Joe Morgan
Joe Morgan

FX on Exchanges - Global growth accelerates

The aftermath of the credit crisis and fears of systemic risk in the over-the-counter (OTC) market is channeling more FX flow on to exchanges. This regulatory push to increase transparency in a global FX market with more than $5 trillion in average daily volumes is spurring innovation among major global exchanges as they scramble to meet escalating demand. Buy and sell side firms now have an unprecedented breadth of centrally cleared products to choose from. Joe Morgan investigates.

A new paradigm in on exchange FX trading

The Chicago-based behemoth CME Group has always been at the forefront of technological innovation in the financial markets. The exchange’s launch in March this year of spot FX basis spreads, titled ‘CME FX Link’, on its CME Globex platform marks the creation of the first ever central limit order book between the OTC spot FX and the exchange’s FX futures market. 

Paul Houston

Paul Houston

“CME FX Link offers a central limit order book between OTC spot and FX Futures for the first time, enabling market participants to offset exposures and credit between each market,”

Paul Houston, global head of FX at CME Group in London, says the service – which will support six currency pairs: EUR/USD, JPY/USD, GBP/USD, CAD/USD, AUD/USD and MXN/USD – will bring increased levels of transparency to the FX market. He says the offering will also enable market participants to more efficiently transition OTC FX activities into FX futures. “This service offers a central limit order book between OTC spot and FX Futures for the first time, enabling market participants to offset exposures and credit between each market, thereby serving as an efficient listed alternative to OTC FX swaps,” he says.
The addition of new on exchange services by CME Group in a terrain that has been historically the exclusive preserve of the OTC market should bolster volumes on the exchange. CME Group reported a surge in trading activity that saw it reach monthly average daily volume of 27.3 million contracts for February, the highest ever. Foreign Exchange volume averaged 1.1 million contracts per day in February 2018, up 42 percent from February 2017. 

The Chicago-based exchange’s CME Globex electronic trading platform – which offers trading nearly 24 hours a day – provides market participants with a capital efficient FX clearing solution. Houston points to the cost benefits of CME’s exchange-based model that will attract FX flow from the OTC market. “We offer a diverse pool of products across asset classes amounting to a $4.5 billion base guaranty fund,” he says. “The result is a secure and cost-effective solution which is an eighth of the cost on incremental funding compared to other NDF clearing providers.”

Houston points to unparalleled portfolio margining opportunities between cleared FX and exchange listed FX futures and options, with NDF margin reductions of up to 90 percent against emerging market futures and 56 percent against G10 futures. The regulatory authorization for enabling portfolio margining between ETD FX and OTC FX products is now also in place, according to Houston, with a target launch date of late 2018. Houston highlights the exchange’s cleared cash-settled FX options solution, which he says provides “superior cost and capital efficiencies”, relative to the “cost prohibitive” physically delivered option solutions.

A bright future for FX 

A Greenwich Associates report, A Bright Future for FX Futures, published in December 2017, finds that FX investors can make cost savings of more than 75 percent by trading futures rather than trading in the OTC markets. The report concludes that market participants subject to Basel III costs could garner even greater costs savings by switching to futures from OTC trades. 

CME’s exchange-based model has many cost benefits
CME’s exchange-based model has many cost benefits

“Pure costs savings are not the only reason to consider FX futures,” the report states. “As sell-side dealers become more selective in the clients that they prioritize, some buy-side traders may find liquidity more difficult to access. Others may find that they are getting de-prioritized and receiving fewer services from particular counterparties. As a result, adding the option to trade in a futures environment could help mitigate the effects of shifting sell-side behavior.”

The increasing costs of OTC FX trading could result in between 20 to 60 percent of the market migrating to exchanges with regulators pushing some $3 trillion of FX options, swaps and derivatives trading towards a formal clearing environment, according to a Reuters report. Still, a switch to futures might not make sense for some FX market participants that trade only infrequently and at relatively small volumes, according to the Greenwich Associates report. “And for some investors, there may be lingering skepticism about the available liquidity in an exchange-traded environment, even though recent statistics show that average daily volume (ADV) in FX futures equals or exceeds the volume on a major spot exchange.”


