Many OTC FX market participants are now looking into ways they can integrate FX futures into their execution models. What’s motivating them to do this?
In recent years, with more OTC FX participants internalising flows along with the growth of Multi Dealer Platforms, coupled with the substantial growth in volumes and liquidity of FX futures, price discovery for key FX currency pairs is beginning to shift from primary OTC venues to futures exchanges.
At the same time, market participants are increasingly using execution algorithms to access as many liquidity sources as possible across multiple venues. They look at multiple data sources, including the futures market, and adjust their weightings to account for the growth of futures. As market participants become more data-driven, the futures market is becoming an important source of price signals.
For example, market participants and liquidity providers are incorporating SGX FX Futures market data like our USD/CNH and INR/USD futures in their trading. This phenomenon is not new as traders have also been using CME’s G10 futures and B3’s BRL futures as primary pricing reference points and important sources of liquidity. SGX USD/CNH FX Futures, the world’s most widely traded international renminbi futures, saw a 66% year-on-year growth in volumes for February 2025 to US$322 billion, with over 40% of our volumes coming from U.S. and Europe time zones.
Banks can now connect seamlessly to both the futures and OTC markets. How important has that development been in accelerating the growth of FX futures trading?
While banks always had access to exchange-traded instruments, their adoption of FX futures has accelerated due to the liquidity and capital efficiencies these futures provide, and their role in price formation and discovery.
As banks can access significant liquidity in listed FX markets, it enhances trading opportunities and they can transfer their OTC risks without information leakage, given the anonymity of exchange-traded futures. Arbitrage opportunities also arise from the basis between OTC and listed FX.
What advantages do FX futures trades offer for FX Prime Brokers and in what ways are they playing an increasingly pivotal role in facilitating access to this market?
By collaborating with their futures clearing counterparts, FX Prime Brokers can offer more trading opportunities through basis swap products. With FX futures gaining in liquidity and prominence, basis swap products can not only increase trading volume but also help FX Prime Brokers use their capital more efficiently.
For popular FX pairs like USD/CNH, where CNH is not eligible for settlement through the Continuous Linked Settlement (CLS) system, FX Prime Brokers can leverage basis swap products to transfer positions into futures where they can be netted and thereby optimise credit line usage.
Bilateral dealer-client relationships are a well-established feature of the OTC FX markets and one that many buy-side firms do not want to lose. What threats, if any, does the futurisation of FX present to these links?
The futurisation of FX enriches the FX trading ecosystem by enabling more trading opportunities and better capital utilization, adding a positive dimension to established dealer-client relationships. The bilateral nature of FX trading will remain, and we see this complemented by the growing connectivity between OTC and exchange-traded FX, which offers better information sharing and risk management.
How do FX futures effectively mitigate other OTC FX market challenges?
FX futures offer a more efficient format with a single day market period of risk (MPOR) compared to the 5-day MPOR for cleared OTC FX, aiding compliance with regulations like Uncleared Margins Rule (UMR) and Basel III Standardised Approach for Measuring Counterparty Credit Risk (SA-CCR). Derivatives exposure for FX futures positions can be significantly lower when compared to a portfolio of OTC uncleared derivatives, especially when multiple counterparties are involved.
Additionally, clearing FX futures through a central counterparty (CCP) reduces counterparty risk and regulatory costs. The liquidity and transparency of FX futures offers better price discovery and tighter bid/ask spreads, leading to more efficient trading. The standardised nature of FX futures also simplifies operations and reduces administrative burdens associated with managing bespoke OTC FX instruments. Overall, FX futures provide broader market access, allowing participants to trade in a regulated environment with robust risk management frameworks, which is particularly beneficial for smaller firms or those looking to diversify their trading strategies.
In what ways does combining OTC and listed markets allow FX traders to manage risk more effectively?
Connecting to highly liquid listed FX markets enhances hedging and trading opportunities, compared to trading on OTC FX venues alone. For listed FX futures which are less liquid, traders can use basis swap products to price trades in the more liquid OTC market and settle in the futures market. This combination solves the longstanding issue of capital inefficiency and delivers benefits such as more accurate pricing and better risk management.
How much of a challenge is integrating FX futures into OTC workflows and what’s been done to make this as easy as possible?
Integrating FX futures into OTC workflows varies depending on the end user. The workflow for an asset manager will differ from that of a hedge fund or a bank. Hence, there is opportunity for bespoke solutions in workflow, risk management and integration.
Advancements in electronic trading platforms have streamlined this integration process, making it easier to manage both OTC and futures trades on a single platform. Moreover, the standardised format of listed FX helps to replicate OTC positions efficiently, reducing the need for extensive adjustments.
Despite the success of the hybrid trading model, what work still needs to be done to promote the benefits of trading FX futures and to develop the kind of tools and technology that will ensure it becomes a long-term fixture of the market?
A successful hybrid trading model is achievable when both OTC and listed FX futures are fully normalised for trading and risk management. This requires continuous innovation and development of systems and tools that work seamlessly in this new trading environment. The ongoing convergence of OTC FX and FX futures will transform how market participants manage risks and capital efficiently.
In what ways do you think the transition to a hybrid structure will ultimately shape the future of global FX markets?
A hybrid structure will drive higher growth in the FX markets. Participants will benefit from improved risk management, lower regulatory compliance costs and better capital use. It will also spur innovation to meet the demand for sophisticated trading platforms. Additionally, it will democratise access, enabling smaller firms and new entrants to participate easily. Increased competition and innovation will ultimately create more dynamic, efficient, and resilient global FX markets.