FX ON EXCHANGES

for the internationalisation of the . “Some counterparties may benefit from relationship- 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 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

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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 such as , options for FX options and has cost of trading OTC products is CNH, Brazil Real, scheduled a number of other highlighting the advantages of and . 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

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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

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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. In May this year, risk management and cross- attributes in a bid to become cleared products traded on the capability to use automated Renminbi (RMB) has given the HKEX expanded its range of currency hedging tools, as well the marketplace of choice exchanges to plug the gaps or algorithmic trading strategies Hong Kong Exchanges and RMB currency futures to include as the domestic policy shift for currency players in Asia, for some parts of the FX to increase the quality of their Clearing (HKEX), a unique EUR/CNH, JPY/CNH, AUD/ that resulted in RMB movement and around the world. market (e.g. Asian NDFs). FX execution and rapidly scale opportunity to entrench Hong CNH and CNH/USD contracts being tracked against multiple HKEX’s trading and clearing FX ON EXCHANGES up their trading activities.” Kong as a gateway for cross- to its USD/CNH contract. currencies. The CNH/USD platforms are scheduled for Han also believes that border fund flows and as a future, which is margined system enhancements to technology is becoming ACCESS TO CHINA risk management venue. While HKEX’s original USD/CNH and settled in US dollars, was upgrade their accessibility increasingly commoditised and With Hong Kong entering futures contract is physically launched to complement and functionality and its helping to level the playing a new phase as a leading Already, the value proposition settled, all the new currency HKEX’s USD/CNH future, with RMB currency futures market field. “We are seeing buy-side international financial centre of trading FX on the exchange futures are cash settled. They reduced cost of funding. now also offers block trade

number of asset manager around the WM 4pm fixing execution mechanisms, 360T echoes shift to exchanges customers who, due to these issue. We see a totally different including OTC RFQ, RFS, numerous discussions around dynamic in the market today executable streams, anonymous 360 Trading Networks, acquired by Deutsche Börse Group last year, has been best execution in the OTC compared to when discussions OTC trading including a central working closely for some months with Eurex Exchange to improve and expand market, are considering using about a rolling spot product limit order book, plus rolling its listed FX derivatives products. on-exchange products for and additional on-exchange spot and classic styled futures the spot and then swapping products first started in – both on-exchange as well While some of the Eurex-listed sizes to align the contracts possible, rather than with the transactions to forwards Europe some years ago.” as off-book negotiated block futures and options contracts better with the OTC market US products that have just for their clients, simply to get and EFP functions soon. are gaining traction, Alfred and reducing block sizes. been copied into London.” Going forward, 360T’s client Schorno, Managing Director base will enjoy having an “We are spending time with 360T Group, says that it Bigger changes are in the Eurex, which is now Europe’s unparalleled breadth of product our clients helping them plan is clear that some aspects pipeline. In 2017, Eurex will biggest futures and options choice with OTC and exchange- for a future where they have of the product definition, extend its trading hours for exchange, first went live traded FX alongside each other, choice of what product and especially the trading times FX, as well as launch a Rolling with FX futures and options with an additional separate execution style they can or available at present, do Spot Future. Schorno says “This in July 2014. The contracts CLOB (OTC central limit order should use for the trade they not suit a global market. will position the Deutsche were designed to combine book) complementing this need to do,” adds Schorno. Börse Group as a strong best-practice OTC market with its rulebook well-tailored Work is underway to change competitor in the FX market.” conventions with the for 360T clients’ needs. The next 12 months will this. In September, more transparency of exchange- see 360T and the German currencies including Yen, “We have always wanted traded and centrally cleared 360T and Eurex are keen to exchange continuing to Australian and New Zealand to satisfy the interest of FX contracts in response to the complete the range of trading position themselves as a viable dollar, were added to the clients in a European product. changing regulatory treatment Alfred Schorno alternative to the OTC market product range, and contract A number of European clients, of OTC instruments. and, following the outcome specifications continue to end-users like asset managers “We see a totally different dynamic in the market of the recent Brexit vote in the be improved to make the and exchange traded funds Says Schorno: “Times have today compared to when discussions about a rolling UK, a serious contender in the contracts more suitable to (ETFs), say they would actually changed. FX clients are looking spot product and additional on-exchange products provision of a European-based today’s market conditions, prefer to trade original for something which is more first started in Europe some years ago.” exchange-traded FX product. such as changing the tick European contracts where ‘controllable’. We have a