Nevertheless, exchanges will undoubtedly benefit from migrating FX flow to a centrally cleared model and are demonstrating an appetite for innovation in both their FX product and market data offerings. “Even before considering the potentially punitive effects that regulations have on trading costs, trading FX futures can have clear economic benefits,” concludes the Greenwich Associates report. “For that reason, we expect FX futures to continue to gain traction as an alternative to OTC trading.”

Igor Marich

Igor Marich 

“The CCP model employed by MOEX has definitely grown in its attractiveness.”

Moscow Exchange widens access

“Although it seems that to some extent FX is a vanilla market,” says Igor Marich, FX, money and derivatives markets at Moscow Exchange (MOEX). “But we see a lot of opportunities to enlarge our product offerings, providing improvements in trading and clearing infrastructure following our strategic plans to cement MOEX’s place as the largest RUB FX liquidity pool globally.”
In a bid to expand its presence in the on exchange FX space, MOEX has widened access to its platform to include non-bank investment firms such as brokers and dealers as well as large Russian non-financial corporations. Today brokers offer their buy side clients access to the MOEX order book via direct market access (DMA) services. At the end of 2017, 10,600 non-resident clients from more than 100 countries were registered on the exchange’s FX market. In 2017 ADTV in MOEX FX deliverable instruments (all currencies) increased by 23 percent to $23.7 billon. In line with recent trends in the global and domestic markets, the share of spot trades at MOEX decreased to 23 percent while the share of FX swaps rose by 77 percent.  MOEX sees an increased interest in FX swap trading as a result of continued overseas investment inflows to financial market in Russia that are rolled by swaps. The exchange’s major currency pairs include USD/RUB, 82 percent of overall market trading, EUR/RUB, 14 percent and EUR/USD, CNY/RUB, GBP/RUB, CHF/RUB, HKD/RUB, BYN/RUB, KZT/RUB – 4 percent. 

As far as cash-settled instruments – USD/RUB FX futures and options in 2017, MOEX saw a decrease in ADTV trading volumes by 30 percent to $2.52 billion the result of reduced volatility. However the open interest (ADOI) rose by 14.7 percent to $5.92 billion due to the increased interest towards the options market from international players and local corporates. “Since 2013 the exchange has been transforming its business model from purely inter-dealer to a combination of inter-dealer and agency access model. In particular, admitting non-bank investment firms such as brokers and dealers to trade alongside banks that let end buy-side clients – Russian and especially international FX market participants – have direct access to the MOEX order book via the SMA and DMA services,” says Marich.

Meanwhile, Frankfurt-based Deutsche Bourse  has acquired 360T, an FX trading platform providing services to buy and sell side firms. Deutsche Bourse’s derivatives exchange, Eurex, offers six pairs on four major currencies, including EUR/USD, EUR/GBP, EUR/CHF, USD/CHF, GBP/CHF and GBP/USD. The exchange’s clearing house, Eurex Clearing, acts as counterparty to the trade until the trade is settled, providing full counterparty risk protection.  Eurex Clearing recently successfully passed the second EU-wide stress test conducted by the European Securities and Markets Authority (ESMA). The objective of this exercise was an assessment of central counterparties’ resilience in stressed market conditions. “The stress test is an important contribution to ensuring financial stability in Europe, given the important role of central counterparties,“ says Thomas Laux, Chief Risk Officer at Eurex Clearing. ESMA put the focus of the test on credit risk as well as associated liquidity risk that EU CCPs would face under different stressed market environments. Eurex Clearing passed the test in both categories. 

MOEX plans to obtain recognition from ESMA as a third-country trading venue
MOEX plans to obtain recognition from ESMA as a third-country trading venue

Bolting down FX risk

Exchanges in the region have developed their on exchange FX offering in response to legislation such as the EU’s European Market Infrastructure Regulation (Emir), which provides a framework for OTC derivatives not cleared by a central counterparty in order to reduce levels of risk in the financial system.

