Richard Willsher
Richard Willsher

Trading FX On Exchanges Compelling alternatives to OTC strategies

On-exchange FX volumes are increasing rapidly, enabling exchanges to broaden the depth and breadth of the products traded on their platforms. Richard Willsher investigates further.

Why On-exchange FX volumes are increasing is easy to see. The large amounts of data produced by exchanges shows that trading increases significantly in response to macro events as customers seek risk coverage. The record breaking EUR/USD futures volume traded on CME following the European Central Bank’s (ECB) monetary policy announcements on 12th September is one example. Another was the jump in RMB risk-coverage products trading on Singapore Exchange following an announcement of US trade tariffs on Chinese imports 

If the growth in macro risk coverage is a major trend in on-exchange FX, another is the development of bridges to OTC markets. Exchanges are increasingly offering complementary products either as hedges or as structures based on OTC trades and this seems set to increase as OTC trading volumes continue to burgeon.

Thirdly, the adage “volume begets volume” remains true. As on-exchange liquidity increases, so exchanges offer more products. This in turn attracts more interest from customers and this gives rise to further liquidity. 

These three trends are well illustrated by recent developments at the four exchanges we speak to here.

FX on Exchanges

Paul Houston

“We have a very diverse liquidity pool that offers all-to-all anonymous trading.”

CME – from strength to strength

If any proof was necessary that size matters in exchange traded FX, CME’s continual record setting would do the trick. The ECB’s series of announcements in September included the reduction of the interest rate on its deposit facility, the re-booting of its asset purchase programme and several other Eurozone bank support operations. The reaction on CME was immediate. FX Futures trades instantly increased to an all-time record of USD256 billion notional, with EURUSD reaching $138 billion. In addition, CME recorded another all-time high six days later when its FX Link product volume reached USD4.3 billion notional, in response to both ECB and the Fed’s monetary policy decisions, stress in the repo market and movements in spot FX markets.

But the point about size is what is increasingly on offer at FX-exchanges to mitigate the effects of uncertainties on capital markets around the world. US government actions, challenges to the Chinese economy, threats to oil supply and the outcome of Brexit in Europe are all causing febrile markets either to run for cover or to react bullishly by turns. With this mind, CME’s head of FX, Paul Houston highlights the advantages of FX exchanges, “We have a very diverse liquidity pool that offers all-to-all anonymous trading. Also, our prices are firm – no last look. There is complete transparency. Being regulated and being subject to a rule book is attractive to some participants. We also offer an efficient way to access the market from a credit perspective. In OTC there’s a need to have a bilateral credit relationship, or an FX prime brokerage relationship. In listed markets access is through the FCM model. There are approximately 50 FCMs that offer FX clearing services, so sometimes market access is easier especially as the OTC market is becoming more constrained for certain counterparts.”

He points to the capital efficiencies that banks can achieve through clearing against a central counterparty. Listed FX attracts no CVA charge, has considerably lower counterparty risk weightings and the benefits of netting reduce exposures generally. This is in addition to the operational and regulatory wrapper that clearing through a CCP offers participants.

“Where margining is applicable,” Houston explains, “and it’s not applicable to all participants in FX, but certainly for products that are subject to uncleared margin rules, then facing a central counterparty instead of facing several counterparties simultaneously in a bilateral world can offer a huge amount of margin savings purely by netting. In addition, there is a more favourable margin model in listed, being a one day margin period of risk versus ten day on the OTC side, and five day with OTC clearing. FX options are one of the largest drivers of uncleared margin balances and we have been focused upon making our Listed FXO product a better proxy for OTC activity. 

Over the last year we have moved our expiry time to 10am New York, introduced more maturities and made our strikes more granular in order to make it easier for participants to obtain the benefits of trading in our market-place. CME also use their broad offering to offer margin benefits to participants trading cross-asset- for example,” he continues. “CNH against gold, we offer a 40% offset and there are a lot of participants who trade CNH against gold, with the exchange recently launching their Shanghai Gold contract” 

Source CME Group
Source CME Group

FX Link 

A longstanding conundrum in the story of OTC versus on-exchange revolves around the concepts of the flexibilities that OTC bilateral trading offers and the standardisation and lower credit risk that exchanges may provide. 