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addition, the USD/CNH futures this year, with open interest “As we continue to attract an increasingly diverse offer eight tenors that cover standing at 27, 808 contracts. “Any highly capitalised large exchange group such customer base, this has spurred significant growth in up to 16 months, facilitating as MOEX has an obvious advantage over any single SGX’s FX suite of products “ long-dated risk management Martin says: “HKEX’s RMB trading platform.” of market hedgers. currency futures are part of a strategy to provide international required, as well as central Traded continuously from RMB currency products for of the Executive Board of the clearing, which reduces 9am – 4.30pm, RMB currency trading and risk management as Moscow Exchange (MOEX), the FX ON EXCHANGES counterparty risk through futures are also among the Mainland China becomes more role of the exchange in the FX a central counterparty that few products that trade in the engaged in external investment market is changing alongside handles transaction of many after-hours futures trading and further opens its financial users’ needs. He says: “We see different buyers and sellers.” session, from 5:15 pm to markets, and the currency’s that on the global FX market, 11:45 pm, which aligns HKEX internationalisation continues.” increasing numbers of buy-side HKEX’s RMB currency futures with the onshore market and investment funds, corporates and are designed to meet investor facilitates price discovery. The HKEX sees this as a unique individuals require direct access to demand for offshore RMB contracts are easily accessible opportunity to build price FX marketplaces with competitive trading and risk management through a wide range of discovery capabilities, execution and reliable post-trade Ivan Han and the addition of the new more than 100 licensed benchmarks and risk services. Russia is in line with Igor Marich contracts is to meet the brokers from international management tools in fixed this trend. In the past few years functionality, to provide greater different needs of market and local backgrounds. income, currency and the traditional MOEX FX market in the first six months of this over-the-counter flexibility with participants, in particular commodities, asset classes model has been transformed year, the FX Market had over minimal counterparty risk. those with cross-currency HKEX regularly reviews its in which Mainland Chinese from an interdealer market to a 700,000 registered clients exposure, whether it is in platforms and microstructure and international liquidity broker-agency model, which is with end-client turnover Julien Martin, Head of FIC assets, liabilities or cash flow. to maintain market integrity will increasingly converge. more oriented to end-users.” accounting for more than 60% Product Development in the They follow the international and efficiency in accordance of the total spot turnover, up Market Development group foreign exchange convention with international principles. HKEX set up OTC Clearing He adds that MOEX is from 25% two years ago. at HKEX, says: “The greatest of month-end expiry, with Examples of this include the Hong Kong (OTC Clear), one of expanding beyond its benefit of trading on exchange the final settlement date introduction of its Volatility its four clearing houses in Hong domestic market by attracting Earlier this year, the exchange is offered through margining, set on the third Wednesday Control Mechanism (VCM) Kong, to providing clearing and international non-resident made several innovative which significantly reduces the of each month (subject to for selected securities in settlement services for OTC banks, and their clients, foreign changes to its products to upfront capital commitment any holiday adjustment). In August, which will later include derivative transactions and high-frequency traders, funds meet client needs. To manage key stock index futures, to complement its listed derivatives and buy-side customers, to client risk, trading accounts safeguard market integrity offering. OTC Clear currently trade on the exchange, given are now registered for with a 5-minute period of provides clearing of inter-dealer that it is the largest global second and third tier clients, trading in a price range after a interest rate swaps, non- FX marketplace for trading giving brokers access to the spike in the price of a product deliverable currency forwards the Russian Ruble against exchange’s risk management covered by the mechanism. and cross currency swaps (CCS). foreign currencies. Non- tools and allowing them to keep The CCS service began last resident clients make up 70% records of clients’ positions. The value proposition has also month. OTC Clear is initially of the clients’ spot turnover Settlement and collateral been strengthened by growing providing clearing for swaps in and increase their activity. nettings are available under the trading volume and open the USD/CNH currency pair. settlement account in which interest. Since 2013, the first The MOEX FX Market offers the positions of different clients full year of trading for HKEX’s CHANGING THE MODEL a wide range of instruments are recorded. MOEX continues USD/CNH futures contract, For Igor Marich, Managing to different categories of to roll-out segregated accounts average daily volume more Director of Money and end users, both institutional to end clients, strengthening HKEX’s USD/CNH Futures Turnover and Open Interest than tripled to 1,882 in August Derivatives Market and Member investors and individuals, and the clients’ protection.

122 | october 2016 e-FOREX october 2016 e-FOREX | 123 Currency trading on exchanges – the value proposition strengthens today, a total of 55,000 clients trade on MOEX’s FX Market using this service. With a trading day lasting 14 hours, participants from almost all regions of Russia (which covers 11-time zones) are able to trade effectively and implement different strategies including FX ON EXCHANGES arbitrage in similar instruments across trading venues.

