The FX Report: 2018 Q2/Q3

Need to Know: Q2 2018

All Up: Q1 2018 Trading Volume, Open Interest (OI) & Participants

  

Q2 ADV FX Futures and Options –

1.04 M contracts

(up 17.7% YoY)

  

Q2 Average OI for FX futures and options –

2.58 M contracts

(up 8.03% vs 2017)


Q2 ADV in Notional –

$106.4 B

  

Large Open Interest Holders in FX futures –

Totalling 1,104, up 8% YTD

FX Link: The Records are Rolling In

Since launch at the end of Q1, liquidity and volume are building with top-of-book regularly 0.1-0.2 ticks wide and $20-$100M deep. Volume reached more than $1B notional on May 25 with 9,555 contracts traded. Participation is increasing with six FXPBs supporting FX Link, with a diverse user base including banks, prop trading firms and buy side firms.

Offset: New margin offsets across Commodities and FX

Need to Know: The CME FX Franchise

We’re working to deliver creative solutions to your most important challenges, so you can access the capital and margin efficiencies of our centrally-cleared and transparent market

That’s why:

We’ve expanded our FX futures offering

With monthly expiries on six pairs, all with implied liquidity, and now with CME FX Link which connects the OTC FX market with FX Futures electronically, for the first time.

We’ve expanded our listed FX options offering

With Wednesday Weeklies, Volatility-Quoted Options (VQO) and Triangulation, we are now the largest electronic FX options marketplace in the world.

We’ve expanded our OTC FX clearing offering

Clear NDFs, G10 NDFs (Cash-settled forwards) and new FX options. All under one Guarantee Fund.

Spot Light: The most capital efficient and comprehensive OTC FX clearing solution

Single Guarantee Fund

With monthly expiries on six pairs, all with implied liquidity, and now with CME FX Link which connects the OTC FX market with FX Futures electronically, for the first time.

Portfolio Margining

Unparalleled opportunities between OTC FX and FX futures and options, with NDF margin reductions of up to 90% against emerging market futures and 56% against G10 futures*.

FX Blending

The first and only FX Blending Solution which significantly reduces notional outstanding and line items.

FX Options

A cleared cash-settled FX Options solution which provides superior cost and capital efficiencies, compared to physically delivered options, which are cost prohibitive.

*pending regulatory authorisation

In Our Markets: CME FX LINK

CME FX Link is the first electronically traded Globex spread connecting OTC FX and FX futures markets. The spread is quoted as the difference between FX futures and the OTC FX spot price, with both the legs in the OTC price convention, enabling participants to simultaneously trade an OTC FX spot transaction and a listed FX future.

CME FX Link was designed in collaboration with the market, to enable efficient management of positions across the two markets while also providing a unique, electronically traded means of managing FX swaps exposures.

And now, award-winning for:

Design

We worked with the market to fully understand and design a solution to address the capital, credit and liquidity pressures facing the FX industry, especially in the balance- sheet demanding FX swap market.

Mechanics

FX Link utilises the existing FCM network for the futures leg and the existing OTC FX Prime Brokerage and interbank market for the spot leg. This enables participants to use existing workflows and infrastructure, and leverage existing OTC FX interbank credit relationships along with the scale of the established OTC FX prime brokerage network.

Scope

Initial scope includes spreads between OTC Spot FX and the front three expiry months of the following currency pairs: EUR/USD, JPY/USD, GBP/USD, CAD/USD, AUD/USD, MXN/USD.

New spreads are added 10 business days prior to the last trade date of an expiring CME FX Futures contract.

The Profit&Loss Perspective

Colin Lambert, the Editor at Profit&Loss, describes what the Launch of FX Link could mean to the FX industry

“Today could actually turn out to be a reasonably significant day for the FX industry. The reason I feel it may be significant is down to my long-standing belief that greater automation and efficiency in FX forwards and swaps is the key to long term growth in the broader FX industry, and there is a chance that FX Link may help deliver the regulatory and capital efficiency to help drive that, in an automated environment”

Read more.

Get to know FX Link in just over five minutes

Watch our video on how it works and how to trade it

Visit cmegroup.com/fxlink for

  • Spread functionality specifications
  • Documentation
  • Videos and Instructions on how to trade

Follow the volume tracker and stay up-to- date on volume, updated daily, showing last 10 days of market performance.

Get connected to CME Direct, our fast, secure and highly-configurable trading front-end and trade or follow the market in real time.

