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. 

FX Calendar Spreads in practice


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


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.


Results

OTC notional reduction and credit-efficient, firm liquidity

Using CME FX futures can generate greater capital efficiencies from the netting of exposures against a single central counterparty as well as more favorable regulatory treatment from facing a regulated exchange. That includes reducing the amount of gross notional exposure used in the Uncleared Margin Rules Average Aggregate Notional Amount (AANA) calculation. Uncleared Margin Rules require the exchange of margin on OTC derivatives for customers who have gross notional OTC derivative exposure over $8 billion.8 Customers with material FX swap exposures can reduce their outstanding OTC derivative notional by substituting OTC FX swaps with futures-based FX swap alternatives.  

CME FX also offers bilateral trading through Block and Exchange for Related Position (EFRP) trades.9 For both bilateral and anonymous trading, no ISDAs or bilateral credit lines are needed as futures are centrally cleared instruments.


8. Otherwise known as the Average Aggregate Notional Amount (AANA) and is measured as the average across every March, April, and May to gauge whether a financial participant is in-scope. For more detail on calculating AANA, see AANACalculationUS_8.26.22.pdf (isda.org)
9. For more detail, visit the FX Futures and Options Block and EFRP Quick Reference Guide.

Now is the time to try this strategy

A deep roster of liquidity providers is supporting FX calendar spreads, providing granular pricing and deep liquidity for your potential trades.

  Euro Futures Japanese Yen Futures British Pound Futures Australian Dollar Futures Canadian Dollar Futures
ON GLOBEX 6E 6J 6B 6A 6C
REFINITIV 0#URO: 0#JY: 0#BP: 0#AD: 0#CD:
BLOOMBERG ECEC Curncy (spread)

ECA Curncy (outright)
JYJY Curncy (spread)

JYA Curncy (outright)
BPBP Curncy (spread)

BPA Curncy (outright)
ADAD Curncy (spread)

ADA Curncy (outright)
CDCD Curncy
(spread)

CDA Curncy
(outright)
CONTRACT SIZE 125,000 EUR 12,500,000 JPY 62,500 GBP 100,000 AUD 100,000 CAD
QUOTATION Quoted in USD per EUR Quoted in USD per JPY Quoted in USD per GBP Quoted in USD per AUD Quoted in USD
per CAD
TICK Outrights on Globex:

0.00005 USD per EUR (6.25 USD)
Outrights on Globex:

0.0000005 USD per JPY (6.25 USD)
Outrights on Globex:

0.0001 USD per GBP (6.25 USD)
Outrights on Globex:

0.00005 USD per AUD (5.00 USD)
Outrights on Globex:

0.00005 USD per CAD (5.00 USD)
Spreads on Globex:

0.00002 USD per EUR (2.50 USD)
Spreads on Globex:

0.0000002 USD per JPY (2.50 USD)
Spreads on Globex:

0.00005 USD per GBP (3.125 USD)
Spreads on Globex:

0.00002 USD per AUD (2.00 USD)
Spreads on Globex:

0.00002 USD per CAD (2.00 USD)
Bilateral Trades (Blocks & EFRPs)

0.000010 per EUR (1.25 USD)
Bilateral Trades (Blocks & EFRPs)

0.0000001 per JPY (1.25 USD)
Bilateral Trades (Blocks & EFRPs)

0.00001 per GBP (0.625 USD)
Bilateral Trades (Blocks & EFRPs)

0.00001 per AUD (1.00 USD)
Bilateral Trades (Blocks & EFRPs)

0.00001 per
CAD (1.00 USD)
LAST TRADING DAY 9:16 a.m. Central Time (CT) on the second business day immediately preceding the third Wednesday of the contract month (usually Monday) 9:16 a.m. CT on the business day immediately preceding the third Wednesday of the contract month (usually Tuesday)
REPORTABLE LIMITS 200 Contracts
BLOCK TRADE Monthlies: 20 Contracts Monthlies: 20 Contracts
Quarterlies: 150 Contracts Quarterlies: 100 Contracts
Spreads: Sum of the legs must equal the higher of the two block thresholds Spreads: Sum of the legs must equal the higher of the two block thresholds

How to access

Conclusion

CME FX futures calendar spreads let you gain exposure to diverse, credit-agnostic, and firm liquidity which complements OTC FX swaps.  As a proxy for forward-starting FX swaps, CME FX futures calendar spreads:

  • Are economically equivalent to FX swaps
  • Offer firm/no last-look liquidity 23 hours a day, to complement OTC FX liquidity
  • Enable you to trade passively by posting bids/offers or aggressively by taking the pricing shown in the market
  • Offer all-to-all trading with a diverse customer base
  • Offer credit separated from liquidity and no ISDA agreements
  • Offer potential balance sheet and capital efficiencies of clearing, lower RWA weightings, and attract zero CVA

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