Introductory Guide to RMB Currency Futures
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1 Introductory Guide to RMB Currency Futures
2 RMB Internationalisation The opening up of Mainland China now is creating more and more business opportunities. China is the second largest economy and a major import / export country. According to a forecast by the International Monetary Fund 1, China will contribute to more than one third of the world s economic growth by The internationalisation of China s Renminbi (RMB) is one of the most significant financial market developments. The RMB will play an increasingly important role in international markets as its adoption in cross border trade settlement becomes more widespread. Key Milestones in Development of Offshore RMB Market in Hong Kong Personal RMB Business RMB deposittaking, cheque, credit/debit card and remittance services RMB Bond Market 1st RMB bonds by Mainland financial institution (CDB) 1st RMB sovereign bond (MOF) 1st RMB bond by overseas corporate (McDonald s) 1st RMB bond by Mainland non-financial institution (Baosteel) RMB Trade Settlement Pilot scheme kicked off in five pilot Mainland cities Expanded to 20 provinces and cities in the Mainland Further expanded to include entire Mainland RMB Investment RMB ODI and RMB FDI RQFII scheme with initial quota of RMB20bn RMB REIT RQFII quota expanded by RMB50bn RQFII A-share ETF (As of July 2012) PBOC Official Exchange Rate (USD/RMB) and Offshore CNH Spot Rate (USD/CNH) (Period: 27 June, 2005 to 24 August, 2012) After the Inception of CNH Market (Period: 23 August, 2010 to 24 August, 2012) PBOC Fixing Mid Point CNH Spot PBOC Fixing Mid Point CNH Spot /6/05 27/10/05 27/2/06 27/6/06 27/10/06 27/2/07 27/6/07 27/10/07 27/2/08 27/6/08 27/10/08 27/2/09 27/6/09 27/10/09 27/2/10 27/6/10 27/10/10 27/2/11 27/6/11 27/10/11 27/2/12 27/6/12 23/8/10 23/9/10 23/10/10 23/11/10 23/12/10 23/1/11 23/2/11 23/3/11 23/4/11 23/5/11 23/6/11 23/7/11 23/8/11 23/9/11 23/10/11 23/11/11 23/12/11 23/1/12 23/2/12 23/3/12 23/4/12 23/5/12 23/6/12 23/7/12 23/8/12 1 IMF economic forecast by 2015:
3 Introduction to FX Market The FX market is the foreign exchange market or currency market. It determines the relative values of different currencies. The FX market supports international trade and investment by enabling currency conversion. FX market s huge trading volume makes it the largest asset class in the world. The value of a currency can be affected by several factors, not only economic factors, such as international trades / current accounts, monetary and fiscal policies, but also the demand for and supply of the currency. Political stability is also one of the things that affects the exchange value of a currency. Information flow is fast and wide nowadays so news can spread in a second, which can lead to quick changes of FX rates. Besides, the ties between countries are stronger than before due to globalisation and the increase of the interaction between economic zones. These interactions will affect the exchange rate of their currencies. What is a Currency Futures Contract? Basically, a currency futures contract allows market participants to take a view on the movement of the underlying exchange rate as well as hedge against currency risk. It allows them to exchange one currency for another currency at a specified date in the future at a price fixed on the date of their futures contract transaction. What is a RMB Currency Futures Contract? For HKEx s first RMB Currency Futures, USD/CNH Futures, the underlying exchange rate is the exchange rate of RMB circulated in Hong Kong (CNH) per one US dollar (USD). It is also the world s first listed deliverable RMB currency futures contract. Potential Users Large corporations and SMEs (small and medium-sized enterprises) with RMB exposure, such as importers / exporters and manufacturers Financial institutions, such as banks, insurance companies and brokers Fund managers Investors of offshore RMB-denominated products Individual investors 1
4 Key Features of USD/CNH Futures Contract Item Contract Feature Contract Size USD 100,000 Quotation Style Contract Months Settlement Method and Settlement Currency Trading Hours Final Settlement Day Last Trading Day Final Settlement Price RMB per USD (e.g. RMB per USD) Spot month, the next three calendar months and the next three calendar quarter months (i.e. quarter months are March, June, September and December) Delivery of USD by the seller and payment of the Final Settlement value in RMB by the Buyer 9:00 a.m. 4:15 p.m. (Trading hours on the Last Trading Day are 9:00 a.m. 11:00 a.m.) Third Wednesday of the Contract Month Two Hong Kong Business Days prior to the Final Settlement Day Spot USD/CNY(HK) fixing published at 11:15 a.m. on the Last Trading Day by Hong Kong Treasury Markets Association or TMA* Position Limit 8,000 net contracts in all Contract Months combined; and no more than 2,000 open contracts in the spot month contract during the last five trading days up to expiration Large Open Position Holiday Schedule Exchange Fee 500 open contracts, in any one Contract Month Hong Kong holiday schedule RMB 8.00 per contract per side Brokerage Commission and Levy Brokerage commission is subject to negotiation between clients and