FX on Exchanges

First Published: e-Forex Magazine 43 / FX on Exchanges / April, 2011

Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). FX futures contracts were first introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. However, exchange-traded currency derivatives represent only about 4 per cent of the total foreign exchange traded over the counter (OTC) turnover.

Also, OTC derivatives account for almost 90 per cent of the derivatives markets. In December 2009, the notional value of outstanding OTC derivatives was around $615 trillion (€435 trillion). OTC derivatives are used in a variety of ways, including for the purposes of hedging, investing, and speculating. Contrary to derivatives traded on exchanges, OTC derivatives are not automatically cleared through a central counterparty (CCP) or subject to reporting rules.

This all looks set to change. In September 2009, at the G-20 Pittsburgh Summit, the leaders of the 19 biggest economies in the world and the European Union agreed that “all standard OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end-2012 at the latest.” Furthermore, they acknowledged that “OTC derivative contracts should be reported to trade repositories and that non-centrally cleared contracts should be subject to higher capital requirements.”

Most developed countries permit the trading of FX derivative products, like currency futures and options on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies and countries such as Korea, South Africa, and India have recently established currency futures exchanges, despite having some controls on the capital account.

It is with this in mind, that e-Forex launches a new section, FX on Exchanges, to chart the momentum and continued growth of FX trading and clearing, on exchanges.

Top FX Exchange-traded Contracts

Top FX Exchange-traded Contracts

* Began trading in February 2010   ** Began trading in February 2009.  Source: Futures Industry Assocation.

Outstanding currency coverage

CME Group has seen extraordinary growth in the past three years - FX futures have grown by 94% and FX options by 226%. Frances Maguire talks to Roger Rutherford, CME Group’s newly appointed London-based managing director and global head of FX products, about the next round of growth.

Roger Rutherford puts the steady, strong growth of volume in FX and currency products at CME Group down to an increased desire, both on the sell-side and the buy-side, to mitigate counterparty risk. The franchise built by CME Group in FX means that the exchange has very competitive pricing, deep pools of liquidity, a diverse range of counterparties across all segments of the FX market, as well as benefitting from the diversity of product range at the exchange – such as fixed income and equities, alongside agricultural and commodity trades. 

Roger Rutherford
“There is a multi-asset offering at CME Group and if agricultural and commodity futures trades have an FX element to them then they too get transacted on our futures exchanges. FX has that differentiating factor from the OTC markets.”

Roger Rutherford

“There is a multi-asset offering at CME Group and if agricultural and commodity futures trades have an FX element to them then they too get transacted on our futures exchanges. FX has that differentiating factor from the OTC markets.”

He says: “There is a multi-asset offering at CME Group and if agricultural and commodity futures trades have an FX element to them then they too get transacted on our futures exchanges. FX has that differentiating factor from the OTC markets.”

He points to the broad range of currency pairs available on CME Group, adding that ECNs tend to have strength in the major currencies only, whereas CME Group has seen strong growth in all currency pairs, and adds that FX options, as risk management and hedging tools, have also seen growth that outpaced the OTC market last year. According to the BIS figures while the OTC FX options market shrank by 2 per cent (from April 2007-2010), the CME Group’s options business grew by 226 per cent in the same period.

“Risk mitigation, good pricing, depth of liquidity, diverse counterparty and good currency coverage have enabled the CME Group to become a very solid leader in the FX marketplace,” Rutherford adds.

Futures and OTC markets

Rutherford says it is the strong relationship between the futures and OTC markets that has fuelled the growth in CME Group’s flagship FX contract, the Euro futures. “The futures and OTC markets compliment each other and as we saw volatility in the euro, and increased trading in the OTC cash market in euros, the futures market benefitted from that as well. The OTC market benefits from our growth and the futures market benefits from the OTC growth, so even though the US/euro is generally deemed a commoditised currency pair, it has a good relationship with the OTC market and seen growth on both sides.” 


E-micros on CME (percentages are a comparion with the prior year)

E-micros on CME (percentages are a comparion with the prior year)

Outside the major currency pairs, Rutherford says there has also been more interest in some of the emerging currency pairs, such as the Russian ruble and the Brazilian real, which are seeing steady growth.

Growing capacity

While CME Group is building faster connectivity to the exchange and improving technology, and while high frequency traders have played a significant in the growth in OTC and futures volumes, it is not just about the high frequency traders, but also about growing capacity globally. “Global infrastructures and global technology is an area of significant investment for CME Group. In terms of the client segments where the need for low latency is paramount, the round trip matching time in our matching engine is now 3 milliseconds,” he says.

The CME Group’s state-of-the-art co-location facility will go live in 2012. This is a direct demonstration of the exchange’s commitment to the latency-sensitive segment, and Rutherford says interest has been very strong from clients looking to co-locate with the exchange. Education and knowledge sharing has been at the backbone of CME Group’s innovation and growth throughout its history, and this continues to evolve and update to provide the educational tools needed, such as webinars across all products and segments. “In line with how we are structuring our business globally, we are now providing training that is targeted at our different market segments as well as products,” Rutherford adds. For FX, a recent example is the educational material distributed internally and externally, and also using webinars, was for the launch of CME’s FX volatility contracts.

