UPDATE 1-China to scrap reserve requirement on yuan forward settlement -sources

(Adds analyst quote)

SHANGHAI, Sept 8 (Reuters) - China’s central bank plans to scrap reserve requirements for financial institutions settling foreign exchange forward yuan positions with effect from Monday, four sources with direct knowledge of the matter said on Friday.

Under current rules, financial institutions must set aside 20 percent of the previous month’s yuan forwards settlement amount as foreign exchange risk reserves.

“Banks will soon no longer need to set aside any additional RMB capital when trading FX forward for their clients in the offshore market,” said Helena Huang, China economist at ICBC Standard Bank. “This move will also significantly reduce the cost for yuan forward trading activities.”

Huang also said the move reflects Beijing’s willingness to relax the regulatory grips as depreciation sentiments fade away after a recent rally.

“In essence, this is a strong and positive FX de-regulation move that arrives at the right moment to reinvigorate the offshore CNH market,” she said.

The central bank did not have any immediate comment. (Reporting by Li Zheng, Zhang Jindong and John Ruwitch; Additional reporting by Sujata Rao-Coverly in London; Editing by Catherine Evans and Chizu Nomiyama)