brokers. SFC Levy is not applicable for USD/ CNH Futures. Common terminology in USD/CNH Futures trading Long position Buy USD/CNH futures at certain price, expecting to sell at a higher price (i.e. expect USD to appreciate and CNH to depreciate) Short position Sell USD/CNH futures at certain price, expecting to buy at a lower price (i.e. expect USD to depreciate and CNH to appreciate) Bid / Bid price The FX rate for buying USD/CNH Futures in the market (i.e. Buy USD Sell CNH) Ask / Ask price The FX rate for selling USD/CNH Futures in the market (i.e. Sell USD Buy CNH) Bid / Ask spread The difference between the best bid (buying) price and the best ask (selling) price * TMA s Spot USD/CNY(HK) Fixing Please refer to TMA s website, The Fixing which serves as the benchmark for market exchange rate of USD against CNY(HK) at 11:00 a.m. Hong Kong time. The Spot USD/CNY(HK) Fixing is published at around 11:15 a.m. Hong Kong time each business day (excluding Saturdays). Thomson Reuters is the calculating agent for the fixing. Thomson Reuters RICs <CNHFIX=>; Thomson Reuters pages <CNHFIX>. 2
5 Clearing and Settlement Arrangement Trading fee, settlement fee, margin and variation adjustments are all in RMB. Principal exchange of RMB and USD according to the specification of the futures contract takes place on final settlement. Daily Settlement Final Settlement Trading Fees Variation Adjustment Margin Obligation Settlement Fees Benefits of Trading HKEx s USD/CNH Futures Hedge or take on RMB exchange rate risk flexibly Investors can hedge or take on RMB exposure with USD/CNH futures. There is no restriction on the use of CNH, so the CNH market is a good reflection of supply and demand. Principal exchange at expiry facilitating currency payment arrangement USD/CNH futures will be settled at expiration by exchanging principal. This enables users to choose whether to settle their payments in USD or RMB when they acquire their contract(s). Transparent pricing USD/CNH futures are offered exclusively on HKEx s electronic derivatives trading platform, so market participants can enjoy transparent pricing in a fully transparent and centralised trading environment. Trading fee of RMB currency futures is competitive. Level playing field in an open trading platform Individual traders, banks, funds and corporations have equal access to the same trading platform and the same prices. Counterparty risk minimised Trades are cleared and settled by HKFE Clearing Corporation Limited, a HKEx subsidiary, acting as central counterparty in every transaction of Exchange Participants. Continuous two way liquidity provided by market makers Market makers provide continuous two sided markets throughout the trading day to enhance liquidity. Leverage USD/CNH Futures contracts are traded on a margin basis, so only a small fraction of the total exposure is required upfront. Capital cost in trading and hedging is reduced. 3
6 When to Buy and Sell USD/CNH Futures Sell when bullish on the RMB in September Buy or Sell? USD/CNH Futures Contracts Price December Contract (1 USD = RMB ) Investor View RMB to Appreciate Action Sell 10 Contracts Anticipated Outcome Close Out Contracts in Profit / Loss Gain of RMB 40,000 (i.e. ( ) x 100,000 x 10 Contracts) Buy when bearish on the RMB in September Buy or Sell? USD/CNH Futures Contracts Price December Contract (1 USD = RMB ) Investor View RMB to Depreciate Action Buy 10 Contracts Anticipated Outcome Close Out Contracts in Profit / Loss Gain of RMB 40,000 (i.e. ( ) x 100,000 x 10 Contracts) 4
7 Comparison of Currency Futures versus FX Forward Item USD/CNH Futures Offshore RMB Forward Counterparty Risk Minimal due to central clearing (HKFE Clearing Corporation Ltd is the central counterparty) Subject to counterparty s credit rating (such as banks or FX dealers) Contract Size Standardised Customised Price Transparency Bid-ask prices are transparent to the public Privately negotiated Trading Fee RMB 8.00 per contract per side Factored into bid-ask spread Mark-to-market Mark-to-market based on daily settlement price Subject to arrangement by financial institutions Maturity Standardised, maturity dates up to 1 year Customised Close-out Process Close out at market price during trading hours Privately negotiated 5
8 Applications Hedging for Companies Paying USD and Receiving RMB Hedging User Outlook Risk Exposure Strategy Company which sells products to Mainland companies and receives RMB Anticipates depreciation of RMB against USD over the next 6 months Profit margin may suffer if RMB depreciates Buys USD/CNH Futures contract for protection from RMB depreciation No Hedging Case Now Expects USD/CNH after 6 months to be Expects to receive RMB 6.3 mil 6 months later Agrees to pay USD 1 mil 6 months later 6 Months Later USD/CNH = Receives RMB 6.3 mil Converts to USD 0.98 mil Summary: USD 0.02 mil short of the agreed payment. Hedging Case Now Expects USD/CNH after 6 months to be Expects to receive RMB 6.3 mil 6 months later 6 Months Later USD/CNH = Receives RMB 6.3 mil Agrees to pay USD 1 mil 6 months later Buys 10 USD/CNH Futures USD/CNH = Gains RMB 0.1 mil on the futures contracts Principal exchange at USD/CNH Futures maturity Total RMB 6.4 mil USD 1 mil Summary: Risk of RMB exchange rate fluctuation can be mitigated. 6
