Chicago's CME takes on HKEx in futures for offshore yuan

Chicago exchange will launch contracts in fourth quarter amid growing demand for hedging tools

PUBLISHED : Friday, 14 September, 2012, 12:00am
UPDATED : Friday, 14 September, 2012, 9:30am

CME Group, owner of the world's biggest futures exchange, will introduce deliverable futures for offshore yuan in the fourth quarter as growing use of the currency in world trade fuels demand for hedging tools.

The move will put it up against Hong Kong Exchanges and Clearing, which is the second-largest bourse operator by market value and has announced plans to make similar contracts available from next Monday. China is the world's No1 exporter and the central bank estimates yuan trade settlement jumped as much as 80 per cent in the first five months of the year.

"There's a lot of customers requiring" instruments to limit risk from exchange-rate fluctuations, said KC Lam, CME's Singapore-based head of foreign exchange for Asia. "There's a push to internationalise the yuan; what's better than doing it on a globalised structure."

HKEx set the standard contract size for offshore yuan futures at US$100,000 each with tenures of up to one year and will offer trading from 9am to 4.15pm. Chicago-based CME would have similar-sized contracts of up to three years and US$10,000 futures with maturities of no more than 12 months, Lam said, adding that both types would be available in Asia, the United States and Europe.

The yuan has weakened 0.5 per cent this year, headed for its biggest loss since a dollar peg ended in 2005, as Europe's debt crisis and an economic slowdown in the US hurt exports. Shipments rose 2.7 per cent from a year earlier in August and 1 per cent in July, the slowest growth rates since overseas sales declined in January, official figures show.

Twelve-month non-deliverable forwards traded at 6.4185 per dollar in Hong Kong early trading, a 1.4 per cent discount to the closing price in Shanghai. The forwards traded at a premium to the onshore spot rate for most of the time between April 2009 and August last year, reflecting expectations the currency would appreciate.

Bank of China formed a strategic alliance with CME to co-operate on clearing and settlement, offshore yuan services and futures trading, the Beijing-based bank said in February. BOC Hong Kong Holdings, a Bank of China subsidiary, is the city's sole yuan-clearing bank.

CME offers futures contracts on yuan trading in Shanghai and offshore clearing services for over-the-counter non-deliverable forwards on the currency. Futures and forwards allow investors to buy or sell the currency at a set price on a specified date and non-deliverable contracts are settled in dollars.

CME delayed the start of offshore yuan futures because of a "liquidity squeeze" last year, Lam said. The yuan in Hong Kong traded at a record 1.9 per cent discount to the onshore rate on September 23 last year as investors in Europe and the US cut holdings of emerging-market assets to bolster capital.

Yuan liquidity in Hong Kong, which includes deposits and certificates of deposits, is likely to approach 1 trillion yuan (HK$1.22 trillion) this year, Donna Kwok, an economist at HSBC Holdings, wrote in a note last month. The total would reach 3.2 trillion yuan by 2015, Kwok forecast.

"Hong Kong is still the most liquid in offshore yuan and it will remain so," said Lam. CME "has informed" the government on its plans to introduce the contracts, which would involve physical delivery of yuan in the city, Lam said.