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Featured Article

19 FEB 2021

CME FX futures:
New ticks on the block(s)

Understand why FX blocks and EFRPs are growing in popularity ‒ and why BNP Paribas, Morgan Stanley, Santander, and Societe Generale are active participants in this part of the market.

As dynamics within the FX marketplace continue to evolve, and the number of participants turning to futures continues to increase, the role of “ex-pit” trading mechanisms are likely to grow in importance as additional ways to access cleared liquidity. This article discusses the mechanisms available to customers along with changes we’re implementing to make it even easier for more traders to access our markets.

CME FX futures averaged $76.7B per day throughout the whole of 2020, reaching more than $270B on large ADV days around major market events, as participants turned to futures to manage their risk. 2020 also saw our FX futures complex achieve several significant all-time records, including the highest ever number of customers holding large open interest positions – of 1,310, and the highest ever open interest in EUR/USD – of more than $120B.

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These records and volumes help to reinforce the role of CME listed FX futures as a primary venue for price discovery, but it is also important to note that the wider FX market remains hugely diverse and that a large part of it continues to trade on an OTC basis away from a centralized venue. For example, in the OTC spot market, over 80% of the volume continues to be traded by voice or on a variety of bilateral electronic platforms, with only 16% being traded on non-disclosed venues. This stands in stark contrast to the FX futures market where the large majority of activity continues to be transacted via the CME central limit order book (CLOB) – a centralized competitive market where every customer trades anonymously on an all-to-all credit agnostic basis. However, while many participants might be able to optimize their trading by interacting with the CLOB, it may not match the preferred trading style or technology of a given firm. For end user customers who are familiar with trading on a disclosed basis with chosen liquidity providers in the OTC market, integrating and interacting with a futures CLOB can be a large behavioral change.

"With changes in UMRs, we have seen a growing appetite to trade listed FX futures, especially via block markets, which offer additional liquidity to the centralised order books that is more synonymous with existing spot and forward markets. This additional cleared liquidity that is available via blocks helps asset owners hedge their global FX exposures while maintaining a trading style that is consistent with more traditional avenues of execution in the OTC market. Block trading has always been popular to the buy-side community in other listed asset classes and we are seeing demand for off-exchange liquidity migrate to FX futures, especially from institutional asset manager customers."

Lee Spicer, BNP Paribas, Global Head F&O High Touch Execution

In response to these dynamics, and in consultation with our clients, we are making several enhancements to how market participants can transact FX futures away from the CLOB in so-called “ex-pit” transactions. We feel these changes will provide a stronger bridge for customers who are only familiar with OTC markets to be able to access futures liquidity and to benefit from the capital, operational, and counterparty risk management benefits of clearing.

There are two main mechanisms for transacting FX futures outside of the CLOB: 1) blocks and 2) exchange for related positions (EFRPs). Full details on both of these mechanisms can be found here, but a summary is provided below.

A block trade is a privately negotiated transaction between two eligible counterparties – enabling them to discuss, negotiate, and agree upon a trade directly together before then submitting it for clearing on a post-execution basis. An EFRP, meanwhile, allows a customer to execute an OTC transaction and to then subsequently negotiate with their chosen liquidity provider(s) to migrate that OTC position into FX futures – i.e. to close out the OTC position and re-establish it within a centrally cleared FX future. As such, both of these mechanisms enable customers to trade in a manner very familiar to the OTC market – on a disclosed basis with their chosen liquidity providers, but with the end result of holding the risk in a cleared and capital efficient FX future, and without needing to interact directly with the CLOB at all.

"The evolution of EFRPs and relevant use cases amongst institutional investors have expanded exponentially. The value proposition in the FX space is clear – FX EFRPs present an opportunity to pair dynamic OTC execution strategies along with high quality market making, and then wrapping the result in a cleared product. This can represent a powerful discussion for any investor. Clients ranging the strategy spectrum (quant funds to asset managers) have identified this edge, and they are working with us hand-in-hand to augment their liquidity pool and create depth of book for large risk-transfer. In addition to pricing and execution that is consistent with the OTC market, we have integrated EFRP solutions with minimal, or no, disruption to existing booking workflows."

