CME Group transformed global finance when it introduced the world's first financial futures — FX futures — in 1972. Today, CME Group is the largest market for FX futures in the world.
The FX futures contracts listed at CME Group go through a physical delivery process on the third Wednesday of the contract month. This happens four times a year for most FX futures contracts (March, June, September, and December). However, Euro FX, Japanese yen, British pound, Canadian dollar, Australian dollar, Euro/British pound, Mexican peso, and South African rand are traded on all twelve calendar months with deliveries in every month of the year.
Brazilian real, Russian ruble, Indian rupee, Chinese renminbi, Chilean peso, and Korean won are also traded on all twelve calendar months but are not physically delivered — they are cash-settled.
While only a small portion of all CME Group FX futures contracts actually result in physical delivery, an efficient and reliable delivery system is essential to the contracts' fair pricing.
The last day of trading for FX futures — with a few exceptions — is the second business day immediately preceding the third Wednesday of the contract month. For Canadian dollars, futures trading terminates on the business day immediately preceding the third Wednesday of the contract month.
The value date for all physically-delivered FX futures is on the third Wednesday of the contract month. If that day is not a business day in the country of delivery or is a bank holiday in either Chicago or New York City, then delivery is made on the next day which is a business day in the country of delivery and is not a bank holiday in Chicago or New York.
The last day of trading for cash-settled futures occurs on different dates. Brazilian real futures for example terminate trading at 9:15 a.m. Chicago time on the last business day of the month for the Central Bank of Brazil immediately preceding the contract month. Close of trading for contracts on the Russian ruble is 11:00 a.m. Moscow time on the 15th day of the month, or if not a business day, on the next business day for the Moscow interbank foreign exchange market.
The following is a brief description of the CME Group FX futures delivery process that explains the roles of the CME Clearing House and market participants, the duties and obligations of CME Group FX futures buyers and sellers, and the process of delivery.
CME deliverable FX futures contracts are required to be physically delivered through the CLS (Continuous Linked Settlement) Bank System when both the trading unit currency and the price increment (minimum fluctuation) currency are supported by CLS delivery procedures. CLS is a real-time global settlement process which allows for both sides of a currency transaction to be settled simultaneously through a CLS settlement bank. A clearing member using CLS must submit a CLS instruction to its settlement bank but is not required to submit an Order-to-Pay (OTP) or wire transfer.
However, if the delivery exposure for a clearing firm is less than $25 million for any one currency or below $50 million across all CLS-eligible currency contracts then delivery through CLS is not required. Current CLS eligible currencies for deliverable FX futures include the US dollar, euro, Japanese yen, British pound, Canadian dollar, Australian dollar, New Zealand dollar, Swiss franc, Mexican peso, Norwegian krone, Swedish krona, South African rand, Israeli shekel, and the Hungarian forint.
For non-CLS currency deliveries, the completion of the currency delivery process depends upon the establishment by CME Clearing of banking facilities in both the United States and the indigenous country for each traded currency. The Exchange contacts an agent bank to act on its behalf and establishes two accounts with the agent bank, a US dollar account to facilitate the delivery of dollars, and a foreign currency account at the agent bank's branch or a correspondent bank (acting under contract with the agent bank) in the country where the foreign currency will be delivered. Current non-CLS currencies for deliverable FX futures include Czech koruna, Polish zloty, and Turkish lira.
A clearing firm with delivery exposure below the above thresholds choosing not to use CLS to facilitate delivery may be obligated to submit an OTP or a wire transfer for the value of their delivery based on the specifications of the currency contract and a clearing firm’s designation in the deliveries system. An OTP is an irrevocable agreement a clearing member firm’s bank will pay funds on the delivery date to the Exchange’s agent bank.
The clearing house’s Role
CME Clearing recognizes its clearing members as the parties to a trade, whether those clearing members are acting for themselves, the accounts of other members, or their customers. When a trade takes place between two clearing members, it is executed through the Exchange's facilities. CME Clearing becomes the buyer to every seller and the seller to every buyer, with a clearing member assuming the opposite side of the transaction. In this way, CME Clearing drastically reduces counterparty risk.
