The Chicago Mercantile Exchange is enjoying phenomenal success in its foreign exchange business. Total FX volume grew more than 50% in 2004 and e-volumes were up 128% from 2003. Among these FX products, FX options are a rapidly growing market. The latest Bank for International Settlements survey indicates that FX options are the fastest-growing part of the global currency derivatives market, with turnover growing by 95% between 2001 and 2004. Such growth acts as a timely reminder for such institutions as the CME of the need to make the market more transparent and to develop new tools to facilitate option trading.
In April, the CME launched new euro and yen options contracts, with European-style expiration, on its electronic Globex platform. A choice between European-style and American-style expiration gives customers flexibility in determining investment strategies. It also provides alternative tools that are more in line with the over-the-counter market.
Clients can view the real-time market prices for these options contracts on the SuperDerivatives SD-FX platform. In addition, SuperDerivatives’ large client base can view indicative volatility levels for the CME’s FX options contracts.
In June, the CME also announced a six-month fee reduction on FX options trading on its electronic Globex platform. Customers of member firms can now trade FX options for $0.85 per side. This was a shrewd move given that Frankfurt-based derivatives exchange Eurex recently stepped into the FX fray and will offer FX futures contracts from September 23. It too sees opportunities in FX options, and hopes to offer contracts once it has made inroads into futures.
FX options are presently concentrated in the OTC market but it is precisely these types of ventures that will help provide greater price transparency between the OTC and exchange-traded FX options markets. “FX options have been notoriously opaque but FX participants tend to feel more comfortable trading on an electronic platform,” says Rick Sears, managing director of FX products at the CME. “It’s cheaper and easier to manage risk. As an exchange, we definitely expect to see more clients migrate onto our electronic platform when trading FX options.”
Sears believes this appetite for FX options is partly a result of the increase in underlying volumes in FX and greater participation by more sophisticated investors such as hedge funds and commodity trading advisers.
“It’s interesting that the exchange-traded space is growing faster than the OTC,” he adds. “This is mainly because there has been an increase in the number of professional traders, and exchange trading gives them a more efficient means of execution.”
The CME’s push to drive options growth appears to have only just started. Over the next quarter, it plans to offer additional currencies as well as more market-makers to facilitate liquidity.
It also recently became the first overseas derivatives exchange to open a hub in Asia. “Options represent a big opportunity and by providing cheaper, easier access to our Asian customers we believe we can make our products more relevant to all,” says Sears.
