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Three steps to developing our fixed income and currency business

Updated: 24 May 2016
Charles Li Direct Page

HKEX’s third annual RMB FIC conference kicked off in Hong Kong today with more people attending than ever before to hear about opportunities in the FIC space. When we started the conference in 2014, it was a much different time.  China’s FIC markets were tiny, the RMB exchange rate was managed in a tight range, one-way appreciation was expected, and nobody had heard of defaults in China.  How quickly things have changed!

Since then, global interest in China’s FIC market has been growing.  The RMB FX market has been opening up, and there are expectations that its bond market – already the second largest in the world – will double or triple in size in the next 10 years.  Funding, which has traditionally relied on banks, is shifting to the capital markets, which is creating even more opportunities.  On the flip side, Chinese investors are slowly coming out to the global bond markets, which many believe will pick up steam as pension and insurance funds seek greater international diversification.  The country is also accelerating its strategy of going offshore through acquisitions, investments, and a willingness to have a stronger voice in the pricing of products.

The RMB, too, has been moving quickly.  Its inclusion in the International Monetary Fund’s Special Drawing Rights basket was an indication that it is becoming a major global reserve currency.  There is now greater tolerance in China for volatility in the RMB exchange rate, and the shift to basket pricing is a sign of a major policy shift.  Once promoted as a trade and payment currency, the RMB is now becoming an investment asset class of its own.

The RMB is currently at the early stages of being used for payment, ranking number five globally according to SWIFT.  But as its use grows, it will develop into a global reserve currency commensurate with the size of China’s economy, followed by a global pricing currency.

These are tectonic shifts, and Hong Kong is in a great position to take advantage of these changes. We can make our mark, and build Hong Kong into a comprehensive wealth management centre.

I’ve said before that for a financial centre to become truly successful, it needs to be able to price companies, goods, and money.  Hong Kong is already a leader in equities, and our 2012 acquisition of the London Metal Exchange has given us a solid footing in commodities and we are making good progress.  But our FIC business is just at the beginning stages, so we are focused on building out a comprehensive ecosystem for FIC investors.

Our plan at HKEX involves three key steps: having the right platform, the right products for investment and risk management, and cross-market connectivity.

On the platform side, we started building OTC Clear in 2013 as a key piece of our infrastructure in anticipation of future clearing by FIC market participants.   To take advantage of Hong Kong’s unique position, OTC Clear focuses on clearing services for regionally-traded products and particularly on RMB-based derivatives.  Over the last year, we have built the capability to provide clearing services for USD/CNH cross currency swaps, which has generated significant interest in the market and is expected to launch shortly, pending regulatory approval.  Going forward, we will further expand OTC Clear’s offering to cover clearing for wider types of RMB-based FX products.

On the product side, we launched our USD/CNH Currency Futures contract in 2012, which has seen turnover take off since last year and is now the most actively traded RMB futures contract in the world.  We are now moving to diversify our product offerings by launching new CNH currency pairs against the Japanese yen, Euro, and Australian dollar, which will begin trading on 30 May to facilitate cross-currency hedging.

There is also tremendous potential for an RMB Currency Index benchmark as the RMB becomes a reserve currency and the market focuses on the relationship between the RMB and global currencies.  That’s why at the conference today, we announced the first tradable RMB index with Thomson Reuters, establishing a market benchmark tracking the RMB against a basket of world currencies.  The China Foreign Exchange Trade System, an arm of the People’s Bank of China, introduced the CFETS RMB Index last December indicating the RMB will be measured against a basket of trading partners’ currencies rather than just the greenback alone.  Our new index will allow market participants to conveniently monitor the RMB’s movements.  We also plan to introduce futures and options on the index in the future to provide the market with effective risk management tools.  A US dollar basket currency index has fulfilled this role for the US dollar since 1973, attracting deep liquidity.  We believe the same potential exists for the RMB.

24 May 2016_RMBFIC

Over time, we plan to launch a full suite of different RMB products, including RMB-USD dual-counter gold futures later this year.  The contracts will give gold producers, users and investors a complete solution to manage risks arising from the gaps between the gold spot and futures markets, as well as the difference between the RMB and USD.

On the connectivity side, we are exploring ways to make bond market access more efficient.  Our experience with Shanghai-Hong Kong Stock Connect puts us in a good position to try and find cross-border solutions that work for both sides.  At the appropriate time we will develop bond index futures and credit default swap products derived from the bond market.

Implementing these three steps will build Hong Kong’s FIC space into a mature, comprehensive market that can serve as an offshore wealth management centre for Mainland investors, an offshore pricing centre for the RMB and global asset classes for China, and a comprehensive risk management centre for Mainland investors.

We are still at the beginning of a long road.  The FIC market in Hong Kong is small, but has tremendous growth potential.  We see that potential at HKEX, and so do the 800 people who turned up today for the RMB FIC Conference.  But while the future is bright, we need to be nimble and act quickly to take advantage of our opportunities.  I’m confident that over time, we’ll develop Hong Kong into a major wealth management centre that serves the needs of both Mainland and international FIC investors.


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