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Foreign Exchange

The future is bright for exchange-traded FX, says CME’s Rutherford

Currency futures trading is about to celebrate its 40th anniversary on CME. Roger Rutherford, the group’s global head of FX, is confident that the exchange’s potential for further growth is far from being reached.

Average daily FX volume on the CME has grown steadily over the past 10 years to a point where it is now close to matching volumes on the biggest OTC electronic trading venues. More than $120 billion in FX futures and options flow through the exchange every day, through 56 FX futures and 31 options contracts. This is the equivalent of more than 85% of EBS’s average daily volume. A decade ago this figure was closer to 10% of EBS’s ADV. Despite a challenging year for the FX industry, overall volume traded on the CME by the end of 2011 had nevertheless matched the record level set the year before.

The group last week reported record levels of open interest across foreign exchange futures and options, reaching a notional value of $256 billion on March 8 – 2% higher than the last record set in June 2007. CME is becoming an important venue for hedging and risk mitigation.

 CME ADV as a % of EBS
 
 Source:  CME Group

At a press conference at the CME’s London headquarters on Wednesday, Rutherford told reporters that bigger volumes are driving an appreciation that CME is a viable alternative to other venues in OTC FX. While intraday trading volumes on the major currencies have suffered from a general risk-off tone in both OTC and exchange-traded markets, says Rutherford, traders are looking to emerging-market currencies, and recognising the benefits of trading them on a regulated exchange.

CME says ADV in all emerging market currencies has risen 42% since 2010; the Russian rouble and Brazilian real volumes have grown 195% and 425% respectively. Last year CME launched an RMB contract, and is preparing to list contracts in the Indian rupee and the Ukrainian hryvnia.

However, not all emerging market currencies listed on the exchange have traded with the same vigour. CME is looking to revive interest in eastern European currencies, for example, which were launched several years ago, but have failed to match the growth in trading volumes seen in the OTC market.


 Emerging market currencies ADV and open interest
 
 Source: CME Group

Banks look to CME for liquidity?

Rutherford said that the exchange had deepened its liquidity through technology, which has enhanced price discovery, and a broadening product set coupled with a diverse counterparty mix. These benefits stand alongside the traditional security and transparency at a time when counterparty risk has become a great concern.

While the standardized nature of FX futures might be less attractive than the bespoke tailoring of the OTC market, it might be a more cost effective way to manage FX hedging, said Rutherford.

Basle III regulations will impose margin requirements five times greater in OTC swaps than in FX futures, creating a big cost of access to capital that could make using an FX futures exchange more attractive for participants with frequent hedging requirements.

Rutherford explained that the growing interest in accessing the FX market through the CME is not only coming directly from the buyside, but also from large market makers looking to differentiate themselves from the competition.

“The meetings we’ve had with the heads of FX of the world’s biggest FX banks show there is increasing interest in accessing our liquidity. Those that are not trading our products today want to trade them tomorrow,” said Rutherford.

He added: “We are actively looking for channel partners to improve our distribution; one way we are doing this is through e-commerce platforms on the single-bank portals that can connect to our liquidity through their existing infrastructure.”

According to CME’s list of certified front-end trading applications, clients can directly access the CME’s online marketplace Globex through more than 30 trading applications, as well as the e-trading platforms offered by Bank of America, Credit Suisse, HSBC, Morgan Stanley and UBS.

Judging by Rutherford’s enthusiasm, that number might soon rise.

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