FX Link is available to trade through Reuters.

FX Link will become available on Bloomberg. Please log a request with their help desk to indicate your demand.

Trade on Reuters

Example RICs

Spot RICs:

<AUDUSD> <EURUSD> <USDCAD>

Spreads FX LINK RICs:

<JYM8-USDJPY> <1CDU8-USDCAD>

Chains

0#1UROXF-EURUSD: 0#UROXF-EURUSD:

0#1BPXF-GBPUSD:    0#BPXF-GBPUSD:

0#1ADXF-AUDUSD:    0#ADXF-AUDUSD:

0#1JYYF-USDJPY:      0#JYYF-USDJPY:

0#1MPYF-USDMXN:   0#MPYF-USDMXN:

-#1CDYF-USDCAD:     0#CDYF-USDCAD:

In Our Markets: Futures

Overall Volume: $101.5 billion notional traded

At the end of Q2, futures YTD ADV reached $101.5B in notional (986K contracts), up 29.9 percent YoY. Q2 futures open interest also saw a YTD increase of 9.8 percent over 2017, representing 1.8M contracts.

Show of Confidence: Participants Holding Large Open Interest in Futures up 8%

On June 26, CME Group reached 1,104 Large Open Interest Holders in FX futures, up 8 percent YTD. This figure is collated by the CFTC and is a measure of participants in our markets, holding long term strategies.

*The CFTC defines large open interest holders as having at least 400 open contracts in Major Foreign Currency futures and at least 100 open contracts in Other Foreign Currency futures.

Monthly Expiries: New pairs in Play

CAD/USD is trading 70% tighter and 2 ½ times deeper HoH. JPY/USD is trading 40% tighter and 1 ½ times deeper HoH. Monthly expiries deliver greater access across the curve, and with implied pricing, additional depth in the front months, with 320 participants actively trading.

Customer-Centric CNH: Now Cash-Settled and Climbing

In response to client feedback, we’ve updated our USD/CNH contract to be cash-settled, and better connected to our commodities complex. Since this change, volume has been increasing with a climb of almost 900% YTD. Participants can now also benefit from 30% credit for Copper versus CNH and 40% credit for Gold versus CNH.

There’s more to our margin offsets than metals:

Spread

Product Code

Type

Side

Ratio

Credit

CNH, EC

CNH EC

Delta

B A

1

1

45%

CNH, JY

CNH JY

Delta

B A

1

1

45%

AD, CNH

AD CNH

Delta

B A

3

2

45%

CNH, CX-GC

CNH CX-GC

Delta

A A

1

1

40%

CNH, CX-HG

CNH CX-HG

Delta

A A

1

2

30%

CNH, SIR

CNH SIR

Delta

A B

2

3

30%

AD, CD, CNH, JY, KRW

AD CD CNH JY KRW

Delta

A A A A A

14

27

8

44

7

30%

In Our Markets: Options

A First: CME FX Options are award-winning

CME FX Options are now the largest electronic FX Options marketplace in the world and now, the winner of Best -Derivatives Platform at the FX Week eFX Week Awards – for:

Depth

Now the deepest, most liquid and diverse direct- access, multi-participant destination for risk dealer and multi-dealer electronic volume globally

Design

Building for better risk management: to complement our Friday Weekly expiration, we launched Wednesdays to help manage mid-week market events, such as MPC meetings. Now, averaging over 5,000 a day.

Distribution

Non-U.S. FX ADV grew 8%, including 29% growth in Asia – driven by an increase in Retail participation.

Based on FXJSC, FXC & TFEMC 2017 surveys.

30 and Beyond: Demand for Wednesdays reaches more than 30k in Open Interest

Wednesdays options reached a record 32,422 in open interest on June 26.

Wednesday options already represent 22% of overall FX weekly options, with a diverse participant mix across time zones.

Time, Align: Our FX Options Expiry Time is Changing

We are changing our expiration time to 10 a.m. New York, to bring our FX options in line with the primary OTC market convention, based on market feedback.

All market participants need to be aware and can visit cmegroup.com/10am for more details, along with The Fix, codes, full listing schedule, impacted products and a two minute video on how this change will come into effect.

More Liquidity Around the Clock: FX Options in Asia

EUR/USD, JPY/USD, GBP/USD, AUD/USD and CAD/USD options today are showing significant and actionable liquidity in Asian hours, enabling more customers around the world to access the liquidity, capital efficiencies and security of our markets.

