The renminbi derivatives market is gaining momentum, especially with the upcoming launch of the deliverable futures market in Hong Kong. But experts believe that the market will remain muted for the time being.
The Hong Kong Exchange (HKEx) is to launch the trading of its first currency futures based on the US dollar/CNH pair in September this year, as the world's first listed deliverable renminbi futures contract. This is a move that furthers the internationalisation of the renminbi.
“It’s a good thing. Futures is just another convenient tool,” said Woon Khien Chia, emerging markets strategist at the Royal Bank of Scotland (RBS) to Asiamoney PLUS in a telephone interview on August 24. “Having an additional tool builds onto the momentum of expanding and deepening the CNH market as a whole.”
The contract size will be US$100,000; quoted in American terms as renminbi per US dollar, says the HKEx in a press release. The contracts are settled and margined in renminbi, and will require delivery of US dollar by the seller and payment of the final settlement value in renminbi by the buyer at maturity.
The contracts will be settled according to spot US dollar/CNH fixing published by the Hong Kong Treasury Markets Association on the last trading day.
This is viewed by market participants as a positive development, but the fact that Asia’s futures market remains relatively inactive and illiquid could be a deterrent to the quick adoption of the derivative instrument.
“I don’t think it is going to kick-start with a big bang and the response will be muted,” said Conrad Kwok, head of foreign exchange (FX) options and head of trading for Hong Kong at DBS to Asiamoney PLUS. “This is because right now most of the currency futures on the exchanges are actually G7 currencies. If you look at Asian currencies, there are none; not even the Singaporean dollar, Korean won and Hong Kong dollar.”
Source: Futures Industry
Additionally, with the current dominance of more flexible hedging instruments, such as the over-the-counter (OTC) offshore renminbi forward and the non-deliverable forwards (NDFs) market, activity in the deliverable renminbi futures market could remain subdued in the near future.
“Compared to what we have in place which is basically offshore renminbi forwards and NDFs being traded in the offshore market on an over-the-counter basis, I’m not sure [the futures market] is going to materially impact the currency," said Dominic Bunning, FX strategist at HSBC to Asiamoney PLUS. "It might be able to broaden out market liquidity but I’m not convinced that it is going to materially change the way that people trade.”
"For the offshore renminbi market to develop further, we will be looking for broader measures that could materially impact how money can flow more easily between offshore and onshore,” he added.
The renminbi NDF has been the dominant offshore forwards market for investors to hedge renminbi risks since the market began around 1996. The CNH forward market began around 2010.
While the general market consensus is that the take off of deliverable renminbi futures will be slow, the risk appetite and the needs of the end-user will also be a factor.
For example, futures pose minimal counterparty risk, with Hong Kong Futures Exchange Clearing Corporation positioned as the counterparty with liquidity ensured by two market makers. HKEx would not give a description beyond saying that the two market makers would be a British bank and the other from Singapore.
Moreover, these instruments are also much cheaper compared to forwards.
“There are people who prefer the futures as there’s no one counterparty risk and you are trading on the exchange. This is one of the biggest merits,” said RBS’ Chia. “Getting in and out of your position is easier than doing the forward once you get more people in it.”
The downside is that futures are standardised, non-customisable products, where their maturity dates and volume traded are fixed.
HKEx has identified markets in London, New York, Tokyo, Singapore and Hong Kong as key targets for the new contracts.