ICAP, 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.
The 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.
IDBs 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 risk.
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 exposure.
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.