In September 2017, MOEX launched instruments to trade at the MOEX FX USD/RUB and EUR/RUB fixing prices at its new Electronic FX Fixing Matching Service with subsequent clearing and settlement by the exchange’s central counterparty, National Clearing Center (NCC). The service will provide domestic and international banks with a robust on-exchange hedging tool against FX Fixing currency risk, associated with underlying non-deliverable forward and FX futures contracts. 

Furthermore, MOEX in January 2018 expanded its FX product offering to include the Turkish Lira, providing clients with access to TRY/RUB currency pairs. The Moscow-based exchange also has plans to include the currencies of the G-10 group of countries, along with the Commonwealth of Independent States (CIS) and European Economic Community. In December 2017 MOEX and Thomson Reuters established an FX trading link between their platforms that enables users of the Thomson Reuters FXT terminal (widely used all over the world) to take MOEX FX order book liquidity. This is the first example of liquidity streaming from one platform to another and it is technically advanced. MOEX hopes that with the link to Thomson Reuters and other FX venues it will begin to actively cooperate in 2017 and bring more remote buy-side clients from outside Russia into the MOEX FX market.



“With deep liquidity of our key products that extend beyond Asian hours, SGX is able to assure our clients both price discovery and formation even in their respective time zones,”

Meeting the highest standards

MOEX plans to obtain recognition from ESMA as a third-country trading venue. The Moscow-based exchange is also in the process of being fully compliant with the Markets in Financial Instruments Directive (MiFID) II and Markets in Financial Instruments (MiFIR) technical requirements. For example, for the transaction and trade reporting requirement, MOEX has improved its trading system to provide microsecond accuracy time stamping on all markets to meet MiFID II’s transaction and trade reporting requirements. MOEX provides microsecond accuracy time stamping across all of its markets. The exchange’s clock synchronization meets MiFID II requirements, with the maximum divergence from Coordinated Universal Time not exceeding 100 microseconds, according to Marich.

The Moscow-based exchange’s plans to obtain further regulatory approval to deliver additional FX services and will enhance its capacity to meet rising demand. MOEX anticipates a growing interest in FX swap trading as a result of continued overseas investment inflows to financial market in Russia that are rolled by swaps, according to Marich. 
“Our strategic goal is to secure and improve a role for Moscow Exchange as a center of excellence and a dominant global electronic platform for trading Ruble foreign exchange instruments with increasing numbers of additional trading, risk-management and net settlement and clearing services,” says Marich. “The CCP model employed by MOEX has definitely grown in its attractiveness to both domestic and foreign participants amid tightening regulatory standards for the financial industry.”

Asia’s biggest listed FX venue eyes new products

The Singapore Exchange (SGX), Asia’s biggest listed FX venue, has plans to launch customized FX futures products. “We are looking to allow customers a choice on how they would like to manage their FX risk very much like what they are doing now in the OTC environment,” says KC Lam, director and head FX rates at SGX in Singapore. “Our customized futures solution, however, will be more capital efficient and has the surety of an exchange cleared solution.”

He points to a “symbiotic relationship” between FX futures and OTC markets, contributing to rapid growth in the FX futures market. He points out that trading on-exchange creates higher transparency in prices and trading information, and provides investors with more flexibility. For example, a key benefit of on exchange trading is that market participants can offset their position at any point of time during trading hours. “The futurisation of the FX OTC market is an exciting area of growth for SGX,” he opines. SGX has witnessed a compound annual growth rate of 12 percent since the launch of its FX futures portfolio in November 2013, with the exchange reporting an aggregate notional value traded since the contracts were launched of US$900 billion. 

“We are focused on growing our role as Asia’s largest and most diverse listed FX venue,” says Lam. “A core part of this is ensuring that we continue to meet evolving client needs and grasp new areas of opportunity. An example is the work we are doing to bridge the futures and OTC markets – providing clients with the flexibility of the OTC market as well as the risk mitigation benefits and cost benefits of on-exchange trading.”  

