Yesterday, CME Group Inc . ( CME ) announced the acceptance of the Chinese currency used for offshore trading - offshore yuan or CNH - as collateral for clearing futures products in China. The company has put a ceiling on initial amount of acceptance of the CNH as collateral at $100 million. CME shall begin clearing futures in offshore markets against CNH from January 2012.
Accordingly, CME has also chosen HSBC Hong Kong of HSBC Holding plc ( HBC ) to be its first clearing custodian in the East. Both the parties have teamed to hold the CNH collateral deposits from CME clients in HSBC Hong Kong. This is an effort to penetrate into the Asian derivative markets, thereby diversifying its business portfolio.
Last week, China Daily had also reported negotiations between China's securities regulators and CME, so that the latter can extend its derivative platform in China by creating a client profile with some of the companies in the region.
These discussions have been culminated into the allowance of CNH and penetration into the Chinese derivative market through offshore futures trading, which was shelved by China for the past 17 years. However, since June this year, the Chinese regulators have liberalized the offshore yuan market.
This market is swelling rapidly to represent about 10% of all deposits in Hong Kong banks against less than 1% in January 2010, thereby reflecting ample growth opportunity.
While expanding into China, CME had also launched dollar-yuan futures in August this year, along with a micro-version of the yuan futures to expand its customer base. Such efforts further enable CME to take a step ahead toward its long-term goal of international expansion. Currently, international business volumes account for about 22% of CME's total business volumes, while the rest comes from North America itself.
However, the company aims to expand its business globally through its product sales rather than mergers and acquisitions. Hence, the company has also allied with HSBC Asia in an effort to initiate offshore futures trading in the region, expecting to add more assets types and currencies to the portfolio in going forward.
Amid regulatory challenges, we believe such attempts to promote, expand and cross-sell its core exchange-traded business through strategic alliances, newer product initiatives along with its global presence, which are expected to boost CME's diverse derivative-product line in the long run.
Hence, CME currently has a Zacks #3Rank #3, implying a short-term Hold rating and a long-term Neutral recommendation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.