Commerzbank has partnered with the Bank of China International (Boci) to launch the Commerzbank - Shanghai Stock Exchange 50 A Share Index Ucits ETF and with China Construction Bank International for the cross listing of the Commerz CCBI RQFII Money Market Ucits ETF.
Both exchange-traded funds (ETFs) have been listed on the China Europe International Exchange (Ceinex), the new joint venture between Shanghai Stock Exchange (SSE), Deutsche Börse and China Financial Futures Exchange (CFFEX), which was launched on November 18 in Frankfurt, which kick-stared the trading of renminbi-denominated exchange traded funds (ETFs) and bonds.
The German bank is looking to leverage its expertise as a leading provider of listed products in Europe and a leading ETF market maker in Europe and Hong Kong, by providing access to onshore renminbi (RMB) investments, as well as its equity derivatives and structuring capabilities to bring new products to market via the new exchange. The internationalisation of RMB continues to gain momentum despite the limited options for onshore RMB investments outside of China, according to Peter Corner (pictured), global head of structuring, equity markets & commodities at Commerz.
"Commerzbank's mutual fund and ETF platform can work with structured products in the sense that we are able to use our structured products capability to work as a highly competent counterparty to the structuring capabilities of the investment bank to bring products to market via the fund platform," said Corner. "Our profile as an asset manager is primarily niche-based and combines traditional asset management services and products with very deep structured products and capital markets capabilities."
One of the main products on Commerz's fund platform is structured funds with capital protection, according to Corner. "We have a competitive offering because of our understanding of how to write bespoke options and trade that with the exotic options desk of a counterparty in the structured products market," said Corner. "An example of [this] is what we call 'cruise control', [which] enables us to provide a large universe of ETFs from, say, 10 sector and rebalances them periodically to maintain a targeted portfolio allocation, at a frequency established by the client, but also provide a high watermark 'guarantee'."
The A share index Ucits ETF is now available to institutional and retail investors in Luxembourg and Germany, while the money market Ucits ETF is now available to investors in the UK, Germany, France and Luxembourg. This ETF was first launched on the London Stock Exchange (LSE) on March 25, 2015.
"The money market Ucits ETF is a fixed-income ETF where CBBI provides the local Chinese knowledge with its RQFII quota to be able to place onshore bonds into the portfolio, and we provide the European governance and oversight, including Ucits and Esma guidelines," said Corner. "This approach generates trust among investors, as the products provide transparency, liquidity and governance - and these are the very qualities investors are looking for in the Chinese market. Investors who don't know this market can get that exposure through an ETF which can be sold back in the secondary market (if they have any uncertainty). For us, these qualities are the way to open up access to China."
For the second ETF, Commerz teamed up with Boci and Prudential Asset Management to provide a strategy tracking the Shanghai Stock Exchange 50 Index. "By using their expertise and tracking methodology, they can replicate the index in a very accurate way," said Corner. "This is the first time the SSE 50 index has been deployed in Europe in renmimbi, and we think this index offers a better exposure to China than other existing indices, as the SSE 50 includes the 50 most representative stocks in the securities market in Shanghai through an objective and scientific methodology that provides the complete picture around good quality and larger enterprises that are most influential in the SSE 50. This is different to the others which offer exposure to the largest 50 A Shares."
Any ETFs launched will continue to be sold as standalone as well as underlyings of structured products, which shows "how complimentary these two sets of products are", said Corner. "Another example of how we leverage our capital markets expertise within our fund offering is that, in our range of ETFs, we have swap-based ETFs, which allows us to offer very accurate correlation with the index, so that our basis tracking is exceptionally strong and this makes holding our ETFs efficient for investors in different jurisdictions," said Corner. "In some jurisdictions, investors hold ETFs directly and they have a look through from the fund's perspective into the underlying and that becomes very complex when you have a range of equity underlyings, so investors prefer to hold swap-based ETFs."
The global market initiative by the Chinese government to promote the renmimbi as a global currency has opened up opportunities for European investors. "As a product provider, we want to participate in this segment, and we see this kind of partnership as a credible way to build a quality product offering for European investors," said Corner. "There will be more products from Commerzbank offering access to China, either in ETF or structured products format. At the moment, the focus is on providing liquid access and governance combined with local knowledge which is what European investors are looking for; this is better achieved via ETFs under the Ucits guidelines."
However, the China market will also open up opportunities for product development in structured products once there is confidence and liquidity around the underlyings, "which is what we are doing with the ETF offering", said Corner. "Here, we are also deploying our market making as a twin part of our strategy," he said. "We are providing peace of mind around meeting all the technical challenges of the fund, which are difficult and not every asset manager can provide that."
There are 25 ETFs/ETPs in Europe providing exposure to China with assets of US$3bn, according to Deborah Fuhr, managing partner at ETFGI. "Many Chinese asset managers are forming partnerships to offer ETFs listed in Europe and in the US that provide exposure to mainland China," said Fuhr.
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