Why hundreds of hedge funds and asset managers are trading cleared FX futures at CME Group

Back in 2022, we published an article on the burgeoning dealer-to-client market for cleared FX: Block by Block: Building a Cleared FX Marketplace for Asset Managers & Hedge Funds.

The article described how an increasing number of buyside firms were looking to CME Group FX futures and options as centrally cleared choices for their FX spot, forward, NDF and option risk, due to: 

  • Hugely liquid and diverse ecosystem: up to $300B notional trading daily, with 99% of all EUR/USD futures globally traded at CME Group1
  • No need for an ISDA, CSA or bilateral credit line
  • Potential significant margin savings for participants subject to Uncleared Margin Rules (UMR)
  • Operational efficiencies for those already trading CME Group futures in other asset classes (e.g., Interest Rates, Equity Indices, Commodities)
  • Choice of execution styles: highly liquid central limit orderbook (CLOB) complemented by OTC-style dealer-to-client trading (blocks & EFRPs).

The article also explained how blocks and EFRPs allow customers to initiate trades with chosen liquidity providers (LPs) in the same bilaterally negotiated risk-transfer manner they are familiar with from OTC markets – while gaining the post-trade benefits of holding the risk as centrally cleared futures.

Two years on, FX futures volumes rival (and in many cases exceed) OTC FX spot venues, and a record 1,300 firms globally are holding large2 positions in FX futures. What’s behind this growth?

Wide liquidity provider support

Twenty-three firms facilitated a block and/or EFRP of FX futures or options in 2023, with the list including almost all the top tier investment banks as well as non-bank liquidity providers (LPs). 

These banks and non-banks are able to provide competitive liquidity in CME Group cleared FX products because of the diverse ecosystem, large established open interest and highly liquid CLOB.

Increased liquidity provider support is crucially important to give buyside customers the confidence that they can initiate, manage and close risk at competitive market rates.

Contact details for LPs can be found in the Liquidity Providers Directory.

International Dealer Banks

Regional Banks

Non-bank LPs

Bank of America

BNP Paribas

ABSA Bank

DRW

Eagle Seven

Deutsche Bank

Goldman Sachs

Banco Monex

Flow Traders

Geneva Trading

JP Morgan

Morgan Stanley

Itau BBA

HNK Alpha

Jump Trading

Santander

Societe Generale

Larrain Vial

Optiver FX

Susquehanna

UBS

 

 

 

 

Surging asset manager adoption

The size of positions held in FX futures by buyside firms has never been higher, with net open positions from asset managers surging to all-time record levels of approximately $160B recently.

These real money customers are turning to FX futures in part due to the increasing awareness of margin efficiencies offered by cleared FX for those subject to UMR, but also because execution methods have aligned with their existing workflows.   

Blocks allow institutional firms to execute large trades at a risk-transfer price with their chosen liquidity provider(s), enabling them to lean on existing OTC relationships and workflows but hold the resulting risk within a centrally cleared environment. 

Meanwhile EFRPs enable a client to ‘flip’ existing FX risk from a bilaterally held OTC spot/forward position into futures. The OTC position may have been established hours or even days previously, or immediately prior to the EFRP in the case of an ‘Immediately Offsetting EFRP’ (IOEFRP).

For more information on Blocks and EFRPs see the quick reference guide.

Increased automation and electronification of OTC-style trading

Trading blocks and EFRPs has historically been a relatively manual process, with customers contacting their chosen LP(s) and negotiating over phone or electronic chat platforms. Once a price was agreed, the LP would typically enter the trade details into their risk management system and submit to CME for clearing manually.

However, the strength of demand from both hedge funds and asset managers in recent years has led multiple bank LPs to invest in automating the workflow for block and EFRP trades. These banks now provide automated end-to-end solutions for their customers over API or their single dealer platform, removing the manual elements of the process. Some even facilitate algo execution of the OTC spot leg of IOEFRPs, and orders via a client’s order management system (OMS).

Find out more on the automation of OTC-style trading workflows.

Blocks and EFRPs open the door to a wider currency pair offering

CME Group lists over 40 currency pairs of FX futures and 25 currency pairs of FX options, with more currencies due to be launched in 2024.

The central limit orderbook (CLOB) is the critical cornerstone of liquidity for most of those currency pairs, with tens of billions of notional trading every day and 23 hours/day firm streaming prices. 

However, blocks and EFRPs allow customers to access additional liquidity by leaning on OTC relationships, which can be particularly important during times of low market liquidity or in currency pairs that generally do not trade on the CLOB.

An example of this can be non-deliverable currency pairs (NDFs) such as KRW/USD and BRL/USD, positions of which may have greater UMR implications for customers than deliverable FX. As a result, cash-settled futures at CME Group FX are increasingly being used to hedge NDF risk, with some customers choosing to execute via blocks & EFRPs.3

Majors

LATAM

EM

Scandis

CE4

Crosses

Asian NDFs

EURUSD

CADUSD

MXNUSD

ZARUSD

NOKUSD

CZKUSD

CZKEUR

EURGBP

EURAUD

AUDCAD

KRWUSD

JPYUSD

CHFUSD

BRLUSD

RUBUSD

SEKUSD

HUFUSD

HUFEUR

EURCAD

GBPJPY

AUDJPY

INRUSD

GBPUSD

NZDUSD

CLPUSD

TRYUSD

EURNOK

PLNUSD

PLNEUR

EURJPY

GBPCHF

AUDNZD

CNYUSD

AUDUSD

USDCNH

 

 

EURSEK

ILSUSD

 

EURCHF

CHFJPY

CADJPY

CNYEUR

What’s next?

The FX futures market at CME Group is primed to continue to grow exponentially over the next few years, as more and more hedge funds and asset managers discover the benefits of trading FX products which are centrally cleared at the point of execution. UMR thresholds are reviewed regularly – so the operational and regulatory burden of holding uncleared OTC risk is only likely to increase for many buyside firms as regulators adjust the relevant UMR thresholds. 

As LPs invest in their systems, execution workflows will continue to electronify – automating the trade lifecycle from order messaging through to central clearing. With LPs now fully recognizing the benefits to both themselves and their clients to trading cleared FX futures, dealer-to-client trading will only increase alongside CLOB liquidity.

FX futures and options at CME Group – established, liquid solutions for buyside central clearing.

References

1. Source: Futures Industry Association (FIA), data for full year 2023

2. The CFTC defines ‘large’ open interest holders as having at least 400 open contracts in major currency pairs.

3. Note – while ‘regular’ EFRPs are allowed for all currency pairs, IOEFRPs are not permitted where the OTC leg is an NDF.


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.

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