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Currency Trading on Exchanges – the Value Proposition Strengthens

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Currency Trading on Exchanges – the Value Proposition Strengthens FX ON EXCHANGES for the internationalisation of the Renminbi. “Some counterparties may benefit from relationship- Currency trading based trading but one of our selling points is that In line with the regulatory we have a clearly identifiable way of treating counterparties and it is the same for all.” desire for certain OTC on exchanges – derivatives to be centrally cleared, greater transparency attract more transactions onto the value proposition strengthens through trading on exchanges exchanges as the uncleared FX ON EXCHANGES or exchange-like facilities margin rules come into and reporting trades, among effect. Houston says that With reports that the other reforms, exchanges are netting exposures against global FX market is seeing a wider spectrum of one counterparty, or one slowly shrinking, customers, and adapting their central counterparty for OTC products for wider appeal. cleared products, bring margin Frances Faulds looks benefits, as well as reducing, at how currency Paul Houston, newly-appointed or eliminating bilateral credit trading on the world’s Executive Director and exposure and the savings exchanges is faring up Global Head of FX at CME from netting are expected Paul Houston and looking to grow. Group, says that the range of to increase further. “The customers using CME Group savings from netting will be futures and options products increased as alongside our it makes the savings even While the days when almost $6 is continuing to broaden to margin methodology we have greater,” Houston says. trillion changed hands in the include banks, non-bank market the ability to margin across global FX market may be gone, makers, hedge funds, asset products,” he adds. Offsetting In terms of risk management, the world’s foreign exchange managers, retail, corporates margins across portfolios is exchange-traded products market is slowly adapting to and high net-worth players. only available on exchange. are transparently margined, the newly emerging regulatory For those facing say, up to are easily defined, and they landscape, post financial-crisis, He says: “Central to our value is ten counterparties, bilaterally, are consistent with regulatory and continuing to recover from that we are a primary liquidity this cannot be done with the best practice. Facing a single the rate-rigging scandal that source in FX futures and options. same levels of efficiency. counterparty also reduces erupted in 2013 and the losses We offer firm liquidity on a risk further as well as the that resulted from the surge global basis. Also, at the same Furthermore, many of the lowering of risks that comes in the Swiss Franc in 2015. time, we are a regulated market Basel III capital requirements, from leveraging technology place and we offer orderly, equal both those that are already in and enabling scalability. “Some Higher capital costs for trading and transparent trading. This place and those that continue counterparties may benefit OTC products and the rising cost is attractive to all participants to filter into the system, offer from relationship-based of compliance and credit are so we expect our customer more favourable treatment trading but one of our selling shaping today’s FX market. At the base to continue to grow, for exchange-traded, or points is that we have a clearly same time, the world’s exchanges particularly as the regulatory OTC-cleared, products. The identifiable way of treating are increasing their ranges of FX and capital benefits of trading leverage ratios are lower, counterparties and it is the instruments and services in a bid listed and OTC cleared products exchange-traded products are same for all,” Houston adds. to mimic the OTC market as far become more pronounced.” not subjected to CVA charges, as possible, seeing new record and liquidity coverage ratios GROWING REGIONAL volumes, and opening up market More products are in the are lower due to netting. FOOTPRINT access, while Hong Kong prepares pipeline to augment this “Add all these together, He also says that CME Group to become the financial centre trend, as well as services to as well as the netting, and is looking to grow its regional studio 55 / Shutterstock.com 114 | october 2016 e-FOREX october 2016 e-FOREX | 115 Currency trading on exchanges – the value proposition strengthens exchange. Earlier this year, CME Group introduced Market Segment Gateway, which is aimed at simplifying the access the exchange’s matching engine by providing a single gateway, to eliminate the variation associated with multiple access FX ON EXCHANGES points and multiple gateways. “This greatly improves the ease of access to the exchange and CME Group has reduced the tick size there are a number of other across a number of currency pairs initiatives planned for later in the year,” says Houston. footprint further. One way is to introduced a number of extra As regulatory change continues attract market makers and grow maturities and is in the process to impact the marketplace, regional liquidity in