The ongoing futurisation of the foreign exchange markets

The ongoing futurisation of the foreign exchange markets

By Malcolm Baker, senior director, interest rates and FX products, CME Group 


According to the Bank for International Settlements (BIS) 2013 Triennial Report, the global foreign exchange markets are trading around US$5.3 trillion a day in notional value across spot, forwards, non-deliverable forward (NDF) options and swaps transactions. This was up from US$4 Trillion in 2010 and US$3.3 Trillion in 2007. This growth has been relentless and extraordinary in a market that had already seemed enormous. What these findings fail to describe are the fundamental undercurrents shifting the 'continental shelves' of the very foreign exchange market we participate in every day. That being said, today's FX market is still  Over-The-Counter (OTC)-driven with primary price discovery occurring across globally fragmented execution venues. But for how long?

Traditional FX market structures are evolving and today being driven largely by global regulations which are and will have definitive impact on margin treatment (Dodd Frank/EMIR), capital charges (BCBS IOSCO), operational and capital efficiencies ( Basel III), mandatory clearing (Dodd Frank/EMIR) and reporting. Each of these drivers are going to impact the way we transact our FX business every day. These structural changes should open the door for more use of standardized FX products to serve the needs of the market.

CME FX Futures is the largest regulated FX market in the world, and has long served as an viable alternative to the OTC FX markets with participants using futures as a proxy for Spot, Forward and NDF markets. In 2013 CME Group's FX Futures and Options averaged a daily trading volume of $109 Billion across their 42 currency pairs, and actually overtook the volumes at the largest Cash FX platform in 2013, with CME Group FX volumes representing 103% of ICAP's EBS platform’s volumes.

Generally speaking, the vast majority of the US$100billion average daily volume transacted in CME Group's FX futures are traded as a proxy forspot or T+2 Days. Increasingly, FX futures are being traded as a proxy for forwards, FX swap s and NDF markets with participants enjoying increased capital efficiencies, deep liquidity, transparency and anonymity all with the benefits of trading with a central counterparty -  CME Group’s Clearing House.

In the forwards space, emerging market FX futures markets have stolen a march on traditional G7 currencies with multiple currencies listing strips of FX swaps and FX outrights electronically. Emerging market FX participants seem to be more familiar with managing risk on exchanges with INR, CNH, CNY and RUB all quoted in the Central Limit Order Book (CLOB). Here, you trade against a central counterparty, and this allows participants to trade in an ‘All to All’ type market with CME Group mitigating any unnecessary bi-lateral credit risk as it is the counterparty to every transaction.  It is indeed these customer protections and investor safeguards which are helping to drive business onto exchanges


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