But the tide has been slowly but surely turning in recent years as regulation bites and exchanges have innovated in order to grab a significant slice of the FX market. Some of that has been done through launching new products, such as crypto currency futures or getting into newer markets, like the Chinese renminbi.
Part of that change has been through systematic acquisitions of successful or start-up FX platforms. In recent years, the market has seen German company 360T bought by Deutsche Boerse, US start up FastMatch taken on by Euronext, and – arguably the largest acquisition of all – was CME Group’s purchase of NEX Markets, which runs long-established interdealer platform EBS.
CME continues to expand and innovate
CME Group reached average daily volume (ADV) of 20.6 million contracts per day during October 2018, up 38 percent from October 2017. Open interest at the end of October was 128 million contracts, up 6 percent from October 2017 and up 19 percent from year-end 2017. Foreign Exchange volume averaged 903,000 contracts per day in October 2018, up 2 percent from October 2017. Digging deeper the highlights included:
- Euro FX futures and options ADV increased 5 percent to 265,000 contracts
- Canadian dollar futures and options ADV grew 1 percent to 80,000 contracts
- ADV in numerous emerging-market currencies increased during October 2018, with Indian rupee futures and options ADV up 126 percent, Russian ruble futures and options ADV up 73 percent and Mexican peso futures and options ADV up 22 percent
Given its recent purchase of NEX Markets, CME now also owns one of the largest interdealer FX platforms – EBS. It will use its technology, futures trading and product development expertise to strengthen and scale NEX businesses, while preserving their existing market structures. The combined company’s leading electronic FX and fixed income platforms will deliver new trading opportunities and simplify access by reducing the number of touchpoints to trade across platforms. In addition, the combined company’s post-trade services expertise will strengthen its compression, reconciliation and processing businesses.
CME Group already has the largest FX futures franchise in the world, but that has not stopped it innovating. The Chicago-based firm announced FX Link late last year and launched it in March 2018. It offers a connection between the listed futures contract and the spot FX world, which is traded as a spread between the futures and spot market. Recently it changed the time its FX options expire to 10 a.m. ET. Clients across time zones are able to trade listed options that expire at the same time as most over-the-counter (OTC) contracts. “Aligning to the 10 a.m. New York OTC convention makes it easier for global clients to take advantage of CME Group’s leading electronic FX options platform and transfer risk more seamlessly between OTC and our cleared, deliverable solution,” said Paul Houston, CME Group Global Head of FX Products. “As more institutions need to comply with uncleared margin rules, we’re extremely focused on providing a regulated FX options solution that is capital efficient.” CME Group offers more than 30 FX options contracts.
Deutsche Boerse’s FX re-boot
Germany’s largest exchange operator has had to bide its time in making a serious move in FX. But once it swooped in and bought 360T for €725 million in 2015, it then had a grounding from which to expand its operations. Since then it has also bought institutional platform GTX for $100 million earlier this year and re-launched its futures business in the summer having originally started in 2014 with six currency pairs.
Jens Quiram, executive director, global head of FX sales and Product Design at Eurex Group, says the focus of the business today is about bringing its core strengths together.
“We have a listed exchange, a CCP that clears listed contracts and OTC FX, and an OTC FX platform. We are combining all of these different strengths into a broad value proposition with aspects appealing to multiple types of FX price-takers, liquidity providers, and clearing firms alike,” says Quiram.
The business relaunched FX futures and options on its exchange, Eurex, in summer this year as well as introducing 23-hour execution for 5 days a week in combination with central clearing at its CCP. On top of this, the firm allowed access to its central limit order book at Eurex to its new 360T clients, which in essence has combined the OTC and futures liquidity pools.
According to the firm’s most recent statistical release for September, 360T’s average daily volume was $75.7 billion – its highest on-record since purchasing the business and up 17% year-to-date. The company has not yet begun listing FX futures statistics. The changes made by Deutsche Boerse has enabled it to look at launching new products such as rolling spot.
“It’s more or less an OTC spot transaction in a futures wrapper, so it delivers all the commercial and financial benefits of a spot transaction but with transparency, price discovery and automatic roll function on-exchange. This creates major efficiencies operationally and during settlement for our clients,” says Quiram.
