In this article, we discuss three tools offered by CME Group to enable FX traders to manage their exposure to FX benchmark rates. These tools include the widely used eFix Matching Service for spot FX from EBS, and two new futures market tools from CME FX, BTIC, and BTIC+.
FX market benchmarks, or “fixes,” are a significant feature of today’s FX market. One of the most widely used benchmarks is the WM/Refinitiv Closing Spot Rate, which is produced at 4:00 p.m. London time. FX trading volumes in the run up to and during the fixing calculation period can often be substantial, as traders seek to offset their exposures.
CME Group now offers three different solutions to manage exposure to the fix.
EBS eFix Matching Service: The compliant solution to manage fixing exposure
The eFix Matching service from EBS is the market leader in this space. Launched in 2014, the record daily volume for this service is $25.3 billion. The service was developed in response to a review of the market by the Financial Stability Board and provides a mechanism for bank dealers to manage their fixing risk in compliance with best practice.
The eFix service has grown over time and is now available across 36 currency pairs and includes fixings from seven different data providers, including WM/Refinitiv and Bloomberg’s BFIX. Moreover, eFix can be used for both intraday and end-of-day values. Although a majority of the volume is against the WM/Refinitiv 4:00 p.m. London rate, a meaningful amount of business is executed across the day on both WM/Refinitiv and BFIX values.
Using the eFix service is straightforward. The service matches buy and sell orders to transact at the fixing rate. Buy and sell orders can be submitted to the platform in the desired size throughout the day, with orders being matched in real-time. A bank trader who needs to buy at the fixing rate can submit their bid order to eFix. This will either trade straightaway against an offer posted in the system or will remain open on the orderbook to be traded against by a seller of the fix. Resting orders and transactions in eFix are not disclosed within market data. The resulting trades are held in a separate file until the fixing rate is set and can be applied to the deal. Once the fix price is known, the deal completes as a standard spot transaction at the day’s fixing rate. Counterparty details are not disclosed until after the fixing rate has been applied to ensure full anonymity for the user.
All orders submitted to eFix are pre-screened using the EBS central credit functionality, ensuring trades will be completed without disruption. Credit limits can be set on either a bilateral or prime basis.
Centralized anonymous matching of fixing orders provides a compliant solution for dealers. Managing exposure in advance of the fix can reduce uncertainty going into fixing period and can potentially reduce the volatility of the fixing process as a consequence.
FX Basis Trade at Index Close: Using futures to hedge your fixing risk
In addition to eFix for spot FX transactions, two new futures offerings are being made available by CME Group. The Basis Trade at Index Close, or BTIC, is a popular trading mechanism in equity futures markets that is now being made available for the EUR/USD currency pair using the WM/Refinitiv Spot Closing Price established at 4:00 p.m. London time as the reference benchmark.
Like eFix, BTIC trading is available ahead of the day’s index publication, with the market opening 23½ hours before the 4:00 p.m. fixing time. BTIC works by allowing futures to trade at the day’s fixing price plus a basis amount. A separate futures orderbook is provided for the basis – allowing bids and offers to be quoted at a basis price. The basis reflects investors’ views on the price differential between spot currency and currency for settlement on the future’s delivery day. Because this differential is sensitive to interest rates over a short timeframe, a finer pricing granularity of 0.05 pips has been established for EUR/USD BTIC trades, to ensure prices best reflect market value. For BTIC block trades – trades for large sizes negotiated privately between counterparties – the pricing granularity is as fine as 0.01 pips. Where orders match and a trade is completed, the BTIC transaction is held until the fixing rate has been published. At this point, the fixing rate is applied to the trade, and the futures are assigned the price of the fixing rate plus the traded basis.
With BTIC investors use futures to hedge fixing risk. Futures are a standard tool for hedging. They are available in CME Group’s regulated and transparent marketplace and offer firm all-to-all prices on their orderbooks. For example, a fund manager wishing to sell at the day’s fix to manage the FX exposure in their portfolio can trade futures to create the same outcome. They would do this by selling the FX BTIC. This creates a short EUR/USD futures position at a price equal to the fixing rate plus the basis, which can be incorporated into their portfolio. Once the fixing rate has been published, the transaction becomes a standard futures position. In turn, this can be liquidated through the central limit order book at any time, or it could be exchanged for a spot FX position through an EFP trade, or it could be closed out against the fixing rate on a subsequent trading day through another BTIC trade.
The third method to manage fixing risk from CME Group is BTIC+. This is another new offering from CME Group based on the EUR/USD futures market. BTIC+ trading provides an opportunity to trade against the fixing rate at month end. This is traditionally the most active day for FX fixing trades, and therefore holds the greatest risk. BTIC+ provides a means to manage month-end fixing risk, and it can be traded up to a month in advance. BTIC+ trades are offered in parallel to EUR/USD futures and the daily BTIC trades described above. BTIC+ trades establish a separate futures contract, which delivers a BTIC trade on the last day of the month. Like BTIC trades, prices are quoted in terms of the basis between spot and futures. Ultimately therefore, BTIC+ trades result in EUR/USD futures positions with a trade price equal to the end-of-month fix plus the agreed basis.
For example, a fund manager might see that their fund will have a need to sell currency at the end-of-month fix, which occurs in two weeks’ time. Instead of waiting to month-end, they can sell BTIC+ today, creating a cleared position that will price against the end-of-month fix. If the amount of exposure changes, this can be accommodated by buying or selling additional BTIC+ trades.
The bottom line
FX benchmarks, and the financial exposures that reference them, are a central feature of the FX market. CME Group offers complementary solutions to manage the risks inherent in these exposures. The eFix service enables spot transactions with cashflows at the fixing rate. BTIC and BTIC+ provide a futures-based solution to manage the risk against an individual fixing.
These solutions allow traders and investors to manage fixing risk ahead of the fixing calculation period. By doing so, risk management can take place throughout the day, reducing the burden and potentially reducing market volatility during the calculation period too.
The WM/Refinitiv Closing Spot Rates are provided by Refinitiv. Refinitiv shall not be liable for any errors in or delays in providing or making available the WM/Refinitiv Spot Rates, nor for any actions taken in reliance on the same. The Closing Spot Rates cannot be used, reproduced, distributed, redistributed, licensed or disclosed in any way without a written agreement with Refinitiv.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.