CME’s FX Link forges connections between the two. It provides a central limit order book on CME Globex for trading spreads between OTC Spot and Listed FX Futures. Not only allowing hedging for participants trading both marketplaces, but also offering an electronic CLOB for FX swaps. “Participants using FX Link for exposure management offer a source of liquidity for other participants” notes Houston. New applications for FX Link are constantly evolving. CME’s recently released third quarter FX Report contains a useful worked example of how it is used to provide pick-up yield for negative yield bond investors through using listed FX futures. The article refers to the worldwide USD16 trillion of bonds that are currently in negative yield territory and how, for example, by applying a EUR/USD future to an OTC EUR purchase, a negative yield on 2-year German Bund can be transformed to a positive yield.

It is noteworthy that CME’s acquisition of EBS, which will be migrated to its Globex platform, is set to enable more trading opportunities between OTC and listed FX product markets.

Trump Spike
Spike in CNH/USD following President Trump’s tweet

Singapore Exchange

FX trading on Singapore Exchange (SGX) continues to increase quarter-by-quarter and year-on-year. “Last year, we actually recorded almost a couple of hundred percent growth for the entire complex, and also the year before that,” explains K.C. Lam, SGX’s head of FX and rates. “So, it’s got pretty big in terms of volume, relatively speaking, and in terms of the exchange-rated products in Asia, particularly the two largest economies, China and India, it is reflected in our offering as well. 

Uptake is increasing and the exchange offers very open, fair and, transparent pricing for a product in Asian currency. If you look 10 years back, Asian currency was pretty much traded by voice and not automated.  This was definitely opaque and so this is a major change. Fast-forward then to now, and we’ve seen a lot of things happening, and a lot of these trends tend to suggest that this growth can continue just by the sheer size of the economy.”

FX on Exchanges

K.C. Lam

“If they are already trading in cleared products on SGX, such as iron ore, commodities and so on, it makes a lot of sense for them then to use FlexC.”

Hedging and flexibility

Risk coverage is a major driver. Following the US President’s Friday 2nd August tweet that the US would impose a ten per cent tariff on USD300 billion worth of goods, SGX traded USD/CNH futures set a new record of USD7.5 billion, as market participants sought to manage currency risk. The following Monday, 5th August, China’s Central Bank set its daily reference rate for the yuan above 7-per-US dollar – a level last breached in 2008. This set off a major wave of trading that led to the largest single day record trading volume of USD10.3 billion, surpassing the prior Friday’s record by 38 percent. 

“SGX has been the clear market leader for CNH futures for close to two years and continues to gain market share,” says K.C. Lam. “In fact, our open interest right now is more than double that of our closest rival. It used to be the other way around. We were leading in volume, but we were not leading in open interest. Our volume is 80 percent of the entire CNH market now. But this actually has been a very secular trend that has been happening for a while.”

Like CME, SGX is developing offerings that mirror OTC FX trading. It is early days since it announced its SGX FlexC FX Futures in July 2018. They enable bilateral trades that are privately negotiated to be tailored with expiration dates to be registered and cleared like a standard SGX FX futures contract. “This will be available for INR/USD, KRW/USD, TWD/USD, USD/CNH and US/SGD contracts,” the exchange announced.

K.C. Lam says that FlexC has attracted new customers. “If they are already trading in cleared products on SGX, such as iron ore, commodities and so on, it makes a lot of sense for them then to use FlexC to have more precise data to help them hedge their market risks in     terms of their commodities, imports and exports and so on. We’re getting a lot of pickup from that.” 

SGX is expecting more developments of the product in the coming months that will add to the trend for ever-closer relations between OTC and on-exchange products. There seems every reason that SGX on-exchange FX offerings and volumes in Asian currencies will continue to grow at similar rates to those of last few years. Meanwhile, CNH related products would seem to be a significant driver and real competitive advantage that Singapore has to offer (see RMB panel.)