But while the Moscow Exchange focuses on RUB The MOEX FX Market offers a wide range of currency pairs, most banks and instruments to different categories of end users their clients still prefer USD to convert currencies. In fact, the CCP WITH A DIFFERENCE NCC guarantee obligations will MOEX share in overall USD/RUB Furthermore, Marich says the be met - the main feature of the trading is steadily growing and unique offering developed on-exchange foreign currency made 64% in July. Total ADV by MOEX is attracting users market in Russia,” he adds. in all instruments made USD 20 worldwide. FX trading venues bln for first 6 months of 2016. worldwide provide only order Marich says that MOEX’s matching while clearing and CCP’s services include a A recent addition to the settlement are performed sophisticated risk management exchange’s product range is by member firms directly system and that the Russian the new currency pair, CHF/ through their correspondent exchange is also working on RUB, for spot trading, with T0 accounts, or via big settlement a number of projects to make and T+1 settlement, which was banks or a clearing bank, members’ operations more launched following requests such as CLS, on a multilateral convenient and efficient. from the exchange’s member basis. MOEX provides a full In July, MOEX launched firms. As a supplement, Marich range of post-trade services risk balancing between the says that this instrument with regard to FX trades. Derivatives Market and FX will be used to calculate Market to facilitate reduced risk parameters for CHF- “This is the major distinction collateral and increased trading denominated bonds, in order from other marketplaces. volumes. Participants will also to admit these bonds to repo Such services include trade soon be able to reduce their with the CCP and make the settlement guarantee from costs with a unified collateral currency eligible as collateral. the central counterparty, pool across all MOEX markets the NCC Clearing Bank (the and with portfolio margining Deliverable futures contracts qualified CCP), which is part to be launched next year. on the USD/RUB, EUR/RUB of Moscow Exchange Group. and CNY/RUB currency pairs The CCP bears the default risk More than 80 of MOEX’s 500 with fixed settlement dates associated with on-exchange member firms now provide were also launched in July trades. Sophisticated risk Sponsored Market Access or 2016. Says Marich: “This allows management practices and Direct Market Access (SMA/ market participants to reduce sufficient capital adequacy of DMA) to their clients and their margin requirements by

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offsetting FX and derivatives positions and avoid paying double margin rate. The new deliverable futures have facilitated arbitrage between the MOEX’s FX and Derivatives Markets and improved hedging efficiency, especially for large players such FX ON EXCHANGES as banks and non-residents.”

The exchange is rapidly gaining international recognition. In The Central Bank of Russia (CBR) March 2016, MOEX’s indices and FX fixings were recognised has officially recognised Moscow as IOSCO-compliant and in July Exchange’s USD/RUB FX Fixing 2016, its USD/RUB benchmark, MOEX USD/RUB FX FIXING, was book liquidity to non-resident the domestic FX turnover and recommended by the Emerging clients of such platforms. ensures safe settlement via Markets Traders Association the central counterparty at the (EMTA) as the major settlement According to Marich, best available price. Due to reference rate for OTC rouble improvements made to the liquidity concentration within derivatives (NDFs, NDOs) for client access facility in the the exchange, the spread is its OTC FX members. CME first six months of 2016 have narrower, thereby making Group will also use MOEX USD/ stimulated activity of market it almost impossible to find RUB FX FIXING for its RUB- participants and extended an better prices. The convenience denominated currency futures. investment base due to new of operating on the regulated categories of clients such as market is worth more than the Says Marich: “After recognition non-residents, Russian and fee charged by the exchange.” of MOEX USD/RUB Benchmark international brokerages, by EMTA member-banks and corporates and individuals. CONCLUSION CME, we expect that global While the exchanges continue to Rouble NDFs will migrate to Marich says: “Any highly prove their value, the real cost of the MOEX FX market with their capitalised large exchange trading in this newly emerging share projected to reach 50% group such as MOEX has landscape remains to be seen, of the total market turnover by an obvious advantage over with the final framework for 2020. Moscow Exchange will any single trading platform. Basle III still unfolding and the benefit from an expanded client The advantage includes the higher capital requirements and base and increased turnover.” ability to offer pre-trade margining for OTC instruments and post-trade services still taking effect. This value For this reason, Marich says (counterparty and settlement proposition will be further the exchange is engaged risk management in the form improved when the effects in discussions about an of secured settlement via its of netting and margin offsets initiative to create direct FX clearing house) in addition to can be fully realised as the FX trading links with large global common price discovery and market moves away from using international FX platforms to trade execution. The exchange bilaterally cleared instruments deliver MOEX FX RUB order covers the major portion of and towards central clearing.

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