Like other exchanges, Deutsche Boerse sees opportunities for more volume to move directly onto exchange as regulations start hit at market participants cost of capital. Basel III, which is the wrapper of post crisis capital and liquidity regulations, has been slowly implemented across global financial markets.
Rules affecting those derivatives trades that do not clear are also becoming subject to non-cleared initial margin, with the rules slowly enveloping a wider portion of the market over a five-year period since 2016, which will hit certain FX transactions more than other asset classes.
“We’ve taken some scenarios that offer cost savings of up to 9 basis points per million, per annum, ,” says Quiram. “Clients can save a lot of money directly and indirectly by benefitting from multilateral netting at a CCP, that can reduce exposure significantly.”
In its relaunch of the FX futures business, Deutsche Boerse has on-boarded new liquidity providers from the proprietary trading firm community as well as traditional bank dealers, and has successfully extend trading hours to US and Asia time zones, too, expanding its offering to the 2,000 clients it has globally on 360T.
“In addition we have a very strong market data offering at Deutsche Boerse and we’re offering different data feeds to clients, such as spot feeds, swap data feeds, which gives access to historical and real time data, which is definitely very important for price dissemination. This data feed delivers swap bid-offers and mids from overnight to two years which is unique,” says Quiram.
Moscow Exchange FX market continues sustained development
Rewind 10 years ago, the Moscow Exchange (MOEX) was just an interdealer platform with limited reach into other types of market participants and currency pairs. Today, MOEX boasts not just being for banks but broker-dealers, large corporations and some insurance companies, 27 companies joined the exchange since the launch of the project to increase participation. For spot FX, banks and brokers have 52% of the market turnover, non-resident clients 38%, and Russian individuals and smaller legal entities 11%. Retail individuals showed substantial interest in the MOEX FX market in 2018, too. The number of active clients (of all categories) increased twofold compared to last year and exceeded 50,000 names in September, 2018.
The move has boosted volume and market share, too. MOEX has $5.8 billion in average daily FX SPOT volume on the exchange for the past 10 months 2018, which is a 9% increase compare with the ADV of 2017. There have also been a currency diversification coupled with a declining share of US dollar pairs, from 84% in 2016 to 79% in 2018, versus a rising share of other currency pairs, especially in EUR/RUB (from 13% 2016 to 17% in 2018) and other pairs – took 4% of total turnover.
“We have also seen growing turnover in currency pairs of Swiss Franc and British Pounds Sterling. Despite the devaluation of the Turkish Lira, we see increasing demand on the new TRY/RUB instruments,” says Igor Marich, Managing Director of money and derivatives markets at MOEX.
“We have started offering a USD/RUB fixing matching service which helps large players of RUB NDF and currency futures market to hedge against FX fixing risk. It shows growing interest because it is an electronic FX tool traded on exchange with centralized clearing,” he adds.
As for new frontiers in the development of MOEX, Marich says MOEX wants to continue expanding into emerging market currencies.
“One of our main areas for the development of MOEX FX Market is expanding the offering of instruments with Russian ruble and national currencies of the Eurasian Economic Union (EAEU), BRICS countries and countries having large cross-border turnover in trade of goods and servises with Russia. The availability of trading of these currencies vs Ruble in a liquid regulated exchange market with a central counterparty gives large impetus to using national currencies in the global market,” he says.
Another strategic development priority of MOEX is further facilitated access to MOEX FX Market for international clients, including sell-side, buy-side and corporate clients, through establishing trading and clearing links between the exchange and other global FX venues. For example, in December, 2017 MOEX launched its first trading link with Refinitiv, formerly Thomson Reuters, which allowed their clients using its terminal to access to pricing and trading on MOEX FX market in the same book alongside streamed OTC bilateral prices.
“Also during 2018 we realized for our clients some changes to help them with compliance with certain specific MiFID II and MiFIR technical requirements. For example, for the transaction and trade reporting requirement, MOEX has improved its trading system to provide microsecond accuracy timestamping on all markets and its clock synchronization according to MIFID II requirements, with the maximum divergence from UTC time not exceeding 100 microseconds,” says Marich.
