The RMB futures contract has an expiry of up to three years, and it will be settled in RMB in Hong Kong and centrally cleared through CME. It will be formally launched before the end of this year, says Lam. Targeted primarily at the import/export needs of corporates dealing with businesses in China, as well as at debt managers, hedge funds and financial institutions outside of Asia, the contract reflects the fact RMB is no longer on a one-track trend of appreciation, says Lam.
“RMB has been depreciating for a couple of months and there is a pressing need to have this [RMB deliverable futures contract] out there,” says Lam.
He says a lot of customers in Europe, which either export to or import from China, were happy to settle in RMB because the EUR was depreciating more than any other currency and the Chinese currency was seen as a one-way bet higher.
CME says it was planning on launching an RMB deliverable futures contract last year, but the weakness of the EUR and the strength of the RMB meant the exchange group was not confident the market would have a use for the offering.
However, now things have changed as equities markets in Asia have declined this year, creating new opportunities for foreign companies to invest in China and therefore increasing demand for RMB hedging instruments.
Companies investing in China were “very happy” with their exposure to RMB until this year, says Lam.
“Now the euro has rallied and the renminbi has remained weak, the pressing need for hedging has increased,” he says. “We are presenting a venue for the market to do that.”
Swift data released in August shows that businesses in 31 of the 158 countries that made payments into China and Hong Kong in July had at least 10% of those payments valued in RMB, as adoption of the currency becomes more common trade usage.
As the EUR appreciates, transparency in pricing for RMB hedging is quickly becoming the central issue for companies that need to settle payments in the renminbi, says Lam.
“The beauty of the RMB deliverable futures contract is that it provides the market with transparency, and CME are the guarantor,” says Lam. “Through Globex we offer to internationalize RMB with our platform and people can have access to it easily. There is an argument between futures and OTC, but that is a counterparty issue around the better, efficient use of capital.”
CME is competing with the Hong Kong Exchanges and Clearing, and the Singapore Exchange for market share of physically settled Chinese yuan futures contracts in CNY or CNH.
In April, CME began clearing OTC NDF FX trades for a variety of currencies, including the RMB.
Lam adds that the new RMB deliverable futures contract is a valuable offering in CME Group’s suite of RMB hedging mechanisms.
Usage of the RMB deliverable futures contract allows companies importing or exporting into China and seeking to settle payment in RMB a specific means of tailoring a hedge to the exact needs of the transaction over a maximum of a three-year period, he says.