emerging of moving to European-style Houston says the increased currencies such as Indian rupee, options for FX options and has cost of trading OTC products is CNH, Brazil Real, Russian Ruble scheduled a number of other highlighting the advantages of and Chilean Peso. For emerging changes for later this year/ trading on exchange. Increased market currencies, both listed Q1 next year to better align requirements for best execution and OTC-cleared, CME Group the products to OTC users. are also making asset managers contracts conform to EMTA increasingly look at the need standard fixing sources and In terms of technology, the for greater transparency and fall-backs. Says Houston: “Our focus is very much upon standardisation. And in the FX core objective is to increase improving access to the market as a whole, partly due the attractiveness of trading listed FX but without disrupting what we have today.” To this end, CME Group has reduced the tick size across a number of currency pairs, the latest being the CAD/USD in July this year. This follows previous changes to EUR, JPY and MXN. According to Houston, depending on the currency pair and size, this has, on average, reduced the cost of trading listed FX by 30%. CME Group is also looking at making a number of changes to Earlier this year, CME Group introduced FX options. The exchange has Market Segment Gateway 116 | october 2016 e-FOREX Currency trading on exchanges – the value proposition strengthens to the regulatory changes but partly due to other factors, the cost of credit has increased. FX prime brokerages are currently reviewing their business models, many of their client bases have been streamlined, the cost of providing this FX ON EXCHANGES credit service is increased. According to Houston, these all point to solutions The Singapore Exchange has also been rapidly where exchange-traded expanding its FX derivatives product shelf FX or OTC-cleared FX can assist in meeting some of the pressures experienced base of customers through a for CNH futures products. by FX market participants. strategic collaboration with leading interbank FX platform For Han, changes in regulatory DEVELOPMENTS IN ASIA EBS, which aims to bridge the policies are continuing to drive The Singapore Exchange (SGX) platforms’ respective liquidity a number of conversations has also been rapidly expanding pools by providing a single surrounding the economics its FX derivatives product shelf access point for customers of the prime brokerage to offer broader coverage of to trade both OTC and model and where clients currency pairs and also the type exchange-traded FX derivatives can get cost efficient access of products available to a broad products. This unique initiative to credit and FX liquidity. pool of global investors seeking will go live shortly in the more exposure into Asian fourth quarter of this year. He says: “The past 18 months markets. Ivan Han, Director and have seen a significant reduction Head of FX & Rates at SGX, Says Han: “As we continue to in credit and risk appetites, with says: “We now offer 15 futures attract an increasingly diverse many traditional FX liquidity contracts across various Asian customer base, this has spurred providers such as market- currency crosses, and most significant growth in SGX’s FX making banks being reined in recently we launched our first suite of products - volume grew by regulatory requirements such listed FX options contract on the six-fold from under 700,000 as margin rules for uncleared Indian rupee. These initiatives contracts in 2014 to 4.2 million swaps and capital penalties. serve to meet the changing contracts traded in 2015.” The consequence of this risk demands of currency traders aversion is less ‘internalisation’, today who are placing increased In June 2016, SGX’s Indian and subsequently higher importance on best execution rupee futures contract achieved trading costs for counterparties and price transparency.” new record trading volumes across the board.” with over US$800 million in Efficient market connectivity is notional value traded per day, As a result, he says that the also a critical consideration for while the exchange’s offshore equation of cleared versus FX customers today and Han Renminbi futures contract uncleared in relation to says the exchange is expanding has grown rapidly to become counterparty risk mitigation and its distribution to a wider the most liquid exchange cost efficiency has also changed 118 | october 2016 e-FOREX Currency trading on exchanges – the value proposition strengthens FX ON EXCHANGES for market participants, which market participants becoming as the world’s interaction with has been recently strengthened have been introduced in HKEX is currently focusing is pushing both end users increasingly tech-savvy in terms Mainland China’s markets and with the addition of a greater response to increasing demand on fine-tuning its business, and intermediaries to look at of getting direct connectivity investors are being transformed, number of currency futures in the region for bi-lateral technology and trading potentially using standardised/ into exchanges where they have the internationalisation of the contracts.
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