CME FX Futures Calendar Spreads: Hedge OTC FX swap exposure using a capital-efficient alternative

Client

Bank OTC FX swap traders

Challenge

Traders need alternative pricing because they are at/near bilateral credit line limits and know that the aggregate swap exposure could trigger SA-CCR and UMR-related charges.

Solution

Substitute select forward-starting swaps with FX futures calendar spreads to free up credit lines and add the capital efficiencies of clearing.

Overview

In the current regulatory environment, Standardized Approach for Counterparty Credit Risk (SA-CCR) and Uncleared Margin Rules (UMR) can present significant challenges for bank FX swap traders. Directional OTC buy-side hedges vs. banks are attracting potentially significantly higher capital charges and tying up bilateral credit lines, which in turn can influence the quality of pricing bank traders are receiving.

For forward-starting FX swaps, one solution is to use CME FX futures calendar spreads – month to month, or month to quarter. FX futures calendar spreads are economically equivalent to a forward-starting FX swap, offering a cleared, capital-efficient proxy for your exposures. For spot-IMM FX swaps for the first four IMM dates, a trader could use CME FX Link.

Why use FX futures calendar spreads?

Access a complementary pool of FX liquidity

Economically equivalent to FX swaps
23-hour access to firm/no last-look liquidity that averages $80 billion per day
Trade OTC-style and seamlessly transition swap exposures to cleared futures using bilateral negotiation mechanisms (Blocks and EFRPs)
Trade all-to-all with a diverse customer base

Minimize costs, gain efficiencies

Trade passively by posting bids/offers or trade aggressively by taking the pricing shown in the market
Credit is separate from futures liquidity, so no credit limit impacts on pricing
No ISDA agreements or bilateral credit agreements required to trade, because instruments are centrally cleared
Balance sheet and capital efficiencies of central clearing relative to bilateral forwards under SA-CCR¹
Lowers RWA weightings, and attracts zero CVA

1. For more detail on SA-CCR’s potential impacts on OTC FX: Will new capital rules be a SA-CCR punch for FX markets? - CME Group

How CME FX futures calendar spreads work

CME FX futures calendar spreads are instruments for instantaneously buying and selling the same currency pair in two different expiry months. This allows one to efficiently roll an existing expiring outright futures position into a new contract month or express an interest rate differential between two currencies for a set period of time.

CME FX futures calendar spreads are quoted as Far Expiry minus Near Expiry price. Buying an FX calendar spread results in the simultaneous purchase of the Far Expiry and sale of the Near Expiry. Selling an FX calendar spread results in the simultaneous sale of the Far Expiry and purchase of the Near Expiry.

Buying vs. selling FX futures calendar spreads

Example: A September 2023-June 2023 EUR/USD calendar spread quotes the difference between the September 2023 and June 2023 futures contracts for EUR/USD. Buying the September 2023-June 2023 EUR/USD contract results in a long position in the September 2023 contract and a short position in the June 2023 contract.

Pricing

In the September 2023-June 2023 EUR/USD spread instrument, think of the bid and offered prices of 0.00502 x 0.00504 as the current pricing for an FX swap, where the near leg settles on the June IMM date and the far leg settles on the September IMM date. In pips, the price is 50.2 pips on the bid side and 50.4 pips on the offered side.

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FX Calendar Spreads in practice

EXAMPLE 1: USING A EUR/USD FX FUTURES CALENDAR SPREAD AS AN FX SWAP ALTERNATIVE

A bank FX swaps trader wants to buy €100 million of a forward-starting FX swap spanning June-September IMM dates. Taking the spread pricing example from above, the trader will buy 800 September-June 2023 EUR/USD calendar spreads at the offered price of 50.4 pips.²

Buying the futures calendar spread entails a simultaneous purchase of the September 2023 contract and sale of the June 2023 contract.³ If the June 2023 expiry is the more active contract and has a latest price ("C-Last") of 1.10325, then the trade results in the following positions⁴:

Short 800 June 2023

EUR/USD futures at

1.10325 [anchor leg]

Long 800
September 2023 EUR/USD futures at

1.10829 [1.10325 + 0.00504]

The position is equivalent to a long €100 million EUR/USD FX swap spanning June 21 through September 20, 2023 at 50.4 pips.⁵ The swap trader could further extend this to observe the cross-currency basis embedded in the swap price by using CME SOFR and ESTR futures.⁶

2. Each CME FX EUR/USD futures contract has a size of €125,000.
3. Calendar spread bid = Far Leg Bid – Near Leg Ask. Calendar spread ask = Far Leg Ask – Near Leg Bid.
4. Either the nearby or deferred contract can be the anchor in determining the prices of the spread legs. If the most recent C-Last price at the time of the spread trade is determined to be in the Near Leg, then the Far Leg contract price is assigned as Near Leg + Spread Price. If the most recent C-Last price is in the Far Leg, then the Near Leg contract price is assigned as Far Leg – Spread Price.
The C-Last price for an FX futures contract is the contract’s latest trade price, price indication, or settlement price. It is the most recent of the following: the contract’s latest CME Globex transaction price; the CME Globex bid price that betters the bid side of the market (and higher than the prevailing C-Last price); the CME Globex offer price that betters the offered side of the market (and lower than the prevailing C-Last price); the contract’s latest daily settlement price.
5. These are the delivery dates for the June and September 2023 futures contracts, respectively, which are analogous to value dates.
6. See the following paper for calculation examples: Covered Interest Parity, Implied Forward FX Swaps, Cross Currency Basis, and CME €STR futures - CME Group

EXAMPLE 2: CONVERTING INVERTED FX FUTURES CALENDAR SPREADS TO OTC-EQUIVALENTS

Most CME FX futures are quoted as USD per non-USD currency as part of legacy convention, but also allows variation margin to be moved in USD. Calendar spreads are also quoted in the “inverse” convention but it is easy to translate back to OTC terms.

Assume a bank FX swaps trader wants to buy $500 million USD/JPY FX swap exposure spanning the same June-September period as above. Further assume the following pricing:

June 2023 JPY/USD futures
C-Last price:
0.0074440

September-June 2023 JPY/USD calendar spread price of
0.0001034 bid x 0.0001036 offered

The swaps trader will sell 5,299 September-June 2023 JPY/USD calendar spreads at the calendar spread bid price, which will result in the following positions⁷:

Long 5,299
June 2023 JPY/USD futures at

0.0074440 [anchor leg]

Short 5,299
September 2023 JPY/USD futures at

0.0075474 [0.0074440 + 0.0001034]

The position is equivalent to a short ¥66,237,500,000 JPY/USD swap spanning June 21 through September 20, 2023. In OTC terms, this position is equivalent to being long $499,920,907 USD/JPY swap spanning June 21 through September 20, 2023 at -184 pips. OTC-equivalent pips are derived by inverting the futures contract prices:

June 2023 JPY/USD futures
are inverted as

1/0.0074440 = 134.3364

September 2023 JPY/USD futures
are inverted as

1/0.0075474 = 132.4960

Results in OTC-equivalent form of
132.4960 - 134.3364 = -1.840

Note the above example is fixed in JPY and floats in USD, as CME JPY/USD FX futures contracts are sized in Japanese yen. As the exchange rate fluctuates, so does the USD size of this trade, but the JPY size remains fixed at ¥66,237,500,000.

7. Each CME JPY/USD futures contract has a size of ¥12,500,000. 5,299 contracts derived by using the notional value of the far leg of the spread as follows: $500 million divided by [June C-Last price + spread price, multiplied by contract size], rounded down: $500,000,000 / [(0.0074440 + 0.0001034) * ¥12,500,000]. The USD value of this is 5,299 contracts * [(0.0074440 + 0.0001034) * ¥12,500,000] = $499,920,907. This example uses the far leg to size the trade.