Nicholas Pratt

FX On Exchanges: Onwards and upwards

March 2023 in FX On Exchanges

With the leading exchanges looking to build on the growing demand for listed FX products Nicholas Pratt reviews the plans of four major players in the FX futures and options world.

There is currently an unprecedented level of interest in FX futures and options thanks to market volatility, divergence in interest rates and regulatory changes to capital and collateral requirements.

Another contributing factor has been the relative maturity of various exchanges’ offerings as they add currencies and instruments to their product portfolios, expand their geographical footprint and enhance their operational infrastructure.

CME Group

Source: CME Group data: all-time FX volume and open interest records in 2022 ADV = Avg. daily volume | ADOI = Avg. daily open interest
2022 saw exceptional growth in FX futures and options across both major and emerging market currency pairs at CME Group

On March 8th, the CME Group announced a record single-day volume for FX futures and options contracts of 3.15million contracts, equivalent to US$296billion in USD notional. It exceeded the previous record of 3 million contracts set in September 2022. The exchange group has also recorded a number of trading records in numerous individual currencies including a record of 1.1 million Euro FX futures and a record 264,000 Canadian Dollar FX futures.

In addition, blocks and exchange for related positions (EFRP) transactions traded a record 274,000 contracts on March 8, a level 23% higher than the previous record set in December 2022.

“We are pleased to see strong momentum in our FX futures and options products as our clients turn to our deep liquidity to manage their currency exposure amid ongoing market uncertainty,” said Paul Houston, Global Head of FX Products, CME Group. “We are pleased to offer clients the flexibility of both our highly liquid, central limit order book, as well as disclosed, OTC-style block and EFRP trading now supported by more than 20 liquidity providers.”

CME Group is also planning to launch USD/offshore renminbi options in April, pending regulatory approval. This comes just weeks after it launched a suite of event contracts to include Bitcoin futures.

According to Houston, the USD/CNH launch is based on the growing demand for offshore renminbi which has made it a core part of global FX trading. The launch also comes at a time when traders face currency risks as China resets its economy during what Houston describes as “this period of reopening”.

“We are pleased to see strong momentum in our FX futures and options products as our clients turn to our deep liquidity to manage their currency exposure amid ongoing market uncertainty.”

Paul Houston

“Our options contracts will offer an attractive complement to the OTC market, with price discovery and anonymous trading on our all-to-all order book, as well as block trading for clients who might prefer the OTC-style of trading but stand to benefit from the efficiencies of a centrally cleared product,” says Houston.

The announcement has also been welcomed by both buy and sell-side clients of CME Group. According to Adrian Averre, head of G10 FX Flow Options at BNP Paribas, it is “an exciting and timely addition to the CME Group portfolio” given that USD/CNH options have become one of the most traded pairs in the OTC market.

For Tim Brooks, Head of FX Options Trading at Optiver, USD/CNH options provide market participants with a hedging tool for trading strategies around the world’s second largest economy. “As a result of the Uncleared Margin Rules (UMR), more and more investors are exploring the listed options markets. By providing liquidity in USD/CNH products from launch, we look forward to enhancing the ability of market participants to seize opportunities and manage their risk with confidence.”

SGX Group

SGX FX Futures trading volume

The drivers for greater demand for listed FX have remained consistent in the last 12 months. Some of these drivers, such as regulatory changes, have been in play for some time. The impact from the latest version of the Uncleared Margin Rules (UMR) and SA-CCR have left banks facing increased capital charges as a result of keeping certain instruments on their balance sheets.

“Regulation has been an important influence on the volumes driving futures,” says KC Lam, executive director and global head of FX and rates at SGX Group. “Because of SA-CCR/UMR, an exchange is a more efficient way of trading and hedging at a lower cost. Global Systematically Important Banks (G-SIBs) face higher capital charges for OTC trades so participants will pivot to more transparent and liquid derivative venues like SGX. At the same time, the Ukraine-Russia conflict and its disruption to supply chains and the commodities market, as well as the divergence in interest rates around the globe, have grown the need for firms to look more closely at their FX hedging and to see where extra efficiencies can be gained,” says Lam.