Renminbi developments

CNH trading and clearing is growing rapidly. SGX is in the sweet spot, as K.C. Lam explains. “We are exceeding USD4 billion a day and we count for about 80 per cent of the listed market; yet we are still growing. That’s pretty exciting for us. We believe that there’s a lot more opportunity for us to grow this market, first and foremost to Asia, because China’s the largest economy in Asia. The US-China relationship is a major talking point of course, you cannot escape that. It’s a global macro thing and is going to continue. I think there will be more participants coming to our venue to basically risk manage and hedge. In fact, because of our position in the global CNH market and because of our highly liquid T+1, we are attracting more participants from the US and Europe.”

FX on Exchanges
CME’s Shanghai Gold Futures product is proving very popular

In October CME announced the first trades in its new Shanghai Gold Futures product. This is proving popular according to Paul Houston. “We see a lot of efficiencies from new participants trading this at the CME and getting efficiency by trading CNH as a hedge against that. It’s a big initiative for the CME and it’s very complementary to our CNH futures. In that context our USD/CNH FX future is relatively new in comparison to other exchanges. We’ve made some recent changes to it. It’s cash settled against the Hong Kong TMA rate. We’ve seen some nice increase in volume and we’re working with a number of participants who are joining the marketplace.”

Similarly, DGCX currently lists two key Chinese-linked products, one of which is commodity linked. The DGCX Shanghai Gold Futures contract 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.

FX on Exchanges

Les Male

“The biggest driver of currency futures and options trading this year has been global geopolitical uncertainty, coupled with high levels of volatility in exchange rates.”

The Dubai exchange

At the Dubai exchange (DGCX), CEO Les Male confirms the experience of other exchanges; that macro events are stimulating activity. “The biggest driver of currency futures and options trading this year,” he says, “has been global geopolitical uncertainty, coupled with high levels of volatility in exchange rates. The unpredictability of the events unfolding around the world – Brexit, the US-China trade war, escalating tensions in the Middle East, to name a few – are causing huge currency swings and price fluctuations across different markets, allowing traders to capitalize on volatility. The introduction of new regulations is also affecting currency trading. MiFID II has created great transparency, for example, and provides investors with access to more data and insights that will allow them to make more informed investment decisions. As we head into 2020, we can see there are a number of political events that look as though they will keep volatility at the forefront of the markets.”

DGCX currently lists 11 currency contracts. To the end of October cumulative trades since the beginning of the year totalled over 17.7m contracts. Its INR options and futures products are world’s largest liquidity pool and it traded a notional value of USD 320 billion in the 10 ten months to the end of October. This is likely to enable the exchange to exceed the USD 395 billion traded in 2018. It also expects to set new annual volumes and open interest records at the end of December. 

Clearing records

The clearing, settlement and risk management services Dubai Commodities Clearing Corporation (DCCC) provides to DGCX have also grown this year. It is the only Central Counter Party (CCP) in the Middle East and clears trades across a range of asset classes. “Over the last year, DCCC has witnessed remarkable growth and broken numerous records for clearing volume, notional value and open interest,” Les Male explains.  “DCCC is committed to ensuring its clearing members and their clients are able to trade on the DGCX platform with confidence.  With a continued focus to meet the growing needs of the clearing member community, DCCC promotes transparency, capital efficiency, robust risk management and trust.  DCCC supports DGCX’s initiatives to widen investor participation and enhance liquidity in the market with innovative products and thereby leveraging the inherent strengths within the DCCC.  Earlier this year, DCCC restructured its default fund to create a stronger foundation in the event of a member default. To show its commitment, the DGCX Group has Skin-in-the-Game (SKIG) of 27%, which is significantly larger than other contributions from exchanges with a similar genetic make-up.”

Among its new initiatives DGCX is intending to launch an FX Rolling product. This is currently pending regulatory approval and sits within the exchange’s commitment to both international and local, Middle Eastern market participants. “Our aim is to ensure that we continue to offer our members and market participants truly innovative contracts, backed by our state-of-the-art technology and Clearing House. 

These contracts must appeal to not only our international participants but also to local banks and trading houses too. The new FX Rolling product is a significant step in developing ever more pioneering contracts contributing to the DGCX’s global offerings allowing us to cross-pollinate our diverse client base,” Male concludes.

