CME targets monthly FX futures after record trading year

CME Group plans to develop further its foreign exchange futures this year, as the US exchange group begins to see the fruits of recent product expansion reflected in record volumes, by Radi Khasawneh.

Speaking to Global Investor, the exchange group’s global head of FX products said he plans to focus on in its monthly futures this year.

“From a product perspective, we have developed the FX futures offering to give a lot more choice and that very much feeds in to where we see demand developing,” Paul Houston said in an interview. “We will be working with liquidity providers to further develop the monthly futures in 2023 as a complement to the quarterly contracts– to feed that choice of execution to a broader range of clients such as the buy-side.”

CME reported an FX futures average daily volume record of 945,000 contracts in 2022, up 24% on the year before. That goes alongside records for both futures and options, with a combined daily open interest total of 2 million lots on average last year.

“In 2022 we saw the return of some FX volatility which affected volumes across the industry,” Houston added. “At the CME in particular we made a number of changes in the preceding years that have made our markets a stronger complement to over-the-counter (OTC) and more attractive particularly for buy-side participants. Those two factors and regulatory change have combined to drive volumes.”

Last year saw the implementation of the final phase of the Uncleared Margin Rules (UMR) and the updated Standardised Approach to Counterparty Credit Risk (SA-CCR) calculations under Basel rules that govern derivatives exposures on bank balance sheets, driving interest in OTC alternatives.

Market experts have said the impact of SA-CCR based calculations on bank balance sheets, starting in January last year, has been more pronounced – particularly in the use of short-dated forwards.

“We expect UMR and SA-CCR to continue to be impactful,” Houston said. “Generally, 2022 was all about the market becoming compliant with the regulatory changes, and 2023 and beyond will be where we might see that trickle down to material changes in trading behaviour. We have prepared for that by focussing on creating what we call execution choice.”

CME also reported records with its FX Link platform, which provides central limit order book trading on spreads between the OTC spot market and FX futures. FX Link had an ADV of 24,500 lots and block trading of its listed products saw 10,600 contracts trading each day on average last year. FX Link’s market data and order entry functions were made available to Bloomberg terminal clients after an agreement in June 2021, widening access to new firms.

“CME FX has long been synonymous with an electronic central limit order book, and it still is our core strength,” Houston said. “The cost of trading in that central limit order book has become less expensive over the years as we changed the contracts, reducing tick sizes and building liquidity for example.”

The exchange has reduced 12 times since 2016 minimum price increments for its FX spread and outright contracts, and extended its block reporting window while also reducing minimum price increments for those trades. Within FX options, CME has changed expiries to more closely align that product with the OTC market, while also offering exchange-for-related positions (EFRP) to allow institutional buy side clients to arrange trades with a liquidity provider while enjoying the benefits of central clearing. That work will continue as CME seeks to capitalise on that trend, Houston says.

“We also made our market more attractive to some OTC participants who prefer and choose to execute on a relationship basis by providing blocks and EFRPs,” he added. “We now have 20 plus liquidity providers providing pricing to customers this way. We are also working with bank FX desks and a number of third-party platforms to electronify the block and EFRP execution more. We see it as an added execution choice. Having grown out from a relatively small base we have achieved a material growth and we see that trend growing further.”