AN INTRODUCTION TO HKEX USD/CNH FUTURES

Octoberr 2016

For Interactive Brokers Webinar Only

FIC Product Development HKEX

HKEX USD/CNH FUTURES

MARKET OVERVIEW

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HKEX USD/CNH Futures – Leading Market Share World‘s most active CNH futures market with the largest trading volume and open interest Competitive spreads throughout all 8 contract months, especially long-dated Diverse participations from different users, including hedgers and professional investors in the region 8 Market Makers include BOC, HSBC, ICBC, DBS, BAML, Bank Sinopac, Virtu Financial and Haitong

Source: HKEX, SGX, Taifex and CME’s websites Note: W1= 1st week in 2016 YTD: year to date as of 30 Jun 2016

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Open Interest (2016 YTD)HKEX SGX Taifex CME

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Open Interest (2016 YTD)

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HKEX’s USD/CNH Futures: World’s Most Liquid

Market Makers

32%

Non Market Makers

68%

HKEX USD/CNH Futures: World’s Most Liquid

US$29mn US$57mn

US$83mn US$106mn

US$219mn

2012 2013 2014 2015 2016 H1

Source: HKEX, as of 30 Jun 2016

Average Daily Volume (Notional value)

2016 YOY 2x+

Source: HKEX, as of 31 Dec 2015

Market Player Breakdown

Turnover of US$771mn on 11 Feb, 2nd All-Time High

AHFT All-Time Record (US$200mn) on 3 Jun16

Open Interest record of US$3.2bn on 5 Feb

3 Straight Months of New ADV Record – Dec15, Jan16 & Feb16

2016 Records

AHFT: After Hour Futures Trading

Onshore Retails Offshore Retails

Prop Trading Firms FI Prop Desks

SMEs Corporate Treasury Import/ Export Corps

Hedge Funds QDII Mutual Funds Asset Managers

Large Corporate

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HKEX USD/CNH Futures: Market Player Analysis

Major Players in the Market

8 Market Makers

Active Traders

Mainland Brokers

International Brokers

Growing Market Segments

Mainland Corporates

Banks

Experienced/Sophisticated Individuals (HK & Mainland)

Proprietary Trading Firms

4Q 2012

2015

Market Makers

62%

Non Market Makers

38%

Market Makers

32% Non Market Makers

68%

Market makers vs. Non-market makers (in terms of contract volume)

5 Source: HKEX

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Introduction: What is a Currency Futures Contract?

At Initiation RMB6.4500

3 Months Later At Maturity

RMB6.4500

USD1

Today

Buyers & sellers agree to trade an asset at a future date, for a price agreed today

Principal Exchange No Principal Exchange

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Introduction of HKEX USD/CNH Futures: Capital Efficiency

Min. Fluctuation 0.0001 (1 pip)

RMB10 (0.0001 x 100,000)

Initial Margin *

RMB17,010

About

40xLeverage

Contract Size USD100,000

(~RMB660,000)

* Margin rate as of 1 August 2016 Trading futures involves the risk of loss. Please refer to the disclaimer for the Risks of Trading Futures.

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Introduction of HKEX USD/CNH Futures: Forward vs. Futures Contract

HKEX Futures OTC Forward

Risk management tool

Physical settlement

No credit limit required from banks

Central matching

Central counterparty clearing

Standardised contract

Better than general retail rate ?

Ease of trading ?

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Key Contract Features of HKEX USD/CNH Futures

Bid-Ask Prices

Bank of China (HK) Bank Sinopac Virtu HSBC BAML ICBC DBS Haitong International

Block Trade Bid-Ask Prices

Provide Prices

Market Makers are obliged to provide two-way prices on screen

List of Market Makers (8)

Key Terms Contract Size: US$ 100,000 per contract Quotation: RMB per USD (e.g. RMB 6.6255 per USD) Contract Month(8): Spot month, next 3 calendar months, next 4 quarter months Last Trading Day: Usually third Monday Final Settlement: Principal exchange on third Wednesday

• Price and execution certainty for size over US$5mil • Privately negotiated • Reduction of counter-party risk

10 10

USD/CNH Futures

Contract Size US100,000

Price Quotation RMB per USD (e.g. 6.6255) Tick Value RMB 10.00 Settlement Methodology

Delivery of US dollars by the Seller and payment of the Final Settlement Value in RMB by the Buyer

Contract Months 8 contract months (Spot, next 3 calendar months and next 4 calendar quarter months) Final Settlement Price TMA CNH Spot Rate at 11:30am Min. Fluctuation RMB 0.0001 (4 decimal places)

Trading Hours 9:00am to 4:30pm (T session) and 5:15pm to 11:45pm (T+1 session), Hong Kong Time

