Frances Maguire
Frances Maguire

Reaching a crossroads: is it time to re-think the management of electronic FX options

The FX options market is the world’s largest and most liquid options market, and while a small fraction of contracts are traded on the exchanges, most of the FX options volume is traded in the OTC market. But with the regulatory spotlight on the OTC market, and the likelihood that clearing FX options through a central counterparty (CCP) will become a mandatory requirement for banks, Frances Maguire explores where we currently stand with the electronic trading of FX options and whether a rethink is needed about how they are traded and processed in the future.

While the FX options market was the last to benefit from the wider reach of electronic trading, greater automation has made it more available electronically, albeit mainly for the more vanilla structures. The need for better transparency in FX options trading prompted the launch of SuperDerivatives, an online FX options benchmarking service, in 2000. Dr David Gershon, founder, president and chief executive officer of the company, says at present, only simple and vanilla options are being traded electronically. This has been in place for some years and the market is fairly matured.  He comments: “Past innovation on the electronic trading side has really been about  connectivity. Current innovation for us is focused on risk management and the fact that we can now support a larger variety of trades, almost every structure that exists, whether it is multi-asset class basket options, dual-digitals and any combination of currency pairs. We can support very complicated options structures through...continued

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