“We were in a low interest rates regime for some time,” says Lam. “That changed and is now starting to normalize, but the rapid change in interest rate environment along with a confluence of macroeconomic factors has grown the need for FX hedging.”

As the main Asian exchange for FX futures, SGX has been a major beneficiary of these trends. “Our volumes have grown a lot in the last year,” says Lam. “In 2022, we achieved a new record with aggregate FX futures volume of over US$2 trillion, which was a 37% year-on-year increase, as well as record open interest. While there was an increase in volumes across CNH, INR, SGD, KRW and TWD FX futures, the growth has been especially evident in CNH and INR. The market share from those two pairs is above 80% and 70% respectively.”

In February 2023, total FX futures volume climbed 39% year-on-year to 2.9 million contracts and 60% year-on-year to US$187 billion in terms of open interest. During the month, the volume of SGX USD/CNH Futures – which is the world’s most widely traded international renminbi futures – jumped 85% year-on-year to 1.5 million contracts, partly because of fewer trading days in the year-ago period due to the Lunar New Year.

The search for liquidity has also been an important factor, especially for the buy-side firms trading FX futures in growing numbers. According to Lam, the choice of trading venue based on depth of liquidity is more important than the choice of instrument for some traders. And as the largest and most liquid futures exchange in the region, SGX has seen a clear increase in trading activity. “Liquidity on exchanges is picking up and that will also drive volumes – liquidity begets liquidity,” says Lam.

Despite the growth of listed FX, Lam does not see it as a replacement for OTC trading. “There is a strong relationship between the two formats,” says Lam. And while there is limited visibility into the volumes of OTC markets, it is clear from the latest BIS Triennial Report that OTC FX remains a huge market.

Indeed, many exchanges are looking to develop products and services that will be complementary to OTC markets and meet the demand among traders to have the best of both markets, says Lam. “FX participants are used to the flexibility of OTC but now many are switching to exchange-based clearing so they can move between physical contracts in the OTC world and electronic trading in the listed world.”

This is an option being offered by a number of banks and something that has been made possible by the greater use of APIs for connectivity into the SGX market, for both bilateral or trading directly onto the Central Limit Order book, says Lam.

“We have used standardised protocols and worked together with a number of vendors so that we can onboard more clients. We believe this is a better model for an exchange and it will help our distribution. We are very open in terms of our protocols and linking with vendors to improve access,” says Lam.

SGX also continues to add new trading functionality on the back of market functionality, says Lam. “We also continue to develop our FlexC FX Futures offering – instruments that can expire on any business day on the exchange. You can send the order bilaterally and then put it on the exchange. You can replicate FX swaps that might be subject to high cost via the UMR regulation if they were traded bilaterally,” says Lam.

“SGX FlexC FX Futures is still in its nascent stage but this product, started as a proof-of-concept, has traded more than US$800 million in cumulative volumes to date. Now we are looking to expand this innovative feature to more contracts and instruments,” says Lam.

“FX participants are used to the flexibility of OTC but now many are switching to exchange-based clearing so they can move between physical contracts in the OTC world and electronic trading in the listed world.”

KC Lam


Meanwhile for Eurex, the derivatives arm of the Deutsche Boerse Group, the focus for 2023 is on building critical mass for its listed FX services. In the last two years, Eurex has spent time developing its product offering and expanding its geographical footprint via alliances with other exchanges.
Following on from the 2015 acquisition of German trading platform 360T, Deutsche Boerse has sought to make inroads into the FX market.

