The worlds largest regulated FX marketplace says FX options trading which will soon come under Dodd-Frank regulations across six currency pairs increased by 53% during the second quarter, with electronic trading receiving an even larger boost of 85% versus the same period last year.
According to CME, the shift to exchange-based trading of FX derivatives saw 26 records set during the second quarter, including 15 new volume records in the month of June alone.
Highlights included more than 3.8 million FX options contracts traded and a new record for AUD/USD options, which rose to an average daily volume of 8,584 contracts per day. The platform continued to see strong interest in its FX futures offering, with volumes up 21% year-on-year.
With Dodd-Frank and Basel III implementation beginning to bite for the largest financial institutions, the increased costs associated with cleared and uncleared OTC derivatives trading appear to be driving a shift in FX liquidity onto exchanges. Although interest rate and credit derivatives are the first products to be impacted by Dodd-Frank, FX options will eventually be explicitly in scope, and are the most capital intensive products.
Taken together, Dodd-Frank, EMIR and Basel III generally may drive client preferences toward centralized trading of listed derivatives on exchanges, says Derek Sammann, senior managing director with CMEs FX, metals and options group. The cost of trading both cleared and uncleared OTC derivatives is increasing as a consequence of the new regulation, while exchange traded derivatives receive favourable capital treatment.
A substantial part of the dealer community has already seen an impact on CDS and IRS rules on their balance sheet, and are getting ahead of the regulations by increasing the amount of FX business they transact in the listed derivatives market. As a result, we are seeing a rapid increase in FX futures and listed FX options volumes.
Sammann notes that CME is looking to expand its FX derivatives business into Europe, subject to regulatory approval.
Meanwhile, European exchanges NYSE Euronext in Amsterdam and Germanys Eurex are looking to capture market share amid the increase in exchange-based trading with new product offerings. For example, NYSE Euronext added GBPUSD and GBPEUR options and futures to its FX derivatives offering on September 16, which previously only featured EUR/USD options and futures.
Eurex is this month launching futures and options on six liquid currency pairs, including EUR/USD, EUR/GBP, EUR/CHF, GBP/USD, GBP/CHF and USD/CHF, and says it is offering long-term incentive programmes with revenue-sharing to attract market makers to provide sufficient order-book liquidity.
The large majority of FX derivatives are currently traded off-exchange, says Peter Reitz, member of the Eurex executive board. With our listed contracts we are offering an alternative in which we bring the advantages of exchange trading, including clearing, to a market that has so far been organized predominantly bilaterally.
We have tailored our offering to current market practices and want to provide efficient and effective access to a regulated and safe market.
With OTC platforms now beginning to trade non-deliverable forwards and FX options under Dodd-Franks swap execution facility (SEF) regulations from October 2, exchanges are keen to position themselves as cheaper, more efficient venues that provide similar transparency benefits as SEFs.
Relative to CDS and IRS, the FX market already trades in an SEF-like manner, says Sammann. It is highly electronic, relatively transparent and many of the FX platforms are based on central limit order-book models.
These are characteristics that are inherent to exchanges and the market move away from bi-lateral, RFQ-based trading is accelerating the shift to an exchange-based model anyway, at least for standardized products.