Time-weighted averages for ATM strike, SGT 7am-4pm, July serial, full prior month

  2017 2018 % Improvement
EUR/USD Spread 1 4.7 3.2

  32%

Quantity 1 42.4 86.4

 104%

Depth 3 104.6 243.5

  133%

JPY/USD Spread 1 5.8 3.5

 40%

Quantity 1 30.8 43

  39%

Depth 3 89.7 142.2

  59%

AUD/USD Spread 1 6.6 3.7

  44%

Quantity 1 36.8 55.3

  50%

Depth 3 88.4 185.1

  109%


GBP/USD
Spread 1 8.7 4.9

  43%

Quantity 1 25.5 37.2

  46%

Depth 3 79.1 114.5

  45%

CAD/USD Spread 1 8.8 4.3

  51%

Quantity 1 33.9 63

  86%

Depth 3 92 210.3

  129%

Spread 1 = bid/ask spread in pips at the top of book (i.e. for EUR/USD, 3.2 = $0.00032 per 1 Euro notional)

Quantity 1 = average quantity on bid/ask at top of book in contracts (i.e. for EUR/USD, 86.4 = 86.4x€125,000 = €10.8 million notional)

Depth 3 = average quantity on bid/ask through 3 price levels (higher depth of book usually indicates more price stability)

In The News: Greenwich Associates

TCA Report On FX Futures

Greenwich Associates has published a paper assessing the value of viability of FX futures as a proxy to the OTC FX market. The report, “A Bright Future for FX Futures” assesses the economic benefits of using FX futures through a quantitative total cost analysis (TCA) model and by analysing the impact of regulatory change to the FX market.

Greenwich interviewed 41 buy-side institutions and nine major FX sell-side institutions to validate inputs to the quantitative TCA.

Read the full TCA report.

EXCERPT FROM REPORT

“In the face of the growth in FX futures trading, Greenwich Associates set out to examine and assess the potential economic benefits of utilizing futures as an alternative to trading in the OTC markets.

To do so, we employed a proprietary quantitative model to analyze the costs associated with trading FX over-the- counter (OTC)  against comparable FX futures. The model calculates the cost of opening, maintaining and closing out    a position. To validate key inputs into the model and gather feedback on current demand and pricing, we spoke with FX traders on the buy and sell side.

The results show that FX investors can find significant cost savings (upward of 75% in some cases) by trading futures rather than executing a trade in the OTC markets. For those entities subject to Basel III costs, switching to futures from OTC trades could garner even greater savings.

Pure costs savings are not the only reason to consider FX futures. As sell-side dealers become more selective in the clients that they prioritize, some buy-side traders may find liquidity more difficult to access. Others may find that they are getting de-prioritized and receiving fewer services from particular counterparties. As a result, adding the option to trade in a futures environment could help mitigate the effects of shifting sell-side behavior.

Even with these potential cost savings, a switch to futures might not make sense for some FX market participants that trade only infrequently and at relatively small volumes. And for some investors, there may be lingering skepticism about the available liquidity in an exchange-traded environment, even though recent statistics show that average daily volume (ADV) in FX futures equals or exceeds the volume on a major spot exchange.

The results of our analysis prove that even before considering the potentially punitive effects that regulations have on trading costs, trading FX futures can have clear economic benefits. For that reason, we expect FX futures to continue to gain traction as an alternative to OTC trading.

COST SAVINGS FOR EXECUTING FUTURES VS OTC FX – 60 DAY HOLDING PERIOD

  EUR/USD EUR/JPY EUR/CAD EUR/USD EUR/JPY EUR/CAD
$1 million ($153) ($168) ($130) 77% 76% 64%
$5 million ($646) ($588) ($255) 52% 52% 24%
$10 million ($1,120) ($916) ($300) 39% 39% 14%

Assumptions:
Funding rate (all-in rate at which you can obtain funding): 0.3% Holding period: 60 Futures type: Quarterly
Exiting position at end of holding period (close out, roll): Roll

COST SAVINGS FOR EXECUTING FUTURES VS OTC FX – 120 DAY HOLDING PERIOD

  EUR/USD EUR/JPY EUR/CAD EUR/USD EUR/JPY EUR/CAD
$1 million ($143) ($164) ($117) 63% 63% 47%
$5 million ($639) ($607) ($228) 54% 45% 17%
$10 million ($1,206) ($1,053) ($348) 47% 37% 12%

Assumptions:
Funding rate (all-in rate at which you can obtain funding): 0.3% Holding period: 120 Futures type: Quarterly
Exiting position at end of holding period (close out, roll): Roll

THE IMPACT OF BASEL III AND OTHER COSTS

For those entities subject to Basel III costs, futures can provide signifci ant cost advantages over OTC FX— with futures, all counterparties face a central counterparty clearing house (CCP) directly.

