Forwards: Typically traded bilaterally, leading to opaque and non-uniform pricing, and the potential for "last look" practices.

Futures: Exchange-traded, providing transparent observable prices on a central limit order book (CLOB). They offer firm pricing, anonymity and the ability to trade passively. Can also be traded bilaterally as per forwards.

Forwards: Require individually negotiated and often extensive bilateral agreements (e.g., ISDA documentation) and bilateral credit for each counterparty, resulting in complex and time-consuming onboarding processes.

Futures: Standardized contracts that do not require ISDA agreements or Prime Broker arrangements. Counterparty credit risk mitigated  due to central clearing, streamlining market access.

Regulatory exemption: FX futures are exempt from the Annual Aggregate Notional Amount (AANA) calculation, which can mitigate compliance burdens related to Uncleared Margin Rules (UMR).

Capital efficiency: Futures can incur significantly lower regulatory capital requirements for banks when compared to forwards, potentially leading to more favorable pricing for clients.

Tax implications: For U.S. entities, futures may qualify for advantageous 60/40 tax treatment under Section 1256 of the Internal Revenue Code. Other jurisdictions may have their own considerations.

Margin efficiency: Futures use the CME SPAN model for initial margin, which can be more efficient than the ISDA SIMM model used for OTC forwards. Cross-margining across correlated asset classes, such as FX and interest rates, are also available.

Variation margin: All variation margin payments for futures are netted to a single payment, simplifying reconciliation.

Physical delivery: In the major currency pairs, FX futures physically deliver into the two constituent currencies in the same CLS cycle as any spot or forwards positions, if held to final settlement.

While FX forwards remain a significant component of the global FX market, FX futures present a compelling alternative. They offer enhanced transparency, firm liquidity, anonymous trading capabilities and an efficient, regulated and centralized post-trade service. The benefits extend across various aspects, including streamlined trading, optimized margin and tax treatment, and improved capital efficiency.

When making a comparison between the futures market and the OTC market, clients can observe average bid-ask spreads in the CLOB of the futures market - for both outrights and for calendar spreads (rolls), but we would encourage customers to consider:

• The ability to trade cleared futures and options using OTC-style trading, which allows the negotiation of trades with chosen LPs on a disclosed, relationship-based pricing model, potentially offering the same or even better pricing as regular OTC activity.
  
• The ability to trade passively in the futures CLOB, allowing clients to avoid paying the spread and potentially earning the spread instead.
  
• Tangible factors that impact the overall bottom line, such as tax, margin funding and interest earned on collateral balances.
  
• Broader considerations such as removing/mitigating counterparty credit risk, trading anonymously and not needing to paper ISDAs, use credit lines or have limits imposed by a FX Prime Broker.

^{*as of August 2025. Interest on cash collateral can be found in the link below:
https://www.cmegroup.com/clearing/financial-and-collateral-management/files/rates-on-cash.xls}