9 Applications Hedging for Companies Paying RMB and Receiving USD Hedging User Outlook Risk Exposure Strategy Company which buys products from Mainland companies in RMB and sells them to overseas markets Anticipates appreciation of RMB against USD over the next 6 months Products costs may increase and hurt profit margin Sells USD/CNH Futures contract for protection from higher product costs No Hedging Case Now Expects USD/CNH after 6 months to be Expects to receive USD 1 mil for payment 6 months later Agrees to pay RMB 6.3 mil 6 months later 6 Months Later USD/CNH = Receives USD 1 mil Converts to RMB 6.2 mil Summary: RMB 0.1 mil short of the agreed payment. Hedging Case Now Expects USD/CNH after 6 months to be Expects to receive USD 1 mil for payment 6 months later 6 Months Later USD/CNH = Receives USD 1 mil Agrees to pay RMB 6.3 mil 6 months later Sells 10 USD/CNH Futures USD/CNH = Gains RMB 0.1 mil on the futures Principal exchange at USD/CNH Futures maturity USD 1 mil RMB 6.2 mil + RMB 0.1 mil (Gains on the futures) Summary: Risk of RMB exchange rate fluctuation can be mitigated. 7
10 Applications Hedging for Companies Using RMB to Buy Commodities in USD Hedging User Outlook Risk Exposure Strategy Mainland company which buys overseas commodities in USD Anticipates appreciation of RMB over the next 6 months The gain in overseas commodities may be reduced by RMB appreciation Sells USD/CNH Futures contract for protection from RMB appreciation No Hedging Case Now Converts RMB 6.36 mil to and uses USD 1 mil to buy overseas commodities 6 Months Later Sells overseas commodities and gets USD 1.02 mil Converts back to and gets RMB 6.28 mil* * USD 1.02 mil x 6.16 = RMB 6.28 mil Hedging Case Now Converts RMB 6.36 mil to and uses USD 1 mil to buy overseas commodities Sells 10 USD/CNH Futures Months Later Sells overseas commodities and gets USD 1.02 mil Converts back to and gets RMB 6.28 mil Closes and gains RMB 0.2 mil profit* Total amount = RMB 6.48 mil # * Profit of USD/CNH Futures = ( ) x 100,000 x 10 contracts = RMB 0.2 mil # RMB 6.28 mil + RMB 0.2 mil = RMB 6.48 mil Comparison No hedging case (Without USD/CNH Futures) Hedging case (With USD/CNH Futures) Profit/Loss (RMB) Loss 0.08 mil Gain 0.12 mil Investment return for RMB 6.36 mil (%) Summary: RMB currency risk can be reduced and enhanced the investment return. 8
11 Additional Resources Product information on HKEx website Final Settlement Price on Treasury Markets Association website The following disclaimers and copyright notice regarding information provided on the Treasury Markets Association s website: a. The price fixings and reference rates in this website are provided with delays for general information purposes. While the Treasury Markets Association (TMA) will make all reasonable efforts to ensure a continuous, accurate and timely service, the TMA and other data providers make no warranties, representations or undertakings, expressed or implied by law or otherwise, in relation to the price fixings and reference rates and are not responsible for any errors or omissions, or losses caused by disruptions in the service or late publication of the daily rates or inaccuracy of the daily rates or otherwise arising from the use of or reliance on the price fixings and reference rates. By viewing or downloading these rates, you implicitly accept this disclaimer and agree to its terms. b. TMA shall not be liable for any loss or damage suffered as a result of any use or reliance on any of the information provided on its website. c. The content available on this website, including but not limited to all text, graphics, drawings, diagrams, photographs and compilation of data or other materials, are protected by copyright. TMA is the owner of all copyright works contained in this website. The information or part of it may be re-disseminated or reproduced provided the source of the information is acknowledged. September 2012 Risks of Trading Futures Futures involve a high degree of risk. Losses from futures trading can exceed your initial margin funds and you may be required to pay additional margin funds on short notice. Failure to do so may result in your position being liquidated and you being liable for any resulting deficit. You must therefore understand the risks of trading in futures and should assess whether they are right for you. You are encouraged to consult a broker or financial advisers on your suitability for futures trading in light of your financial positions and investment objectives before trading. Hong Kong Exchanges and Clearing Limited (HKEx) All rights reserved. Nothing herein is to be construed as a recommendation to purchase or sell futures and / or options contracts or to provide investment advice. While efforts are made to ensure the accuracy of information contained in this publication, HKEx and its subsidiaries do not warrant its accuracy, timeliness, completeness or fitness for a particular purpose and do not assume any liability for any errors or omissions or any action taken on the basis of such information.
12 Hong Kong Exchanges and Clearing Limited 12/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong Tel: Fax: Website: info@hkex.com.hk
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