Dr. Len-Yu Liu

Dr. Len-Yu Liu

“..a variety of small-sized currency futures listed on TAIFEX have proved popular with investors and exporters.”

FX trading volumes at SGX rose by 59 percent in 2017, according to the exchange. The People’s Bank of China’s decision in early January to reduce the influence of the “counter-cyclical factor”, a formula introduced in May 2017 in the determination of the USD/CNY reference rate, also resulted in a further volume spike in SGX’s USD/CNH futures trading, according to Lam. Overall trading in SGX USD/CNH futures contract crossed the US$ 1 billion mark on 19 days in January 2018, according to SGX data. The total volume for the SGX INR/USD futures crossed 1 million contracts for the first time in its history in January, with 1,127,178 contracts traded. In notional value terms, this translates to more than US$ 35 billion of SGX INR/USD futures traded in January 2018, according to SGX.

In the wake of escalating FX trading volumes, SGX is ramping up its FX market data offering. The Singapore-based exchange has rolled out SGX FX futures as part of its Derivatives Market Direct Feed (DMDF), a service that provides real-time price information on SGX futures and options contracts direct from its trading engine. The FX market data offering is available to all market participants on either a real-time or delayed basis. SGX has waived fees on data and market participants should be able to receive it directly from their market data provider.

A low latency Titan

The launch of SGX Titan DT/DC, is central to the Singapore-based exchange’s drive to expand its FX product offering, with the low-latency trading and clearing platform supporting various protocols such as ITCH and OUCH. “With deep liquidity of our key products that extend beyond Asian hours, SGX is able to assure our clients both price discovery and formation even in their respective time zones,” says Lam. “For instance, as much as 40 percent of our CNH volume are from our T+1 session with active trading from clients in Europe and US.”

SGX provides connectivity to its trading platform via the exchange’s co-location services, managed network services, offshore hubs or approved network service providers. In addition to being the leading exchange in Asia for INR and CNH futures contracts, the platform also serves as the most liquid offshore market for the benchmark equity indices of China, India and Japan. The platform is also the leading commodities exchange hub in Asia for iron ore and rubber. In addition, Titan OTC, the Singapore-based exchange’s OTC trade registration platform, provides unified OTC trade workflow on FX, along with a variety of major asset classes and derivatives contracts. 

Meanwhile, the Taiwan Futures Exchange (TAIFEX) reported trading volume of more than 265 million contracts in 2017, with TAIFEX’s flagship options contract generating volumes of more than 167 million contracts in the year. Average daily trading volumes of TAIFEX’s 8 currency products reached 3,578 in January 2018. “TAIFEX has seen strong market demand for FX products,” says Dr. Len-Yu Liu, Chairman of TAIFEX. “As Taiwan is one of the world’s most trade-dependent economies and a vital part of many global supply chains, where most enterprises are SMEs and need to hedge FX exposure. The newly launched GBP/USD and AUD/USD futures have further complemented the FX product suite. And a variety of small-sized currency futures listed on TAIFEX have proved popular with investors and exporters.”

The launch of SGX Titan DT/DC is central to expanding its FX product offering
The launch of SGX Titan DT/DC is central to expanding its FX product offering

Growing appetite for RMB on exchange trading

Appetite among institutional investors for exposure to the Chinese yuan shows no sign of abating. To meet this demand for exposure to the currency of the world’s second biggest economy, exchanges are continuing to expand their product offering. For example, TAIFEX’s two USD/RMB FX futures contracts have built up traction since their launch in July 2015, attracting a growing international investor base along with banks that perform a market making role, the exchange says. 

TAIFEX has cemented its position as the world’s second biggest offshore hub for RMB trading, broadening its product offering with the launch of two RMB options products. The exchange’s international investor base has increased from 7.82 percent in April 2017 to 10.63 percent in January 2018. To meet burgeoning demand among international investors to trade RMB denominated products, TAIFEX obtained regulatory approval to allow foreign investors to use USD, EUR, JPY, GBP, AUD and HKD as initial margin on the instruments. Meanwhile, DGCX’s increasing focus towards serving its international investor base has resulted in the exchange launching a RMB futures contract traded against the USD, which is settled in Chinese Yuan. 

