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Foreign Exchange

Tradition-ICAP launches volatility fix

Tradition-ICAP, the leading interdealer broker for FX options, has introduced a daily volatility fixing service – Vol-Fix – aimed at creating greater transparency in the options market and which may encourage the growth of more sophisticated volatility products.

The fixings will be of most interest in the market for cash-settled forward volatility agreements, but also can be applied to volatility trading funds, volatility indexes and hybrid instruments. “Vol-Fix will allow new instruments such as cash-settled forward volatility agreements to be traded with greater transparency and confidence,” Terry Benson, global head of business development at Tradition-ICAP, tells EuromoneyFXNews.

Before, clients trading these instruments would have had to rely on where their bank counterparty told them volatility was trading at the time of settlement, making such products quite unpopular, according to one leading structured options market maker. Now, an impartial reference point might boost the attractiveness of such instruments.

“The absence of an objective reference point for volatility at a particular time has often been a limiting factor and so this will be helpful for the market,” states the structured options market maker. “It will allow us to settle slightly more complicated vol trades, which we wouldn’t be doing if it wasn’t for this.”

Benson says the Vol-Fix also gives the buy-side opportunities to take on risk in new ways and develop new investment vehicles, such as volatility trading funds and volatility indexes.

The fix itself is calculated using a volume-weighted average of all prices and deals traded on the electronic trading platform, Volbroker, between 3.50pm and 4pm. The resulting mid-point rate will be published everyday at 4pm and will be available on Bloomberg and Reuters, under the code VFIX.

Initially, the fixing will be for the most-liquid tenors in EURUSD options before being extended to cover other liquid currency pairs, including USDJPY, EURJPY, GBPUSD, AUDUSD, EURCHF and USDCAD, and liquid EM currency pairs.

At a time when several banks have been accused of rigging Libor rates to profit from derivatives linked to the benchmark interest rate,  Benson explains that the Vol-Fix will not be vulnerable to gaming.

Tradition-ICAP say about 150 banks use the Volbroker platform, with around 1,000 active users at any given time. The fact that the fixing is based on hundreds of prices that are occurring over an electronic platform means it will be extremely difficult to game the price, or force the fix in a certain direction.

Tradition-ICAP was formed in 2000. In 2001, the company integrated Volbroker into its currency option business with six partner banks: Deutsche, Citi, JPMorgan, Goldman Sachs, UBS and RBS.

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