- Richard Condon, Morgan Stanley, Head of Hedge Fund Sales

Historically, blocks and EFRPs have been used for two main reasons: trade facilitation and price uniformity. A typical trade facilitation scenario would be when there is a futures market in a currency that is considered to be relatively illiquid or for a transaction that takes place at an hour of day when an otherwise liquid futures market is relatively inactive. In this scenario, the buyer and seller of the futures contract might utilize a block trade or EFRP to obtain sufficient liquidity for their transaction – as a function of necessity. The second driver has been price uniformity, and this is where a buyer and seller of the futures contract may use a block trade or EFRP to ensure they can execute a large transaction at a single price.

In 2020, almost 180 buy-side customers added new pairs of FX futures or started trading FX futures for the first time, with notable growth from both hedge funds and asset managers. The large majority of volumes from these new participants continued to be transacted directly through the CLOB. But as we look forward to 2021 and beyond, we feel that the ability to use blocks and EFRPs not just for their functional benefits, but also for the familiarity of executing orders in a similar way to the OTC market, will be of increasing importance – enabling new customers to trade on a disclosed basis with their chosen liquidity providers, and without needing to consider how to integrate with the CLOB or having to work an order over a period of time to get the optimal price.

"As portfolio managers continue to increase their exposure to FX listed derivatives, usage of blocks / EFRPs in order to implement their investment strategies plays a key role. Our commitment to provide liquidity on a wide range of CME FX products for our customers is a relevant part of the service that complements electronic execution and reinforces flexibility of exchange traded derivatives. Blocks offer the possibility to execute cross asset strategies and hedge FX exposure most efficiently."

- Rafael Sogorb Diaz, Santander, European head of ETD and Equity structured product sales

In this context of wanting to ensure that blocks and EFRPs continue to serve as an effective bridge for institutional customers who want the benefits of FX futures, but who wish to maintain their OTC trading techniques and relationships, we are making several amendments to our offering that are due to go in to production on Sunday, February 21, 2021 for trade date Monday, February 22, 2021.

  1. An extension of our block reporting times from five minutes to 15 minutes during regular trading hours so that there is now global consistency in reporting requirements for all FX futures blocks, in the same way that there already is for our FX options blocks. 
  2. An amendment to the rules governing the minimum price increment (MPI) on blocks and EFRPs in G10 currency pairs. Historically, the MPI for block and EFRP trades was the same as the level for trades executed via the CLOB ‒ but from Feb 21, 2021, G10 pairs will now be able to be quoted and traded at a more granular tick (e.g. EUR/USD moving from 0.5 to 0.1). This change will enable customers to execute large trades at finer increments that are more comparable to the OTC markets, whilst still also retaining the liquidity in the CLOB for competitive, open, and efficient price discovery.

To access this “ex-pit” market, a variety of market participants including banks, non-bank liquidity providers, and agency brokers facilitate block and EFRP trades for customers today and some of these are listed in our directory which can be found here

"Over the last five years we’ve seen the FX futures ecosystem develop materially, both in terms of the sophistication of existing customers as well as a variety of new participants entering the marketplace. We believe that this growth trend in FX futures will continue, and the increased usage of EFRPs and blocks are a logical part of that progression given their similarities to trading styles in the OTC market. Using a relationship based “off-exchange” price provider to transact a block or EFRP gives you both the benefits of a listed product along with an execution mechanism and spread very similar to the OTC market."

- Chris Callander, Societe Generale, Head of FX futures sales and trading

See the full technical details of the changes coming in to effect on February 21, 2021can be found via our official market communication.

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*Pending all relevant CFTC regulatory review periods.

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