DGCX has bolstered FX transactional flows by obtaining comprehensive  regulatory approval
DGCX has bolstered FX transactional flows by obtaining comprehensive regulatory approval

Middle Eastern promise

The growing significance of Dubai as an FX hub is spearheading the Middle East’s increasing importance in global currency markets. The Dubai Gold and Commodities Exchange (DGCX) has bolstered FX transactional flows by obtaining comprehensive regulatory approval as a derivatives exchange and through strategic investment in the trading infrastructure necessary to support major institutions across the buy and sell side. “By virtue of our diverse product offerings, we have been able to widen our international footprint and attract different client groups,” says Les Male, chief executive officer (CEO) at DGCX in Dubai. “However, if you specifically look at our FX offering, we have 15 products that sit between the G6 currencies and emerging markets currencies bracket with our innovative offerings resonating with traders. In essence, there is a huge FX trading marketplace in which we are actively present and contributing in terms of trade volumes, innovation, transparency and regulation.”

DGCX reported a cumulative trade of more than 90 million contracts since 2007 among the 15 currency contracts currently listed on the exchange. The exchange’s clearing house, the Dubai Commodities Clearing Corporation (DCCC), is regulated by the Securities and Commodities Authority (SCA), the regulatory arm of the UAE Central Bank and is also recognised as a third-country CCP by ESMA. 

Les Male

Les Male

“By virtue of our diverse product offerings, we have been able to widen our international footprint and attract different client groups,”

A global regulated trading hub

“We have rolled out a series of initiatives and formed strong partnerships to enhance our market access and trading infrastructure,” says Male. “Our clearinghouse, DCCC, is recognized as a third-country CCP by ESMA, and this recognition has enabled us to work with European clearing institutions, which was not the case before. The ESMA recognition also presented us with many collaboration opportunities within the UAE and wider region, and we are optimistic that it will continue enhance our growth prospects.”
DGCX in 2017 launched ActiveRisk, a risk management system designed to enhance regulatory compliance of regulations such as Emir. The integration of ActiveRisk enables DCCC to better determine the appropriate margin requirements and also gauge short-term liquidity challenges amidst adverse price movements, according to Male. DGCX has also collaborated with global network provider BSO Network Solutions to enable direct trading and market data access between the exchange and colocation data centre service provider Interxion in London. This added connectivity to London from the emirate facilitates market access and myriad trading opportunities between the two trading hubs. DGCX is also upgrading its trading system and the protocols used for the transmission of data, thereby resulting in greater bandwidth efficiencies while enabling lower latency access to the exchange. “We remain focused on enhancing efficiencies in our systems and processes by deploying the latest technology, while also ensuring that our members get to take advantage of the ample trading opportunities that exist between Dubai and other international markets,” says Male.

He says the rise in the use of currency derivatives compared to trading in the spot FX market can be attributed in part to increasingly volatile and interconnected global financial markets. For example, the proliferation of cross-asset class trading has resulted in financial firms pursuing increasingly sophisticated trading strategies. “There has been an increased need to hedge as global markets are becoming more volatile, leading to more unpredictable and erratic movements in the underlying FX market,” says Male.

Bitcoin makes it to the big stage

A key milestone in Bitcoin’s coming of age has been the listing of futures on the cryptocurrency at the Chicago powerhouses CME Group and CBOE Global Markets.

CBOE reports that more than 282,000 contracts have traded across expiries since the launch of contracts on the cryptocurrency, representing a notional value of over $3.2 billion. “It is a product that really captured public imagination last year, and we’ve fielded an unbelievably high volume of inquiries from folks looking to get started,” says Michael Mollet, Director of Product Development at CBOE in Chicago. CBOE says it has received enquiries from a variety of investors – including retail brokers and proprietary trading firms – with participation in the market continuing to broaden.

Bitcoin makes it to the big stage