China Preps Yuan for World Stage

The RMB has displaced the Japanese yen to become the fourth most-used currency for global payments, according to latest statistics by SWIFT, shrugging off a surprise revaluation to rise to its highest ranking in 2015, and boosting its prerogative for reserve status.

The report comes as the International Monetary Fund (IMF) prepares to conduct a twice-a-decade review of its Special Drawing Rights (SDR) basket, which comprises the US dollar, euro, yen and the British pound. China has been actively lobbying for the yuan’s inclusion in the SDR basket, which could generate as much as US$1 trillion of inflows into the currency, according to Standard Chartered Plc.

On 8 October, China also launched the first phase of the China International Payment System (CIPS) in Shanghai to provide capital settlement and clearing services for cross-border yuan transactions for financial institutions domestically and abroad. This will help boost the RMB’s claim for reserve currency status. As China seeks to open its domestic foreign-exchange market to overseas central banks, the CIPS will make it easier for other nations to hold yuan assets.

Corporate Hedging Costs Soar after New PBoC Measures

Chinese corporates looking to hedge following last month's RMB revaluation are reportedly facing price hikes of up to 400 basis points, arising from new requirements imposed by the People’s Bank of China (PBoC) for banks to hold a deposit against foreign exchange derivative transactions.

The deposit requirements would apply to dealers for all foreign exchange forwards, options, cross-currency swaps transactions, and any other business associated with customers buying foreign exchange on a forward basis. Reserve ratios will be set at 20% of the nominal value of forwards and swap contracts, and 10% of the nominal value of principal for options.

Pre-revaluation, Chinese corporates with revenues denominated in RMB were benefiting from the falling US dollar and may have opted not to hedge,. But in light of the current environment, the same companies are now actively seeking to cover their currency exposures amidst increasing costs of hedging.

SGX USD/CNH Futures Seize Market Leadership

Trading volumes in the Singapore Exchange’s (SGX) USD/CNH futures have surged more than four-fold since its inception 12 months ago to 34,951 contracts (approximately US$3.5 billion in notional value) traded for the month of September. This growth has propelled SGX USD/CNH futures to the forefront as the most liquid offshore RMB futures product traded across various global futures exchanges.

Month-end outstanding open interest has surged to 7,387 contracts, or approximately US$739 million in notional value on 30 September.

Source: Singapore Exchange (data as of 20 October 2015)

With the sharp rise in RMB market volatility spurring increased demand for effective currency hedging tools, SGX USD/CNH futures can offer a number of unique advantages to market participants seeking to protect themselves against downside risks:

- Availability of trading liquidity across various contract expirations up to 12 months forward, supported by key market makers such as Bank of China and DBS Bank.

- Narrow bid-ask outright spreads averaging as low as 2.0 basis points for front-month contract.

- Ease of cash settlement provides greater margin efficiency for end-users and minimises settlement risk associated with physically-delivered contracts.

Source: Singapore Exchange (data as of 20 October 2015)