(Expiring contract month closes at 11:00 am on the Last Trading Day)

Final Settlement Day The third Wednesday of the Contract Month

Last Trading Day Two Hong Kong Business Days prior to the third Wednesday of the Contract Month

Holiday Schedule According to Hong Kong holiday schedule

Information Vendor Codes

Bloomberg: UCAA CRNCY CT <GO>

Thomson Reuters: 0#HCUS:

Initial Margin RMB 17,010 (as of 1 Aug 2016)

Exchange Fee RMB 8.00

Block Threshold 50 contracts (US$5m)

HKEX USD/CNH Futures Contract Specification

HKEX USD/CNH FUTURES

OPERATIONAL DETAILS

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LTD Final Settlement Day

After 14:30

LTD + 1 By 09:15 By 09:15

LTD - 1 By 09:15

Buy 1 spot month contract, @ RMB 6.3011

Day

-end

Pro

cess

ing

Afte

r 18:

45

CQ :

RMB 6.3010

VA loss : 6.3010 - 6.3011

- 0.0001 X 100,000* = - RMB 10

Assume Margin Requirement# :

- RMB 20,412

Final Settlement Price: RMB 6.3000

Underlying Price @ market close :

RMB 6.2980

VA loss: 6.3000 - 6.3010

- 0.0010 X 100,000* = - RMB100

Delivery P/L Margin (DR): 6.2980 - 6.3000

- 0.0020 X100,000*

= - RMB 200^

RMB payment obligations Net shortfall Final Settlement Value 630,000 Margin release – 20,412 Delivery P/L margin release – 200^

RMB 609,388

Clearing House Collects RMB 20,422 (RMB 10 + RMB 20,412)

Clearing House Collects RMB 300 (RMB 100 + RMB 200^)

Clearing House Collects RMB 609,388

Upon receipt of withdrawal request from Participant, Clearing House releases the USD delivery of USD 100,000 to Participant’s bank account

Set C

Q

~18:

00

Tra

ding

Hou

rs

(09:

00 –

16:

30)

~11:15

CQ – Closing Quotation LTD – Last Trading Day VA – Variation Adjustment

* Contract size = USD 100,000 # Margin rate (RMB17,010) as of 1 Aug 2016, with spot month charge (20% of full rate) included, if applicable ^ Losses arising from the Delivery P/L margin will be added to and collected as Clearing House margin payable The indicated time is referred to as Hong Kong time

USD delivery USD100,000

Final Settlement Process for Buyer (for illustration purpose only)

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Final Settlement Process for Seller (for illustration purpose only)

LTD Final Settlement Day

After 14:30

LTD + 1 By 09:15

LTD - 1 By 09:15

Sell 1 spot month contract,

@ RMB 6.3011

Day

-end

Pro

cess

ing

Afte

r 18:

45

CQ :

RMB 6.3010

VA gain : 6.3011 - 6.3010 0.0001

X 100,000* = + RMB 10

Assume Margin Requirement# :

- RMB 20,412

Final Settlement Price: RMB 6.3000

Underlying Price @ market close :

RMB 6.2980

VA gain: 6.3010 - 6.3000 0.0010

X 100,000*

= + RMB 100

Delivery P/L Margin (CR): 6.3000

- 6.2980 0.0020

X100,000* = + RMB 200^

RMB receivable Final Settlement Value 630,000 Margin release + 20,412^ RMB 650,412

Clearing House Collects RMB 20,402 ( - RMB10 + RMB 20,412)

Clearing House Collects USD 100,000

Upon receipt of withdrawal request from Participant, Clearing House releases the RMB payment of RMB 650,412 to Participant’s bank account

Set C

Q

~18:

00

Tra

ding

Hou

rs

(09:

00 –

16:

30)

~11:15

CQ – Closing Quotation LTD – Last Trading Day VA – Variation Adjustment

USD delivery obligation USD100,000

After 14:30 Upon receipt of withdrawal request from Participant, Clearing House releases the VA gain and Margin (Cr) , i.e. RMB 300 (RMB 100 + RMB 200^) to Participant’s bank account

* Contract size = USD 100,000 # Margin rate (RMB17,010) as of 1 Aug 2016, with spot month charge (20% of full rate) included, if applicable ^ Profits arising from the Delivery P/L margin will be offset against Clearing House margin payable The indicated time is referred to as Hong Kong time

HKEX USD/CNH FUTURES PRODUCT APPLICATIONS

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USD/CNH Futures Jun-2016 Contract (After-Hours Session on 3 June)

