This time we would like to discuss about a new RMB business opportunity competitor of SEHK (or called HKEx): CME Group FX, which is a subsidiary of CME (Chicago Mercantile Exchange).
CME CNH Futures Contracts
Just a few days before the first launch of this SEHK CNH future product, CME Group FX announced on September 13, 2012 that it plans to offer a similar physically-delivered CNH future contract product soon in coming months. This derivative product will be allocated to International Monetary Market (IMM) division and will also be dually-listed on both CME USA (by 2012 Q4) and CME Europe Ltd (by 2013 Q2). Remark: CME Europe is to be established early next year to compete with LME (London Metals Exchange) recently brought by SEHK.
Unlike SEHK/HKEx (Hong Kong Stock Exchange), CME CNH futures products offer both standard contracts of size USD$100K per contract (Globex Code: CNH), as well as electronic contracts (E-micro) of size USD$10K per contract (Globex Code: MNH) which is only 1/10 of its standard-size contracts.
This CME move is hence considered as a direct RMB business opportunity competition against Hong Kong Stock Exchange (SEHK/HKEx Stock Code: 0388.HK). CME has already offered USD/CNY (RMB) contracts since August 2011 but it is for onshore RMB market in mainland China and is cash-settled (not physically deliverable). CME has also run clearing for USD/CNY OTC (Over-the-Counter) NDF (Non-Deliverable Forward) contracts since June 2006.
CME announced on the same business day (September 13, 2012) that it has selected Bank of China (BOC - New York Branch) as a CME-approved Clearing settlement bank and collateral custodian. It is right another battle-field beyond RMB banking business we addressed before. Source: Banking Sector RMB Business Opportunity Competition.
For SEHK/HKEx (Hong Kong Stock Exchange) side, its clearing settlement banks and collateral custodians are DBS, Merrill Lynch, as well as Hong Kong and Shanghai Banking Corporation (HSBC Stock Codes: 005.HK in Hong Kong, HBC in New York, HSBA in London).
Below is a head-to-head comparison between HKEx and CME for their CNH currency futures contract details:
| Item | Contract Details (HKEx Futures) | Contract Details (CME Standard Futures) | Contract Details (CME E-micro Futures) |
|---|---|---|---|
| Contract Name | USD/CNH futures contract | USD/CNH futures contract | USD/CNH futures contract |
| Trading Code (Symbol) | CUS | CNH | MNH |
| Contract Months | Current month, the next three calendar months and the next three quarter months. | 13 consecutive calendar months, and 8 March-quarterly-cycle months (up to 3-year maturity range). | 12 consecutive calendar months. |
| Contract Amount (Size) | USD$100K. | USD$100K. | USD$10K. (1/10 the CME standard-size contract) |
| Method of Quotation | CNH per USD. | CNH per USD. | CNH per USD. |
| Trading Hours | Mondays through Fridays HKT (Hong Kong time) 9:00 a.m. to 16:15 p.m. the same business day without lunch break. | (1) For CME Globex: Sundays through Fridays CT (Chicago Time) 5:00 p.m. - 4:00 p.m. the next business day without break. (2) For CME ClearPort: Sundays through Fridays CT (Chicago Time) 5:00 p.m. - 4:15 p.m. the next business day with 45 minutes break per day. | Same as CME standard-size contract. |
| Minimum Fluctuation | CNH 0.0001 (four decimal places). | CNH 0.00005 (five decimal places) for calendar spreads. | CNH 0.0001 (four decimal places). |
| Final Settlement Day | The third Wednesday of the contract month. | The third Wednesday of the contract month. | Same as CME standard-size contract. |
| Last Trading Day | Two business days before the final settlement day. (closure time of the last trading day for the expiring contract month is HKT 11:00 a.m.) | First Hong Kong business day immediately before the final settlement day. (closure time of the last trading day for the expiring contract month is HKT 11:00 a.m.) | Same as CME standard-size contract. |
| Final Settlement Price (FSP) | Spot CNH exchange rate fixing published by HKTMA (Hong Kong Treasury Markets Association) at 11:15 a.m. on the last trading day. | Spot CNH exchange rate fixing on the last trading day through correspondent banks approved by CME Clearing. | Same as CME standard-size contract. |
| Position Limit | No more than 8K net contracts for all contract months combined, and No more than 2K open contracts for the last five trading days in current month. | No more than 1K net CME standard-size contracts for all contract months combined, and No more than 500 net CME standard-size contracts for the last week in current month. | Same as CME standard-size contract. |
| Settlement Method (Settlement Currency) | Sellers pay for the specified amount in the contract (in USD), while buyers pay for the calculated full principal amount at final settlement price (in CNH). | Sellers pay for the specified amount in the contract (in USD), while buyers pay for the calculated full principal amount at final settlement price (in CNH). | Same as CME standard-size contract. |
Between two exchange giants CME vs HKEx, who will win? No matter you think CME or SEHK product is better, we believe Hong Kong will win. It is because CNH physical delivery of CME and SEHK futures contracts will BOTH be made in H.K. This will surely reinforce HK's status as a key offshore RMB centre in the world. In particular, HKEx CNH trading platform has less capital amount requirement, thus making it more capital-effective for local SMEs (Small-and-Medium-sized Enterprises) to strategically hedge their RMB forex exposures. Hong Kong brokers normally require deposits of HKD$10K per CNH future contract.
While there are uncertainties over PRC (People's Republic of China) monetary policy as well as concerns over its economic slow-down, the previous one-way RMB appreciation trend seems to have recently come to an end, Therefore we believe that it is now just the right time for either SEHK or CME to launch such similar RMB-denominated derivative products and it is definitely a critical step for the whole process of RMB internationalization. We, Mr China, also believe that these products will make RMB more easily tradable and convertible throughout international forex markets. After all, these new RMB-denominated currency future products are strategic financial tools for investors to hedge against RMB currency trading fluctuation risks, and are therefore particularly useful for qualified foreign institutional investor (QFII) fund managers, mainland China business institutions, PRC or foreign companies currently running RMB cross-border trade settlements, and foreign institutions that engage in direct investments on PRC etc.
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