Indirect CIPS Participant

An indirect CIPS participant is a bank or other financial institution that uses the Cross-Border Interbank Payment System (CIPS), China's system for cross-border renminbi payments, without holding its own settlement account in it. Instead, it sends and receives payments through a direct CIPS participant, which settles eligible RMB transactions on its behalf through the direct participant's own account.

The great majority of institutions connected to CIPS are indirect participants. The model allows banks around the world to reach the system without meeting the requirements for direct membership, much as smaller banks reach other large-value systems through a correspondent.

CIPS was launched in October 2015 under the oversight of the People's Bank of China to provide clearing and settlement for cross-border payments in renminbi. Before CIPS, banks outside mainland China relied on offshore RMB clearing banks appointed in individual financial centers, or on correspondent accounts with mainland banks. A second phase, introduced in 2018, extended operating hours and added further settlement modes. The system is operated by a company established for the purpose and is based in Shanghai.

CIPS has two tiers of participants. Direct participants hold accounts in CIPS and settle with each other in real time; they are typically large Chinese banks, their overseas branches and subsidiaries, and major foreign banks with a significant renminbi business. Indirect participants sit behind them.

An indirect participant signs an agreement with one or more direct participants and is registered in the CIPS directory, which allows other users of the system to address payments to it. Its payment instructions are passed to the direct participant, which submits them to CIPS and settles them across its own account. Incoming payments for the indirect participant arrive at the direct participant, which credits the indirect participant's account on its books, in effect a nostro account held by the indirect participant in renminbi.

Messages can flow over CIPS's own messaging standard, which is based on ISO 20022, and many institutions also use SWIFT to send payment instructions to their direct participant. In that case CIPS provides clearing and settlement, while SWIFT carries the instruction between the indirect participant and its correspondent.

A commercial bank in Kenya wants to pay renminbi to a Chinese supplier on behalf of an importer. The Kenyan bank is an indirect CIPS participant and holds an RMB account with the overseas branch of a large Chinese bank that is a direct participant. The Kenyan bank sends the payment instruction to its direct participant, which debits the Kenyan bank's account and submits the payment to CIPS. CIPS settles the payment between the direct participant and the supplier's bank, or its direct participant, and the supplier is credited in China. This is a typical case of cross-border RMB settlement for trade.

• Settlement account: a direct participant holds one in CIPS; an indirect participant does not.
• Liquidity: a direct participant must fund its CIPS account and manage intraday liquidity; an indirect participant relies on its balance and credit lines with the direct participant.
• Requirements: direct participation involves stricter technical, operational and regulatory requirements and approval by the system; indirect participation is easier to obtain.
• Dependency: an indirect participant depends on its direct participant's service, pricing, cut-off times and risk appetite, including sanctions and compliance policies.

CIPS is part of China's effort to increase the international use of the renminbi and to provide infrastructure that does not depend on correspondent accounts in other currencies. The indirect participant model has helped it extend reach to banks in Asia, Africa, the Middle East, Europe and Latin America with limited investment on their part. For banks and payment firms, the choice between paying through CIPS, an offshore clearing bank or a traditional correspondent depends on cost, speed and whether the payment involves onshore RMB or offshore RMB liquidity. Cross-border renminbi payments remain subject to Chinese foreign exchange administration, including rules set by the State Administration of Foreign Exchange.

• Cross-Border Interbank Payment System (CIPS)