6.5300

6.5400

6.5500

6.5600

6.5700

6.5800

6.5900

6.6000

6.6100

17:00:00 18:25:00 19:20:00 20:15:00 21:05:00 21:55:00 22:45:00 23:35:00

美元兌人民幣 期貨價格 美元兌人民幣 即期匯率

Trading Application – HKEX USD/CNH Futures

Source: HKEX, Bloomberg

3 June 2016 Total Profit RMB228,500

The US Non-Farm Payroll in May 2016 was far lower than expected, triggering market volatility

3 June 22:45 @6.5487 Close position Futures price fell by 0.0457 (Tick value: RMB 10) Profit RMB228,500

3 June 20:25@6.5944 Sell 50 contracts

The hypothetical case study is for illustration only and does not include transaction costs. If USD/CNH exchange rate moves to the opposite direction, investors could suffer losses.

USD/CNH Futures Price USD/CNH Spot Rate

Hong Kong time

16

Hedging Application Protection against RMB appreciation

The hypothetical case study is for illustration only and does not include transaction costs. If USD/CNH exchange rate moves to the opposite direction, the corporate could suffer losses.

RMB0.22m profit on USD/CNH futures covers RMB0.22m loss due to RMB appreciation

A Mainland Chinese company purchases overseas USD-denominated commodities and anticipates RMB to appreciate against USD in the next few months.

The company coverts RMB6.5m to USD1m (@6.5) and purchases commodities overseas

The company sells 10 USD/CNH futures contracts @6.5230

1. The company sells the commodities overseas and receives USD1.1m;

2. RMB appreciates 3% against USD to 6.3 3. The company converts USD1.1m to RMB6.93m and

makes a RMB0.43m profit (less than the RMB0.65m had the exchange rate remained unchanged @6.5)

The company closes its USD/CNH futures position @6.3030 and makes a RMB0.22m profit.

Now

Strategy

Later

HKEX EUR/CNH, JPY/CNH, AUD/CNH AND CNH/USD FUTURES

CONTRACT DETAILS

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18

EUR/CNH Futures

JPY/CNH Futures

AUD/CNH Futures

CNH/USD Futures

Contract Size

EUR50K JPY6,000K AUD80K RMB300K

Price Quotation

RMB per EUR (e.g. 6.8028)

RMB per 100 JPY (e.g. 5.5923)

RMB per AUD (e.g. 4.6942)

USD per 10 RMB (e.g. 1.5288)

Tick Value RMB5 RMB6 RMB8 USD3

Settlement Cash settled in RMB Cash settled in USD

Contract Months

4 contract months (Spot month, next month and first two calendar quarter months)

8 contract months

Reference Benchmark

A cross rate calculated from WM/Reuters Intraday Spot Rates at 11:00am and TMA USDCNY(HK) Spot Rate at 11:30am

TMA USDCNY(HK) Spot Rate at 11:30am

Minimum Fluctuation

RMB 0.0001 (4 decimal places) USD 0.0001

Trading Hours

9:00am to 4:30pm (T session) and 5:15pm to 11:45pm (AHFT session), Hong Kong time

Last Trading Day

Two Hong Kong Business Days prior to the third Wednesday of the Contract Month

AUD/CNH Australia emerged as one of China’s largest

trade partners in commodities

AUD offers diversification benefits through its strong link with commodity prices

EUR/CNH EU largest trade partner to China; China

2nd largest trade partner to EU Divergence between fiscal / monetary policy

of US & Europe. Risk management against ECB policies

JPY/CNH World’s 3rd most traded currency Pair trading on precious metals Risk management against BOJ policies

CNH/USD (i.e. inverse style)

Margining & settlement in USD Cash settlement reduces operational burden Smaller notional for retail participation Trading opportunities with existing

USD/CNH futures

New CNH Futures – Launched on 30 May 2016

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New CNH Futures – Launched on 30 May 2016

Cost Saving • No Levy for All Currency Futures

• No Exchange Fee for the First 6 Months

Price Transparency

• Real-time prices available on HKEX website and other popular information vendors

Block Trade • Liquidity Providers to Facilitate Large Size Quotation

(Min. Size: c.US$2.5million)

• No Bilateral Credit Line Required

Leverage • Margin basis; Around 2-4% of notional amount

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How To Use Additional RMB Currency Futures

Add Value to Multi-

Currency Portfolios

Correlation / Covariance

Play between RMB Pairs

Pair Trading and Commodity Plays

(e.g. AUD)

Capture Policy Changes (ECB/BOJ)

& Macro News Release

Hedge for Own Treasury Inventory

(e.g. EUR, JPY, AUD)

OTHER FIC INITIATIVES

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FX Product Roadmap

Cash settled, notional ~US$50,000 1) EUR/CNH 2) JPY/CNH 3) AUD/CNH 4) CNH/USD

30 May 2016 September/October 2016

CNH Currency Index Futures

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Phase I – Launched Phase II – Subject to SFC Approval