For US dollar-based contracts, CME Clearing requires that the long position holder (i.e., the buyer) pay dollars into the US-domiciled delivery account designated by the clearing house. This is the same account from which the short (i.e., the seller) is paid. Likewise, the transfer of the foreign currency occurs in the indigenous country. The short's delivering bank transfers the currency to the delivery account in that country and the currency is then delivered from that account into the long's account at its bank of choice.
For cross-rates, the buyer pays an amount in the minimum fluctuation currency and receives an amount equal to the trading unit. The seller receives delivery of the minimum fluctuation currency in the country of issuance and pays an amount equal to the trading unit.
Prior to the last day of trading:
The buyer must arrange with a bank to deliver US dollars (or minimum fluctuation currency in the case of cross-rate futures) to the correct delivery account at the respective agent bank. The exact dollar amount is determined by the contracts' final settlement price.
The buyer must arrange with a bank in the currency's country of origin to receive the currency on the contract value date. The long position holder must inform his clearing firm of the bank and the account details necessary to send the currency to the account.
Last day of trading:
At 11:00 a.m. Chicago time, clearing firms acting on behalf of their customers submit a Buyer's Delivery Commitment form for each customer. This form must be submitted or entered into the delivery system. This form details the number of contracts that the clearing firm will accept delivery of the payment bank from which US dollars (or minimum currency fluctuation currency) will be arriving (order-to-pay bank if necessary), and the account names, account numbers, and banks to which to send the foreign currency payment (foreign remittance bank).
At 10:00 a.m. delivery commitments for Canadian dollar must be submitted into the deliveries system.
One day following the last day of trading for all currencies (except Canadian dollar):
At 1:00 p.m. Chicago time, the buyer must either transfer dollars to the agent bank associated with that currency or have his bank issue an "order-to-pay" to the agent bank. The order-to-pay must take the form of a promise to pay in "same day" funds by 10:00 a.m. local time in the currency's country of origin on the value date.
The clearing house submits information to the agent banks via the Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.) system. CME Clearing then transmits this information to their subsidiary or their agent bank in the currency's country of origin to arrange the transfer to the buyer's account on the value date.
By 10:00 a.m. Chicago time, all orders-to-pay must be fulfilled by the transfer of "same day" funds into the delivery account at the appropriate agent bank, if necessary.
The delivery bank in the country of issue transfers the contracted currency to all buyers. This occurs whether or not all shorts have delivered the contracted currency to the account.
Prior to the last day of trading:
The seller must arrange with a delivery bank to deliver the contracted currency in its country of issue at the appropriate agent bank.
The seller also must arrange with a bank to receive dollars in the US (or minimum fluctuation currency in the case of cross-rates). The position holder must inform his or her clearing member of the bank and account number details necessary to send dollars to his or her account.
Last day of trading (except Canadian dollar):
At 11:00 a.m. Chicago time, clearing firms acting on behalf of their customers submit a Seller's Delivery Commitment form for each customer. This form may be submitted or entered into the deliveries system. This form details the number of contracts to be delivered, the bank from which foreign currency will be arriving (foreign remittance bank), and the account names, account numbers, and banks to which to send the US dollar payment (US remittance bank).
Day following the last day of trading for all currencies:
Seller notifies his or her delivery bank of the amount of currency to be delivered on the value date to the delivery account in the country of issue or have his bank issue an order-to-pay to the agent bank if required by the clearing house. The order-to-pay, if necessary, must take the form of a promise to pay in "same day" funds by 10:00 a.m. local time in the currency's country of origin on the value date.
The clearing house submits information to the agent banks via S.W.I.F.T. CME Clearing then transmits this information to their subsidiary or their agent in the indigenous country of origin, notifying it of the amount and source of deposit to be expected on the value date.
By 10:00 a.m. local time the seller's delivering bank transfers the contracted currency to the delivery account at the agent bank in the currency's country of origin.
The agent bank releases the US dollar (or minimum fluctuation currency) payments to the sellers.