Dubai's eastward-looking currency exchange drives derivatives trading growth

The Dubai Gold and Commodities Exchange (DGCX) has seen strong expansion of forex trading activities in recent years, driven by growth in Indian rupee futures and a successful diversification strategy. In a bid to capture a larger share of global forex trade, the exchange launched several new products in 2014, including diversified rupee instruments and new emerging market currency futures. Plans are also underway to introduce Chinese renminbi – or yuan – futures, following the launch of a renminbi futures contract, rolled out with a plastics contract in 2014. Although the renminbi has yet to gain the same foothold as the rupee, demand for Chinese investment products and financial services, coupled with rapidly expanding trade ties, should see renminbi trading expand significantly.

DGCX

Majority-owned by the Dubai Multi Commodities Centre, an initiative of the Dubai government that has a mandate to boost commodity trade flows by providing infrastructure and services, the DGCX was established in 2005 as the first commodity derivatives exchange in the region and has since grown to become the leading derivatives exchange in the Middle East. Its rapid expansion has been driven in large part by currency futures trading. In 2013 the exchange’s annual trade volume expanded 43% year-on-year (y-o-y) to $448.25bn, with some 13.76m contracts – the most ever. Currency continued to lead growth, up 48% to reach 13.18m contracts. Growth slowed somewhat during in 2014; however, with 11.8m contracts worth over $350bn during the year. Currency futures trades remained dominant, with 10.98m contracts valued at $320bn.

DGCX’s success has prompted authorities to roll out new currency futures in recent years. In December 2014 three new emerging markets currency futures were launched: the South African rand, the Russian rouble and the Korean won, which together brought the number of derivatives products in DGCX’s currency portfolio to 14, and currencies to 11.

Rupee Growth

Product diversification has also extended to existing currencies, most notably, Indian rupee futures. DGCX launched the world’s first rupee futures contract in 2007 and introduced cash-settled rupee trading in 2008. In the years since, rupee offshore futures contracts have gained widespread market acceptance, with average daily turnover of more than $2bn in 2013 (though this was down to $1.4bn-1.5bn in January 2015) and net open positions in excess of $1bn, making DGCX the world’s largest offshore rupee futures liquidity pool and the only exchange outside India to offer rupee trading of futures and options.

One of the worst-performing currencies in 2013, the rupee lost 27% of its value between June and August 2013, before making a moderate recovery in the last half of the year. Government measures to halt the slide, including restrictions on forex trading licences and gold imports, led some Indian traders to move to the DGCX. Rupee futures trade volume was up 36% y-o-y in 2013 to reach 11.78m contracts, or 89.4% of the DGCX total.

To capitalise on this, the DGCX has been actively pursuing product diversification in rupee trading, expanding its user base and capturing global market share. In October 2014 it launched two new pairs of non-dollar mini-rupee crosses, denominated in euros and British pounds and priced at INR400,000 ($6560) per lot, compared to INR2m ($32,800) for a standard rupee futures contract. They are expected to encourage retail participants, individual investors, and small and medium-sized enterprises to participate, as well as present new opportunities for arbitrag e. In the same month, the exchange also listed two MSCI India Index futures contracts, representing 67 locally listed entities in India, and covering approximately 85% of its equity market.

The diversification strategy has paid off: mini-rupee futures trading increased by 69% y-o-y in December 2014, and the exchange announced its global rupee futures market share increased by 5.22% y-o-y to 34.35%.

Tiger Currency

DGCX could soon see a repeat of this success through the introduction of renminbi futures, with China’s efforts to internationalise its currency – a government priority since 2009 – expected to significantly impact Dubai’s forex market. The emirate is an ideal market for offshore renminbi trade – a position bolstered by growing trade ties with China, with bilateral trade reaching $46bn in 2013 and projected to increase by another 30% by end-2014. Although the UAE’s Chinese population is much smaller than its Indian population, the nation is home to 300,000 Chinese expats and an estimated 5000 Chinese businesses, with another 150,000 Chinese visitors per year, according to the Commercial Bank of Dubai (CBD).

Banks have been trying to capitalise on growing bilateral trade. In October 2010, Standard Chartered Bank opened a yuan account for retailer Rivoli – the first such corporate account to be opened by a foreign bank in the Middle East, and in December 2012 the CBD launched the Chinese banking platform, TianLong. Emirates NBD became the first local bank to introduce renminbi accounts for private individuals in February 2013, and in September 2014, the Agricultural Bank of China, China’s third-largest bank, launched a RMB1bn ($163m) bond on NASDAQ Dubai, the first such listing by a Chinese issuer in the region. In January 2015, The National reported that banks in the UAE forecast 40% demand growth for yuan accounts in the coming years, with the UAE already using yuan for over 25% of direct payments to Hong Kong and China.

Renminbi Trading

With the yuan having overtaken the euro as the second-most-used currency in global trade finance in 2013, the DGCX is preparing to launch renminbi futures in the second half of 2015. The writing has been on the wall for a while: in January 2012, China and the UAE signed a currency swap agreement worth RMB35bn ($5.54bn), one of several in recent years, and in January 2013 Norman Chan, CEO of the Hong Kong Monetary Authority, told media Dubai is poised to become an offshore renminbi trading hub.

This gathered pace in July 2013, when the DGCX announced plans to offer futures contracts for polypropylene and the renminbi. Although the former is dollar-denominated, it traded alongside a renminbi futures contract, allowing traders to hedge currency exposure. In December 2014 the DGCX further set the stage, signing a memorandum of understanding with the China Financial Futures Exchange to collaborate on areas including new product development, while also announcing that Nanhua Futures Hong Kong, a subsidiary of China’s leading overseas futures company, had been approved as a broker member.

Renminbi trading still faces several obstacles. Negotiations for a China-UAE free trade agreement, which would significantly increase financial ties, are still under way, and the fact that all Gulf currencies except for the Kuwaiti dinar are pegged to the dollar makes it a more popular choice for many businesses. Nonetheless, with companies and individuals increasingly choosing to make yuan payments, and bilateral trade ties expected to soar in the coming year, renminbi futures should help the DGCX continue its upwards trajectory in 2015.