In the OTC market, when calculating both risk-weighted assets (RWA) and total leverage exposure (TLE), the addition of non-netting counterparties can have a major impact, ratcheting up risk and associated capital requirements exponentially. Within futures, this is not a concern, as participants are facing a single counterparty: the CCP. The CCP model allows for maximal compression with a minimal amount of effort. In an OTC environment, having more than one counterparty generally results in some level of capitalization being necessary, even if risk

is fal t across counterparties. Furthermore, for those entities subject to G-SIB reporting and associated add-on charges, FX futures are not included in the requisite calculations.

For those constrained specifically by RWA calculations, when facing a qualifying CCP, only a 2% risk weight needs to be applied to QCCP exposures, while in OTC, there isa fol or of 20%. Additionally, credit valuation adjustment (CVA) charges do not apply to centrally cleared transactions, allowing participants to reduce their requisite CVA charges by 100% if all FX products were cleared.

Additional uncleared margin rules (UMR) components are still due to come into force in Europe after MIFID II defines deliverable OTC FX derivatives. There is expected to be a requirement to exchange variation margin on all linear deliverable OTC FX products (outside of spot) once MIFID II releases the classification of deliverable OTC FX products in 2018. This VM change will impact all participants that are captured under the uncleared margin rules and will do so once the definitions are released. There will not be a phase-in approach as there has been on the IM component of UMR. This will be the first time some buy-side institutions will have ever exchanged margin on FX.”

Go Learn: Resources

Event risk, managed: Our FX Options Expiration Calendar now includes US Economic Events

Now you can view and download 12 months of options listing and expiration dates, including yet-to be-listed weekly expiries and view all relevant US economic events, and their potential impact, side by side with any expiry.

Access the tool

The CME Institute: FX

Start learning about the futures and options markets with a variety of courses designed to help you at each stage of your trading journey. Whether you are brand new to the derivatives market, or an experienced trader looking to sharpen specific skills, our courses will help you deepen your knowledge and improve your understanding of our markets.

There are six dedicated courses on FX. Start Watching and Learning today.

Start learning with the CME Institute

See Who Participates in FX Futures Markets

Analyse information by client segment including dealer, asset manager and leveraged market participant using The Commitments of Traders tool. The tool charts the CFTC’s report on market open interest released each Friday afternoon based on positions held during the prior Tuesday.


Rolling FX Futures with Pace of the Roll Tool

For open interest holders who prefer to carry positions in FX futures over time, the quarterly roll indicates the optimal liquidity period to roll a futures position forward from the expiring front month futures contract to the deferred month futures contract and therefore analyse and set their futures roll strategy. These charts are updated and available on a daily basis during the roll period.


Calculate your margins with CME Core

CME CORE is an interactive margin calculator that enables users to calculate and evaluate initial margin requirements for all CME Group products, and execute OTC efficiency analysis through additional analytics.


FX Trading with CME Direct

View or trade CME FX futures with CME Direct, a fast, secure and highly-configurable trading front-end. Benefit from the deep liquidity and transparency of CME Group markets and uncover new trading opportunities.

To trade with CME Direct, you will need a relationship with a clearing FCM so contact you bank if you’d like to get connected.


FX data to help you simulate or back test your strategies

Our new self-service cloud solution allows you to quickly and more efficiently access CME FX historical data in a more integrated and streamlined process, providing you with the data you need almost instantaneously.

Go Further

For more information, please contact:

Paul Houston
Head of FX, London Office
paul.houston@cmegroup.com
+44 203 379 3355

 

Divay Malhotra
London Office
divay.malhotra@cmegroup.com
+44 203 379 3355

Ravi Pandit
Singapore Office
ravi.pandit@cmegroup.com
+65 6593 5562

 

Craig Leveille
Chicago Office
craig.leveille@cmegroup.com
+1 312 454 5301

Matt Gierke
Chicago Office
matthew.gierke@cmegroup.com
+1 312 930 8543

 

Kevin Mcmillin
Chicago Office
kevin.mcmillin@cmegroup.com
+1 312 930 8264