Next round of growth

Going forward and fuelling the next round of growth, Rutherford says the exchange will continue to look to broadening its currency set, improve contract design to keep in line with market changes. For example, in the CME’s E-micro strategy some currency pairs were amended  to align more effectively with the markets. He says: “We are most certainly looking to grow and improve our FX offering and part of  the rationale is to introduce new products that are relevant to the market, that create a robust, transparent trading environment for the good of the market. The success with the Russian and Brazilian currencies also means we will be looking to the growth areas for more currencies to add.” 

And throughout the current regulatory debate, Rutherford says the exchange is working closely with the market and positioning itself as a solutions provider for the OTC FX market, and towards introducing a clearing solution for FX options, forwards, swaps, NDFs and FX spot, that underpins the OTC market as part of the CME Group FX suite.

He says: “We are working with the buy-side and sell-side on a clearing solution that will potentially be an evolutionary step, but purely from an FX trading perspective, there is a need, and a desire, to mitigate counterparty risk in the FX market. FX is well established as an asset class but trading on an exchange provides competitive robust platform, good technology and a global infrastructure with the support of CME Clearing to provide a very compelling package.”

RTSRussia expands currency offering for growth

FORTS, the derivatives arm of Russia’s RTS Stock Exchange, expanded the range of currency instruments traded in 2010 and became one of the top 10 global derivatives exchanges in 2010 according to the Futures Industry Association.

Cash settled futures contracts on the GBP/USD and AUD/USD exchange rate were launched in December in a joint venture between RTS Stock Exchange, Thomson Reuters and ICAP brining the total number of FX contracts traded on the exchange to seven.

FORTS also began trading the first Russian five-year futures on the USD/RUB exchange rate, the longest settlement term among existing contracts, as well as adding options on EUR/USD futures contract.

Evgeny Serdyukov
“We are now seeing increased interest from market participants, mostly hedgers, in futures contracts on the EUR/RUB exchange rate, for which the open interest has been steadily rising.”

Evgeny Serdyukov

“We are now seeing increased interest from market participants, mostly hedgers, in futures contracts on the EUR/RUB exchange rate, for which the open interest has been steadily rising.”

Trading on FORTS started in September 2001. Evgeny Serdyukov, director of FORTS at RTS Stock Exchange, says: “Investors of the derivatives market FORTS are principally interested in volatile and highly liquid instruments such as the FX contracts traded on RTS, i.e. futures contracts on USD/RUB and EUR/USD exchange rates. These contracts are interesting to market participants, first of all in terms of speculative transactions, a futures contract on the USD/RUB exchange rate is also a tool in hedging currency risks, which is sought after during times of financial market downturn.

“We are now seeing increased interest from market participants, mostly hedgers, in futures contracts on the EUR/RUB exchange rate, for which the open interest has been steadily rising.” Serdyukov adds that the next step in the FX market development will be the launch of a few new contracts for speculators. This year, the exchange plans to start trading in USD/JPY and USD/CHF exchange rates.

Increasing capacity

The exchange is constantly working to increase the capacity of the trading system. In November 2010 an upgrade of FIX and FAST FIX took place and in February, the migration of the FORTS trading platform to the Plaza II protocol was completed.

Following a year’s migration work, the transfer of OJSC RTS to Plaza II technology delivers a single consolidated trading platform based on the internal protocol for all trading operations of RTS markets and its clearing, settlement, statistics and reporting systems, and services though the old RTS Gateway may be fully or partly disabled. As a result the new platform has improved the overall efficiency and speed of the FORTS and RTS Standard trading platform.

FORTS offers co-location facilities for servers of algorithmic traders on the exchanges and reduced commission fees for high frequency transactions.

Serdyukov sees further development of currency contracts and growth ahead.  He says: “We see a considerable demand for FX contracts as a result of the Bank of Russia’s coherent policy in liberalising the Russian ruble exchange rate against the US dollar and Euro, as this leads to higher volatility in the FX market.  This raises the attractiveness of futures and options on currency exchange rate among the market participants.”

dubaiDubai sees 28% growth in currency futures

February volumes on the Dubai Gold and Commodities Exchange (DGCX) grew 17% year-on-year. Consistent with recent trends, DGCX currency futures were the mainstay of trading activity in February accounting for 82% of total volumes. Currency futures volumes increased 28 % on last year to 172,181 contracts.

Indian Rupee futures volumes in February reached 149,126 contracts, a substantial increase from 7,796 contracts in the same month last year. On February 22, Indian Rupee futures registered a new daily volume record of 12,499 contracts worth US $551.55 million surpassing the previous daily high of 11,968 contracts achieved on January 5, 2011.

Australian Dollar, Canadian Dollar and Swiss Franc futures achieved volumes of 1,279, 244 and 1,050 contracts respectively while Euro/Dollar, Sterling/Dollar and Yen/Dollar saw volumes of 10,283, 9,405 and 794 contracts respectively.

Established in 2005, DGCX is the region’s first derivatives exchange and the only one allowing participants to clear and settle transactions within the Gulf region. The exchange has played a pioneering role in developing the regional market for derivatives. 

DGCX is a Dubai Multi Commodities Centre (Dubai Government) initiative in partnership with Financial Technologies (India) Limited and Multi Commodity Exchange of India Limited (MCX). It is an electronic commodity and currency derivatives exchange with 230 members from across the globe, offering futures and options contracts covering the precious metals, energy and currency sectors.