CME deals blow to last look in FX

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By:
Paul Golden
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CME Group delivers a blow to last look by revealing its plans for spot FX basis spreads, just weeks before the launch of its OTC FX options clearing service.

CME Group says the launch of spot FX basis spreads – known as CME FX Link – on its electronic trading platform will create the first-ever central limit order book between over-the-counter (OTC) spot FX and CME Group FX futures markets.

The service is expected to launch in the first quarter of next year and the company says it will provide OTC FX market participants with a more efficient way to access and use FX futures as part of their overall trading activity.

Paul-Houston-160x186
Paul Houston,
CME Group

Paul Houston, global head of FX at CME Group, says FX futures volumes have grown considerably with new clients joining the marketplace. Record open interest was achieved across futures and options on September 3, with volumes up by 35% compared with last year and a 15% increase in the number of large open-interest holders since 2016.

The factors driving this trend are that some participants are attracted by executing on firm liquidity in a regulated marketplace, while others favour the capital and credit benefits of transacting futures and also clearing against a central counterparty, says Houston.

“For instance, we have seen European asset managers join our marketplace ahead of mandatory variation margin on physical delivered foreign-exchange forwards coming into effect in January 2018,” he says.

CME FX Link will enable trading of an OTC spot FX contract and a CME Group FX futures contract via a single spread trade on CME Globex, which should allow for more efficient credit-line management across both markets.

Same rules

According to Houston, the advantage of CME Group’s exchange listed FX marketplace is that it is a global all-to-all market where all participants execute under the same rules.

“The rules are transparent to all and governed through our exchange rulebook,” he says. “Feedback from market participants is that our marketplace is particularly attractive in that it offers firm liquidity with no last look. With the diverse number of participants, the liquidity is very resilient offering optimal execution in our main currency pairs.”

CME is partnering with Citi’s FX prime brokerage unit to act as central prime broker for the spot FX transactions resulting from the spread. This will allow participants to leverage existing OTC FX interbank credit relationships and the scale of the established prime brokerage network.

“By strengthening the integration between futures and the OTC FX marketplace, CME FX Link will enhance access to our FX futures market,” adds Houston. “Market participants will benefit from the capital and regulatory advantages of listed futures as well as optimizing credit lines through facing a central counterparty.”

The FX basis spreads will be available in the new release testing environment in November and for first trade in the first quarter of 2018, pending regulatory review, and will initially be supported for six currency pairs: EUR/USD, JPY/USD, GBP/USD, CAD/USD, AUD/USD and MXN/USD. The spreads will be offered against each of the front three CME FX futures expiry months.

Implied pricing

CME Group will also be offering implied pricing across FX monthlies from next week.

“We launched the monthlies to offer end-users additional maturities to execute and with the aim of building a broader spread market,” explains Houston.

To date, the company has had more than 230 participants trade in the market, he continues.

“We turned on implied functionality as the next step in building this marketplace, allowing us to optimize liquidity between spread and outright markets,” he says.

“The aim is to build the front-end of the curve and offer a risk-management tool to the FX market, such as the Eurodollar futures provide in the OTC interest-rate market. This can provide a capital-efficient means for OTC participants to manage their risk.”

Earlier this year, Houston confirmed that CME would – pending regulatory approval – offer FX options clearing for cash settled FX options clearing across several of the pairs that will be supported under CME FX Link as well as USD/CHF and EUR/GBP. “We are still on schedule to launch OTC FX options clearing into production in October,” he concludes.