Innovation has been a big focus this year for MOEX. Besides changes, mentioned above, it has set up a unified collateral pool to reduce the costs of trading for market participants on MOEX’s markets and to help contribute to greater trading volumes It is a cross market project with the long-lasting effect. This allows clearing members with access to any of major MOEX markets such as Equities, Fixed Income, Money, FX & Derivatives Markets to use the single settlement account and one pool of assets as collateral as well as get net cross market margining offsets based on portfolio approach to net risk calculations. A major benefit is that the Unified collateral pool now enables participants to post various assets as a collateral across all their Markets. For instance, in the FX market the participants can post as eligible collateral now also the securities and not only cash currency as before. It is definitely quite beneficial for them because of cost reduction and a freeing up of cash liquidity to drive FX trading volumes up.
Another advanced service that MOEX introduced this year is a cross margining between MOEX FX and Derivative markets which helps clients to mange their costs more efficiently and create additional incentives for more trading volumes with reduced margin requirements. In the meantime, a number of new currency pairs have been launched – such as GBP/USD – and started new projects which will continue the development of the product set next year.
“Over the past few years,” says Marich, “we have seen two main trends: migration of the FX market into the exchange universe and growing importance of non-banking participants on FX markets. Already several exchange groups have added FX platforms to their business lines in order to strengthen cross-selling and offer their clients the single point of access to all FX products, including spot and derivatives. They also do their best to raise the efficiency of trading across all these products through the development of clearing services; MOEX is already there. I am confident that the MOEX model of CCP based risk-free trading, our multi-product offering and efficient collateral and risk management enable us to cement our market position as key largest global Ruble FX electronic trading platform to our various local and international clients under best principles set in the FX Global Code.”
SGX on taking over Asia, going global
In Asia, FX futures markets are a newer commodity on some exchanges compared to other geographies. The Singapore Exchange (SGX) first launched FX futures five years ago and since then has built liquidity in 19 futures currency pairs.
“In just five years we’ve managed to build Asia FX futures in most diverse exchange in whole of Asia. In terms of volume across exchanges, comparing to unencumbered exchanges where no capital constraints, we are probably the largest,” says KC Lam, head of rates and FX at SGX.
Unsurprisingly, given its Asian roots, SGX has targeted building liquidity in the Asia region, listing currencies such as the Indian rupee, the Chinese renminbi and the Singapore dollar. SGX has managed to establish itself as the world’s largest exchange for USD/CNH futures, overtaking the Honk Kong Exchange (HKEX) in early 2017. SGX’s market share now stands at roughly 80% in this contract, with September’s statistics showing a 68% increase year-on-year.
There is a similar story brewing in USD/INR, too. SGX has been battling it for market share against the Dubai Gold and Commodities Exchange (DGCX) since mid-2017 and can claim a roughly 50-50 split in this contract market share, with September’s statistics reporting 14% growth year-on-year.
Since launching in November, 2013, SGX has seen $1.48 trillion in aggregate notional value since launch, with an open interest of $4.75 billion as of September. On an annual basis, the growth rate equates to 224% on a compounded basis. Total FX futures volume for September was up 26% year-on-year.
“One of the measures of our success is how much volume is coming from the US and European time zone. In CNH futures – a marquee contract right now where trading is in excess of $3bn per day – we are seeing close to 42% of volume coming in our T+1 session which starts at 6.30pm Singapore time. So there is a lot of interest out of the West in trading Asian products,” says Lam.
Like other exchanges Lam sees opportunities arising from the growing costs of regulation hitting the OTC market place. This is has accelerated in part recently due to the events surround the Swiss National Bank in 2015, which has increased the cost of FX prime brokerage.
“Banks in the past were more freely allowing credit usage in the past, and are pulling back now because of cost,” he says. “Funding costs and XVA can vary hugely, while there are the non-cleared margin rules to consider now, too. In futures you pay margin to the exchange and, until expiry, any P&L is accounted for on a day to day basis. In an OTC world, whoever you trade with bilaterally you post margin and hold the position.”