Crypto offerings

Everyone is watching the crypto currency space, though not all are yet ready with product offerings. CME is ahead of the curve here. CME Group and Crypto Facilities (CF) have offered standardised reference rates and spot price indexes on Bitcoin and Ether for some time. CME also offers a hedge against bitcoin exposure with a futures contract. What is new, is that is that CME is planning to launch options on Bitcoin futures in early 2020, pending regulatory approval. Options on Bitcoin futures will trade on the CME Globex platform as well as via ex-pit transactions on CME Clearport.

SGX is not yet ready with an offering though it is keeping an eye on developments in crypto. “We’ve been doing a lot of research in this space,” says K.C. Lam. “We do not have a plan to offer anything at present because we need to ensure reliability and security of anything we bring to our platform. We continuously look at what we might do in this area however; we are always watching market.”

DGCX takes a similar view. “Although cryptocurrencies have been trending for several years now,” Les Male admits, “they are still relatively new and unregulated. However, we are now beginning to see regulations emerge. Until these are firmly in place, we will not be exploring the possibility of listing these types of unique contracts on the Exchange.”

FX on Exchanges

Igor Marich

“We see fairly good growth and demand for execution of large orders in one trade.”

The Moscow Exchange

Igor Marich, Managing Director of Money and Derivatives Markets, at Moscow Exchange (MOEX) believes in new business growth opportunities from Asian markets. “In the coming years we believe that the potential of Asian financial markets will only increase. Russia, most part of which is geographically situated in Asia, is becoming more and more focused on trade and investment opportunities associated with fast growing Asian economies. 

Therefore,” he adds, “MOEX is aiming to enhance its product offering to the large number of Asian clients willing to trade and hedge in Russian Rouble products, and we are working on substantially bigger presence in the dynamic Asian economies.” This plan spans not only new product offerings in JPY/RUB and TRY/RUB currency pairs but also those involving Chinese Renminbi and Kazakh Tenge that have been traded on the MOEX platform for many years. They also include a new cooperation model currently being discussed between MOEX and CFETS to create a joint FX liquidity pool in CNY/RUB to facilitate bigger use of national currencies in bilateral foreign trade and investments.

In terms of FX futures and options, average daily USDRUB options open interest at MOEX for 9M 2019 increased 13.4% year-on-year and reached USD1.68 Bln, driven by more hedging deals due to increased market volatility.


MOEX is currently finalising its real time data streaming for its FX fixings. This will be made available through its web API.

In April, MOEX launched a new large volume trading board with first instrument - USD/RUB_TDB (settlements T+0, TDB comes from ToD Big), order book for larger than currently ticket sizes from USD1 million upwards. This included a refined matching mechanism and a speed bump and simulated random delay for incoming orders. “We listened to many of our major clients,” says Marich, “who helped us in finding desired parameters of this new instrument. It creates a level playing field for all participants, including HFT and ordinary players. We see fairly good growth and demand for execution of large orders in one trade.” 

In other developments, MOEX is working on a request for stream service, which it expects to launch in the coming months. It will enable MOEX clients to receive a stream of customised FX liquidity in USD/RUB and EUR/RUB for large amounts from various types of liquidity providers.

Like other exchanges, MOEX is looking to provide products that complement OTC trading. “We are keen to provide our clients fast and competitive access to global OTC FX spot and swaps liquidity in G10 popular currency pairs such as EUR/USD, GBP/USD, USD/CNY and USD/TRY. It is a product with good liquidity measured by tight spread, fast execution and lower rejections.

It is designed similarly to OTC bilateral market but has the advantage of our safe and reliable exchange infrastructure of pre-trade and post-trade risk management and central clearing. More than 50 MOEX members have connected to the service so far,” says Marich. 

FX on Exchanges
Next set of instruments for new MOEX large volume trading board: additional currency pairs and other settlement dates - USD RUB value date TOM and EUR RUB value date TOD and TOM.
Current USD RUB value date TOD 50% lower spread crossing costs for end users of liquidity than MOEX traditional FX