“We are seeing increased demand for listed derivatives products on FX,” says Lee Bartholomew, global head of FIC Product Design at Eurex. “There are the regulatory drivers like the UMR and SA-CCR and traders are becoming more comfortable that it can coexist alongside OTC markets, together with the benefits of listed FX. The fungibility of listed markets is growing and the expectation is that it will continue to evolve. End users are getting more comfortable with the idea that exchange listed derivatives can co-exist with OTC markets, providing alternative liquidity pools. We have seen an acceleration in the electronification of trading and clients are increasingly cognisant of reducing market impact,” says Bartholomew.

Despite the growing demand, listed FX is still a nascent product offering, says Bartholomew. Consequently, the priority for this year is to build out its client base.

Eurex has partnered with the Korea Exchange (KRX) which has helped expand its presence in the Asia Pacific region

“Creating critical mass is the big focus for us,” says Bartholomew. “The readiness of the sell-side to support the exchange-based market has increased and we have done a significant amount of work with European asset managers to scale the offering. It is equally important to develop a diverse ecosystem to ensure longevity and attract the systematic segment. It is important not to rest on our laurels and to continue the momentum.”

In terms of expanding its geographical footprint, Eurex is committed to executing its strategy of becoming the incumbent exchange for Euro crosses and Scandinavian currencies. Meanwhile, it is further building on some of the alliances it has struck with other international exchanges.

For example, in July 2021, Eurex partnered with the Korea Exchange (KRX) to list KOSPI and USD/KRW derivations at Eurex. This built on an existing link between Eurex and KRX for equity products and it enables Eurex to expand its presence in the Asia Pacific region while also extending trading hours and adding more liquidity.

“Eurex will always look for alliances where we feel we can add value and work collaboratively,” says Bartholomew. “In terms of product development, we are executing on the things we did last year and to show our commitment to the market that we’ve entered. It is about building volume and pipeline of new initiatives that support our long-term strategy. Our approach is one of collaboration and working with our stakeholders”

Another driver for listed FX is the growth of multi-asset trading, says Bartholomew. “Having 360T within the group and building the FI product suite will be additive to our FX offering. For example, ETF options can be additive to the listed FX market because there is a rebalancing risk to the underlying instruments in the ETF,” says Bartholomew.

“Anything that bridges the gap between the two markets (listed and OTC) will be beneficial. Our approach is to be very client centric and to try and anticipate what the market will look like in the future – for example, more electronic trading,” says Bartholomew.

“The market infrastructure is evolving as are the market participants. Both banks and non-bank liquidity providers are extending their coverage and traders are playing across asset classes. Our aim is to bring everyone together on this journey.”

“Anything that bridges the gap between the two markets (listed and OTC) will be beneficial. Our approach is to be very client centric and to try and anticipate what the market will look like in the future.”

Lee Bartholomew


Finally in the UAE, the Dubai Gold & Commodities Exchange (DGCX), the Middle East’s first ever derivatives venue, has reported a record year in terms of trade volumes for 2022. A total of 8.239 million contracts with a total value of $162.01 billion equated to growth of 16% and 8.24% respectively.

Whilst trading in gold increased by 78% during the year thanks to a steady rise in inflation, there was also steady growth in currency trading. More specifically, there was a slight increase in trading in Indian Rupee as market participants and corporates looked to manage their exposure to one of the world’s most rapidly expanding economies, as well as increases in volume for the Yen as well as Australian and Canadian dollars.

The exchange also made history by becoming the first venue in the UAE to list Israeli Shekel Futures in a move that CEO Ahmed Bin Sulayem said would deliver “even greater product diversity and liquidity for traders”.

DGCX recently extended its trading hours by 90 minutes, thereby giving market participants a 30 minute window before the opening of the derivatives markets in Southeast Asia and thereby furthering its ambitions to serve as a bridge between the Far East and Europe. This ambition was also supported by the renewal of DGCX’s recognition as a third-country CCP by the European Securities and Markets Authority, thereby bringing it further in line with international regulatory standards and governance frameworks.