Part of the opportunity the exchange has spotted is the blurring of the lines between OTC and listed products. As a result, the firm launched FlexC FX futures, which offers participants the ability to trade customizable FX futures in an OTC manner and clear the trades on SGX’s platform.
“This product would benefit participants tremendously if they can retain the relationship they have with customers but have the benefit of exchange-traded derivatives so they can reduce costs, get margin offsets and will go a long way to achieving lower costs of trading,” says Lam.
SGX has also made efforts to expand its global presence, hiring five sales people in the US and trading 22 hours per day. It has also made an effort to upgrade its technology to attract some of the biggest FX liquidity providers in the region. This includes launching the exchange’s reference data feed.
TAIFEX moves into FX
In recent years, TAIFEX, which has long been known for its equity-index products, has also expanded its product lines to FX products in response to the rapid development of Taiwan’s offshore renminbi market and to the trading and hedging needs of businesses and investors.
The launch of two USD/RMB forex futures in July, 2015 not only attracted additional foreign institutional participation, but also drew banks into the Taiwan’s forex futures market. Subsequently, TAIFEX introduced EUR/USD and USD/JPY FX Futures in November, 2016, and GBP/USD and AUD/USD FX Futures in January, 2018 to round out its forex offerings and foster a cluster effect in forex futures.
In September 2018, the combined average daily volume of TAIFEX’s forex products amounted to 3,381 contracts.
“This diversification of our product line provides investors with a variety of instruments with which to respond to movements in forex markets,” says Yu-Jer Sheu, chairman at TAIFEX.
One of TAIFEX’s innovations has been to introduce mini-sized contracts, which make up six of the eight FX products the exchange offers: USD/CNT FX Futures ($20,000 contract size), EUR/USD FX Futures ($20,000 contract size), USD/JPY FX Futures ($20,000 contract size), GBP/USD FX Futures (£20,000 contract size), and AUD/USD FX Futures (AUD25,000 contract size).
“Their small contract size presents a much lower barrier to trade than a typical contract size of $1,000,000 bank-issued forex derivatives. Because of their highly-leveraged nature, FX futures enable investors to hedge, trade and arbitrage at a lower capital cost, increasing the efficiency of investors’ capital usage,” says Sheu.
TAIFEX has continued to make other changes to its offering. It introduced an after-hours trading session in May 2017, extending the trading hours for forex products from 7.5 hours to 19 hours to enable market participants to make real-time adjustments to positions and strategies in response to breaking news and emerging situations affecting international markets.
The after-hours trading has drawn additional foreign investors and traders to the market, driving foreign investor participation in forex futures up from 7.82% in April 2017 to 21.81% in August 2018. TAIFEX also implemented a three-tiered price-limit mechanism in January 2018 that stabilizes prices while supporting price discovery.
“Moving forward, TAIFEX will continue to diversify its products, strengthen and align its rules with international norms, and actively pursue international business and promotions to attract still greater numbers of participants to the Taiwan futures market,” says Sheu.
DGCX benefits from volatility
Sometimes it is the simplest reasons for why there is more demand for currency derivatives trading. At DGCX, that boils down to one thing – volatility.
“Throughout the year, markets have been reacting to a range of unknowns including Fed rate hikes, trade wars and further geopolitical uncertainty, causing traders to seek various hedging mechanisms to mitigate their risk,” says Les Male, chief executive at DGCX.
Total volumes on the Dubai Gold & Commodities Exchange (DGCX) this year hit 17,255,556 contracts at the end of September, with yearly Average Daily Volumes (ADV) at their highest ever, reaching 89,873 contracts per day.
The launch of renminbi (CNH) futures has been one of the more exciting developments to hit the FX market in recent years, but due to the nature of China’s strict currency controls, growth has been measured.
The introduction of the offshore renminbi (CNH) was a major step towards the internationalization of the Chinese currency, and put it on track to become one of the world’s reserve currencies. There has been strong and consistent growth in the renminbi market throughout the internationalization process.
SGX has managed to establish itself as the world’s largest exchange for USD/CNH futures, overtaking the Honk Kong Exchange (HKEX) in early 2017. SGX’s market share now stands at roughly 80% in this contract, with September’s statistics showing a 68% increase year-on-year.
