Increasing functionality, expanding access to liquidity
CME FX Link is the first anonymous, electronic central limit order book (CLOB) with firm pricing that permits basis spreads between over-the-counter (OTC) spot FX and CME FX futures markets to efficiently manage a wide range of FX swap, forward, and basis risk exposures ‒ available on eight currency pairs.
With the launch of this functionality, more participants will be able to access this liquidity via their broker or on Globex, via CME Direct or via API.
Committed Cross (“C-Cross”) and Request for Quote (“RFQ”) functionality provides customers with the ability to engage in pre-execution communications on size, price, and direction, prior to entry of orders into CME Globex. This new method of execution provides participants and liquidity providers with an alternative form of execution, enabling larger order sizes to be negotiated at a single price pre-execution and subsequently submitted through CME Globex. It is closer in nature to the existing OTC FX Swap market, enabling brokers to be used and offering participants the ability to execute larger trade sizes by accessing additional liquidity that is not immediately present in the CLOB.
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Committed Cross is a financial futures and options crossing protocol for market participants seeking to engage in pre-execution communications, pursuant to CME Rule 539. Pre-execution communications are discussions between trading participants for the purpose of gauging interest in the execution of a transaction on CME Globex, prior to the exposure of the order to the market. The C-Cross protocol allows for size, price, and direction to be discussed prior to the entry of an order into CME Globex.
This process provides market participants with:
Consider a short-term interest rate (“STIR”) bank trader who needs to sell EUR 500M of the September Euro/US Dollar basis spread on FX Link at a price of 0.00227.
The current top of the book bid in the FX Link CLOB is 0.00227, but the number of contracts available at this price is 480, which is equivalent to EUR 60M.
The trader has three options. First, the trader could work his order over a period of time to get a fill in the CME Globex CLOB. Alternatively, the trader could aggress his order into the CME Globex CLOB across multiple levels to transact the desired trade size. Lastly, the trader could decide to find another counterparty willing to buy the EUR 500M at 0.00227.
The bank trader decides to use a broker to help find a potential counterpart. The trader’s broker speaks to his or her panel of counterparts and finds a trader willing to buy the full order of EUR 500M at 0.00227, providing the broker an opportunity to utilize the CME Committed Cross order protocol.
The broker creates a ticket for a Request for Cross (“RFC”) on their chosen front-end platform1 which submits the trade to CME Globex, where a message is then displayed notifying all users that a cross in the September EUR/USD basis spread on FX Link has been committed to the market. This message does not name the counterparts, price, or quantity involved – it just highlights that a C-Cross trade in the EUR/USD spread has been placed and will be filled in five seconds.
Once the banker’s broker has submitted the RFC ticket, it starts a five-second pre-cross period where other competing market participants can place, amend, or cancel orders in the CME Globex CLOB. Once initiated, the C-Cross order cannot be canceled during this time.
Following the five-second pre-cross period, the C-Cross matching process begins on CME Globex. If the price of the RFC represents a new best price level (both a bid price higher than the current bid and an offer price lower than the current offer), or if the price of the RFC is equal to the best bid or offer and the quantity of the RFC is greater than the quantity at that current best bid or offer at the time of submission of the RFC to CME Globex, and during the five-second period between the entry of the RFC and the cross occurring, a better price for either the buy or sell order has not been entered into CME Globex, the trade is eligible for a better price or volume match (“BPVM”) of 50%.
In the above example, the banker’s broker entered an RFC transaction to sell EUR 500M (4,000 contracts) of the September EUR/USD basis spread at a price of 0.00227. At the time the broker submitted the order, the top of book was 0.00227 bid at 480 contracts (60M), with 400 contracts offered at 0.00228.
Given the bid-offer spread for September Eur/USD basis spread was already at the minimum price increment for FX Link of 0.00001, the market price could not be improved, and during the five-second pre-cross period, no market participants improved in the size available at the top of the CLOB. At the end of the pre-cross period, the trade is BPVM eligible and will immediately take place because the RFC quantity of 4,000 contracts bettered the quantity at that current best bid price of 0.00227 at the time of submission of the RFC to CME Globex.
In this scenario, where the RFC matched the best price but improved upon the quantity at the top of CLOB, the quantity eligible for the BPVM is the difference between the RFC quantity and the quantity that was at the best bid or offer at the time of submission, in this case 3,520 contracts (4,000 contracts less 480 contracts).
As a result, 1,760 contracts (50% of 3,520 contracts) are eligible to be matched immediately between the two RFC counterparts. Following this initial match, 480 contracts of the remaining offer on the cross will interact with the 480 contracts that were already at top of book in the market when the RFC was submitted. The remaining 1,760 contracts of the cross order will match with the two participants in the RFC trade.
In this example, the STIR bank trader that originated the order benefits by completing his sell order of EUR 500M (4,000 contracts) at 0.00227, with the buying counterparty to the RFC trade qualifying for EUR 440M (3,520 contracts), and the competing market participant buying the remaining EUR 60M (480 contracts) that were already available in the CME Globex CLOB.
After the pre-execution communication, an RFC order for EUR 500M (4,000 contracts) of the September EUR/USD basis spread on FX Link at a price of 0.00227 is entered into CME Globex. At the time before the order is submitted, the top of book was 0.00227 bid at 480 contracts (EUR 60M), with 400 contracts offered at 0.00228.
CME Globex will display an indication that a cross has been committed to the market and will occur in five seconds.
During the five-second pre-cross period, other competing market participants can populate the order book to improve on the price and/or quantity at the top of the book.
In this example, the price cannot be improved upon as it is already at the minimum price increment, and no participants choose to improve on the quantity available at the top of the book.
A BPVM allocation will match 50% of the two-sided order when certain price or quantity improvement conditions are met:
Where the RFC has a price matching the best bid or offer but has a greater quantity than was available at the top of the CME Globex CLOB, the quantity eligible for the BPVM is the difference between the RFC quantity and the quantity that was at the top of the CLOB. In this case 3,520 contracts (4,000 contracts less 480 contracts) qualified for a 50% BPVM – matching 1,760 contracts immediately with the RFC participants.
The remainder of the cross will interact with resting orders at the top of the book in the market before any remaining quantity matches between the cross orders.
In this example, 480 contracts would then match with the quantity that was already available in the CME Globex CLOB, leaving a further 1,760 contracts to match between the two counterparties in the RFC trade.
For more information or to discuss any of the detail here, please contact us at email@example.com
1 Front end platforms that support RFC functionality include CME Direct, Fidessa, and Trading Technologies. A full list of independent software vendors (“ISVs”) can be found here.