of western financial markets by allowing banks to offset

The need for a sophisticated and liquid interbank market
modelled along western lines has grown following last year's
revaluation of the yuan, which has created a new demand for derivatives
to manage currency risk.

ICAP has benefited greatly
from the recent volatility in the world's financial markets and the
growth of hedge funds, which use derivatives to hedge their risk

ICAP's local partner is the China Foreign Exchange
Trade System, owned by the People's Bank, which operates the country's
interbank and foreign exchange markets.

The JV will provide
voice broking services to the money, bond and derivatives markets in
both the yuan and in western currencies.

Unlike other financial
markets which have mostly migrated to electronic trading, voice broking
is still widespread in the IDB market.

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