HKEX launched the USD/CNH futures in September 2012, the world’s first deliverable renminbi currency futures product to be quoted, margined, and settled in renminbi, to provide greater capital efficiency and flexibility for managing exposure to the expanding offshore renminbi market.
DGCX currently lists two key Chinese-linked products – one of which is the DGCX Shanghai Gold Futures contract that allows international investors and traders access to the Chinese Gold market and is both traded and settled in Chinese Yuan.
The other is the Chinese Yuan futures contract traded against the USD, but settled in Chinese Yuan. Both products are listed on DGCX because they are relevant for regional and international participants.
In March this year, TAIFEX and S&P Dow Jones Indices jointly launched the S&P/TAIFEX RTF RMB Index and the S&P/TAIFEX RHF RMB Index, which respectively use USD/CNT FX Futures and USD/CNH FX Futures as their underlyings.mIn July, TAIFEX and S&P followed up by introducing x2 leverage daily and 1x inverse daily indices for both of the two RMB indices.
The best performing asset class in September was the Indian Rupee (INR) product suite, which saw Rupee Mini Futures record its 2nd highest monthly Average Open Interest (AOI) of 110,020 contracts, and the Indian Rupee Quanto, which has traded 3,160,471 contracts year-to-date (Y-T-D), up 51% from 2017.
“The robust performance of our Rupee Mini Futures, in particular, is of note, with its increasing liquidity and depth of market, it is testament to the smaller sized contract’s ability to enable retail remitters, individual investors and SMEs to cost-effectively manage their currency risk,” says Male.
As for innovation, there has been plenty of that going on too. “Last year, for example, we collaborated with BSO Network Solutions to enable direct trading and market data access between the Exchange and Interxion London. This enables market participants to obtain market access and to take advantage of trading opportunities between Dubai and London,” says Male.
Furthermore, DGCX has upgraded its market infrastructure provided by Cinnober Financial Technologies. Alongside this, the exchange moved from Tagwire to Blink Protocol, ultimately saving clients and participants up to 45% on their bandwidth usage. DGCX is one of the few exchanges to offer clearing services in the region, too. In July, DGCX partnered with Standard Chartered to expand its collateral basket, and announced that clearing members can now deliver eligible global securities as collateral.
Many commentators expect to see even more OTC FX trading migrating to exchanges with market participants looking to benefit from a centrally cleared model. There are also clear economic benefits in trading FX futures and these are almost certain to continue to gain traction as an alternative to OTC trading. With the leading exchanges expanding both their FX products and global footprints the direction of travel is now clear. FX trading on exchanges is definitely set for dramatic growth.
Development in crypto currencies has predominantly been a US-focused venture by the CME and the Chicago Board Options Exchange (Cboe).
CME Group Q3 Highlights:
- ADV reached 5,053 contracts, +41% versus Q2 and equal to ~$177M notional or 25,265 equivalent bitcoins
- Average daily OI continues to grow at over 2,800 contracts, +19% versus Q2
- Bid-ask spread remains tight at under two ticks wide, reflecting unrivalled liquidity compared to past quarters
- Over 1,700 active accounts are trading
As of the end of October 2018, more than 1,122,321 XBT contracts traded across expiries since the launch, representing a notional value of over $9.92 billion. Average daily value traded in October 2018 was 1,937 contracts; year-to-date 2018 ADV was 5,046.
“Regardless of various views on cryptocurrency, market participants have continued to request exposure to the asset class. Cboe answered that demand with XBT futures, a cleared futures product offered for trading on our regulated futures exchange,” says a Cboe spokesperson.
“Cryptocurrency is a global, recognized asset class that will continue to benefit from a regulated derivatives market, and central clearing at an established CCP to mitigate counterparty risk. This should aid in the creation of more efficient price formation, hedging tools, enhanced transparency, deeper and centralized professional liquidity,” the spokesperson adds.
Other exchanges appear to be more in a wait-and-see mode before committing to the new asset class. They want to a see tighter regulatory regime come into force in the cryptocurrency sphere. This is not just locally, but on a global scale too.