Deutsche Börse to set up Europe's first multi-asset RMB platform

Frankfurt has strengthened its position as a major renminbi trading hub with a joint-venture deal between Deutsche Börse and its Chinese counterparts, the China Financial Futures Exchange (CFFEX) and Shanghai Stock Exchange (SSE), that will base a multi-asset platform in the German financial capital.

On March 17, the governments of China and Germany published a series of action points as the culmination of a yearlong process of economic dialogue. This included a joint effort to develop an offshore RMB centre, and outlined "support" for co-operation between the two country's exchanges.

"China and Germany encourage financial institutions in both countries to strengthen communication and deepen co-operation. Both sides support the Shanghai Stock Exchange, China Financial Futures Exchange and the Deutsche Börse Group's plan to co-establish a RMB offshore platform to trade financial instruments in Frankfurt," the communiqué stated.

No further details were disclosed in March, but a source close to the matter says the platform is likely to focus initially on renminbi bonds issued in Europe before expanding to include cash equities and, ultimately, derivatives products.

"They aim to develop the platform into the trading centre of renminbi bonds in Europe and hope it will further fuel bond issuance in the region," says the source.

It will greatly improve the circulation of the currency within the eurozone

Deutsche Börse, SSE and CFFEX will form a joint venture in Frankfurt to back up the trading platform. Market sources indicate the German firm will have a 40% stake in the resulting entity, leaving the two Chinese exchanges with a joint majority share.

Bonds first, then cash equity

"The platform will follow a path of launching bonds first, followed by cash equity products and then derivatives. So you can expect some equity exchange-traded funds and hedging instruments to be listed as well," says the source.

Treasury bond futures and CSI 300 index futures that currently trade on CFFEX in China are also potential inclusions.

All participants emphasise the early stages of this process, but one potential long-term casualty could be the $270 billion renminbi qualified foreign institutional investor (RQFII) sector. Introduced in 2011, the scheme provides RMB-denominated offshore investors with access to listed mainland companies.

RQFII already faces threats from Shanghai-Hong Kong Stock Connect and the broader policy of Chinese capital account liberalisation, and the source says a global RMB trading platform based in Frankfurt could add to this.

"In the future, RQFII holders may not necessarily trade renminbi securities in China's domestic market. They may simply buy and sell China assets on the platform in Frankfurt. It will greatly improve the circulation of the currency within the eurozone," says the source.

While China has established multiple renminbi-clearing and swaps agreements with London, Frankfurt, Paris and Luxembourg over the past two years, its decision to establish this platform in Germany may give that country a major boost in becoming Europe's renminbi hub, says an Asian exchange expert.

"It will be the first and only trading platform in Europe. There will not be another one in other European countries. To facilitate its operation, a comprehensive clearing and settlement mechanism will further be developed," the expert says.

Significant economic relations

Germany and China already have a significant economic relationship.

According to the Ministry of Commerce of the People's Republic of China, Germany is its biggest European trading partner. Payments provider Swift reports that by the end of 2014 the European state was settling 15% of its trades in yuan.

German firms such as Siemens have deep roots in China, having adopted the renminbi for cross-border payments and settlements since 2013, while an increasing number of small and medium-sized German enterprises are switching to RMB payment.

SSE, CFFEX and Deutsche Börse Group are expected to formally announce the programme in June, but all three declined to comment.

The bilateral discussions also leave room for regulators and policy-makers in China and Germany to work more closely in future.

"Both sides agree to strengthen cross-border supervisory and oversight co-operation on futures and over-the-counter derivatives market infrastructure, cross-border payment services... and launch joint analyses in payment and financial market infrastructure. Both sides are willing to conduct joint analyses on topics such as the development and opening up of the securities market," the communiqué stated.