2012

Physically settled, notional US$100,000

USD/CNH Currency Futures – Launched

Additional RMB Currency Futures

RMB Currency Options

First RMB Currency Futures

23

Currency Products

RMB Currency Products

Currency Futures

Currency Options *

Currency Index *

Currency Index

Futures*

USD/CNH (Physically settled)

CNH/USD, EUR/CNH, AUD/CNH, JPY/CNH (Cash settled)

More new pairs to come

USD/CNH (Physically settled)

EUR/CNH, JPY/CNH, AUD/CNH (Cash settled)

TR/HKEX RXY indices

Launched

To be launched

* Subject to SFC approval

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DISCLAIMER TMA’s Spot USD/CNY(HK) Fixing https://www.tma.org.hk/en_market_info.aspx The Fixing which serves as the benchmark for market exchange rate of USD against CNY(HK) at 11:00 a.m. Hong Kong time is determined by averaging the middle quotes after excluding the highest two quotes and lowest two quotes from the 18 Contributing Banks. The Spot USD/CNY(HK) Fixing is published at around 11:15 a.m. Hong Kong time each business day (excluding Saturdays). Thomson Reuters is the calculating agent for the fixing. Thomson Reuters RICs <CNHFIX=>; Thomson Reuters pages <CNHFIX>. The following disclaimers and copyright notice regarding information provided on the Treasury Markets Association's website: a. The price fixings and reference rates in this website are provided with delays for general information purposes. While the Treasury Markets Association (TMA) will make all reasonable efforts to ensure a continuous, accurate and timely service, the TMA and other data providers make no warranties, representations or undertakings, expressed or implied by law or otherwise, in relation to the price fixings and reference rates and are not responsible for any errors or omissions, or losses caused by disruptions in the service or late publication of the daily rates or inaccuracy of the daily rates or otherwise arising from the use of or reliance on the price fixings and reference rates. By viewing or downloading these rates, you implicitly accept this disclaimer and agree to its terms. b. TMA shall not be liable for any loss or damage suffered as a result of any use or reliance on any of the information provided on its website. c. The content available on this website, including but not limited to all text, graphics, drawings, diagrams, photographs and compilation of data or other materials, are protected by copyright. TMA is the owner of all copyright works contained in this website. The information or part of it may be re-disseminated or reproduced provided the source of the information is acknowledged. WM/Reuters Intraday Spot Rates The WM/Reuters Intraday Spot Rates are provided by The World Markets Company plc (“WM”) in conjunction with Reuters. WM shall not be liable for any errors in or delays in providing or making available the data contained within this service or for any actions taken in reliance on the same, except to the extent that the same is directly caused by its or its employees’ negligence Risks of Trading Futures Futures involve a high degree of risk. Losses from futures trading can exceed your initial margin funds and you may be required to pay additional margin funds on short notice. Failure to do so may result in your position being liquidated and you being liable for any resulting deficit. You must therefore understand the risks of trading in futures and should assess whether they are right for you. You are encouraged to consult a broker or financial advisers on your suitability for futures trading in light of your financial positions and investment objectives before trading. The information contained in this document is for general informational purposes only and does not constitute an offer, solicitation, invitation or recommendation to buy or sell any futures contracts or other products or to provide any investment advice or service of any kind. This document is not intended for distribution to or use by individual investors. This document is not directed at, and is not intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Hong Kong Exchanges and Clearing Limited (“HKEX”), Hong Kong Futures Exchange Limited (“HKFE”) (together, the “Entities”, each an “Entity”), or any of their affiliates, or any of the companies that they operate, to any registration requirement within such jurisdiction or country. No section or clause in this document may be regarded as creating any obligation on the part of any of the Entities. Rights and obligations with regard to the trading, clearing and settlement of any futures contracts effected on HKFE shall depend solely on the applicable rules of HKFE and the relevant clearing house, as well as the applicable laws, rules and regulations of Hong Kong. Although the information contained in this document is obtained or compiled from sources believed to be reliable, neither of the Entities guarantees the accuracy, validity, timeliness or completeness of the information or data for any particular purpose, and the Entities and the companies that they operate shall not accept any responsibility for, or be liable for, errors, omissions or other inaccuracies in the information or for the consequences thereof. The information set out in this document is provided on an “as is” and “as available” basis and may be amended or changed. It is not a substitute for professional advice which takes account of your specific circumstances and nothing in this document constitutes legal advice. Neither of the Entities shall be responsible or liable for any loss or damage, directly or indirectly, arising from the use of or reliance upon any information provided in this document.