CME will look to offer offshore renminbi deliverable futures with longer tenors and more frequent contract months in the United States and Europe, with the aim of capturing the rising need for renminbi derivative products.
CME Group, the US’ largest futures exchange, has realised the importance of expanding its overall suite of offshore renminbi products and just like the Hong Kong Exchanges and Clearing (HKEx), it has decided to include deliverable CNH futures. However, CME has opted to extend the maturities of its trade contracts and with more regular contract months.
Contracts will be traded in sizes of US$100,000, and are quoted in standard interbank foreign exchange/ European terms. There will be 13 contract months for investors to choose to suit their time-horizon needs in hedging, which include the 12 months of the year plus eight March quarterly months with a three-year maturity range.
By comparison, HKEx offers similar contract size, but with only seven contract months and shorter tenors of up to one year.
“We see CNH futures as an additional avenue for risk management for these institutions, especially important in support of a nascent market such as the offshore renminbi,” said Julien Le Noble, head of Asia Pacific at CME to Asiamoney PLUS in a telephone interview on September 20. “Market participants can take positions on CME Group to manage risks of up to three years. The HKEx only trades during their market hours which is more limited than CME’s Globex capabilities providing near 24 hour trading markets.”
CME’s deliverable renminbi futures will be traded on its Globex platform which is open almost 24-hours a day, signalling that time zone differences will not impede on the trading of its derivative products.
“Our target is institutional and the retail or professional traders, that is why we have two sizes for the contract – the regular and a micro size contract, which is one-tenth of the regular futures size – we also target institutional investors like banks and corporates with exposure to the renminbi,” he added.
The group will launch and list the deliverable CNH futures in Chicago in the fourth quarter of this year and in Europe in the second quarter of 2013, in a bid to tap the currency's increased demand in overseas markets.
However, CME may have to do some work to attract clients to longer maturities. Currently, the general market is worrying about the lack of offshore renminbi liquidity, especially for longer tenors, which could hamper the uptake in deliverable futures.
“I understand for the futures market, for tenors longer than one year it could be illiquid and even in the OTC (over-the-counter) market, it is still illiquid for anything longer than two years. Also, if we need to do something that long, we will compare the economic savings,” declares Steve Wong, director for corporate treasury at Johnson Controls to Asiamoney PLUS. “However, we are monitoring the development closely and see whether we can take the advantage of using this market for our future needs.”
Another corporate treasurer also expresses the difficulties of buying futures from a risk management point of view as they fall under the category of ‘derivatives’, which still carry some perceptions of being risky and unsafe.
“Our global corporate guidelines only allow us to use hedging products that are simple and straightforward in nature like forward contracts. We are not allowed to do options and futures as such,” said Sarah Leung, treasury manager for China at Schenker International (Hong Kong) Limited to Asiamoney PLUS. “We normally hedge short-term maturities of around one to two months as we must have the underlying assets at hand.”
While market participants remain somewhat sceptical, CME is confident that the general interest in transacting the currency – either through trade or day-to-day transactions – will continue to grow. This will lead to the eventual take up on specific futures contracts.
Noble argues that global CNH liquidity is aplenty.
“As the market continues to evolve as Hong Kong will not be the only offshore trading centre for the renminbi. Taiwan is going to be one very soon and London and Singapore are vying to be another,” he said. “We are aiming to support the Chinese central bank and government in their efforts to open up their capital account and internationalise its currency.”
In the global arena, the recorded volume of CNH deposits currently stands at Rmb673 billion (US$106.9 billion), with Hong Kong bearing Rmb563 billion, Singapore with Rmb60 billion, London with Rmb35 billion and Taiwan with Rmb15 billion.
Also, the daily turnover of the offshore renminbi is currently around Rmb1.5 billion – Rmb2 billion in Hong Kong.
In Hong Kong, the first deliverable renminbi currency futures contract traded on the HKEx on September 17. The end of tally was 415 contracts totalling a notional turnover of US$41.5 million, according to data from the exchange.
The HKEx's renminbi currency futures contracts are based on the exchange rates between the renminbi and the US dollar. The settlement is made through the delivery of US dollars against the renminbi with the full principal amount as the final settlement price.
The three most actively traded expiries were quarterly expiries in December 2012 with 82 contracts, June 2013 with 80 contracts and March 2013 with 72 contracts.