Understanding FX Link with C-Cross

FX Link, from CME Group, provides a tradeable basis between over-the-counter spot FX and FX futures from CME Group, thus creating an electronic central limit order book (CLOB) for standardized and cleared FX swaps. Trading the spread on FX Link results in the simultaneous execution of a FX futures contract, cleared through CME Clearing, and an OTC spot FX transaction, which is intermediated by a central OTC FX credit counterparty.

Since its launch in 2018, market participants have traded FX Link by directly interacting with the CLOB via the CME Globex electronic trading platform. Committed Cross, or C-Cross, functionality has been added to provide an additional trading mechanism for FX Link.

C-Cross is a method of execution that permits FX Link market participants to engage in bilateral, pre-execution communications pursuant to CME Rule 539 prior to order entry into CME Globex.  This pre-ex communication can be direct with other market participants or through a broker to discuss trade size, price, and direction prior to order entry into Globex. This execution style more closely resembles the existing OTC FX Swap market and offers participants the ability to access additional liquidity that is not immediately visible in the Globex central limit order book.

Let’s consider an example where a bank short-term interest rate trader wants to sell 500 million euros, equivalent to 4,000 contracts, of the September EUR/USD basis spread on FX Link at a price of 0.00227.

The current, top of book, best bid in the FX Link central limit order book is 0.00227, but the number of contracts available at this price is 480, which is equivalent to 60 million euros.

Rather than work an order in the central limit order book, the bank trader speaks to her counterparts and finds a trader willing to buy the full order of 500 million euros at 0.00227. This provides the opportunity to utilize the committed cross protocol.

When a Request for Cross, or RFC, order is entered into CME Globex, a five-second pre-cross period begins with Globex sending a message to market participants that a cross has been committed to the market and will be executed at the conclusion of the pre-cross period.

During this five-second period, competing market participants can place or amend orders in the Globex central limit order book to improve on the price and/or quantity at the top of the book.  In this example, neither the top of book price nor quantity is changed.

It’s important to note that the price, size, or counterparts involved in the RFC are not disclosed to the market, and that the C-Cross cannot be cancelled or amended during the five-second pre-cross period.

Following the pre-cross period, the C-Cross matching process begins. In this example, the RFC trade qualifies for a better price or volume match (BPVM).  Because the order matched the best price already in the order book while improving upon the quantity available at that price, the RFC is BPVM eligible. The BPVM percentage is 50% for all FX Link transactions.

In this scenario, the quantity eligible for the 50% BPVM is the difference between the RFC quantity and the quantity that was at the best bid at the time of submission, which results in 1,760 contracts matching immediately between the two RFC participants. 

Following this initial match, the C-Cross order would then interact with the 480 contracts that were already available at the top of book in the Globex central limit order book, leaving a further 1,760 contracts to match between the two counterparties in the RFC trade.

As a result, the bank trader that initiated the C-Cross order completes her sell order of EUR 500 million at a single price of 0.00227.

With the addition of C-Cross to FX Link, market participants have an alternative form of execution, enabling larger order sizes to be negotiated bilaterally on a pre-execution basis at a single price.