How has liquidity across the derivatives market evolved in the past year? What are the key drivers behind this?
Futures and options are among the world’s most liquid markets, where traders, investors, producers, banks and institutions turn to discover prices, pursue opportunities and manage risk on everything from interest rates, equities, foreign exchange, and commodities.
For our clients, this is a time of unparalleled uncertainty where risk is widespread – everything from constant macro-economic shifts to rapid geopolitical change and extreme weather events. Exchange-traded derivatives play a vital role in helping institutions worldwide manage these risks in regulated markets.
As the head of EMEA for CME Group, I’m focused on our diverse client base in the region where use of our products is expanding rapidly as clients respond to global and regional risks. In February, we saw 7 million contracts traded daily from this region, a 17% increase from last year. Clients here face a more complex interest rate environment. As a result, we’re seeing increased participation, particularly from hedge funds and asset managers.
With increased market volatility, how can traders and institutions effectively use derivatives to hedge risks?
Futures and options are designed to help clients efficiently manage risk in any market scenario, but they’re particularly critical in volatile markets. This year, market participants have been active across all asset classes. US Treasury volumes have surged as market participants assess inflation and US debt issuance. FX futures and options volumes have risen with significant dollar movements against major currencies, and open interest has hit record highs.
Traders and institutions need products that trade around the clock, around the world, as it allows them to respond to news and manage risk in real time no matter their location. For example, after the US election results, we saw over 865,000 equity index options traded before the US equity markets opened as investors responded to the results. Similarly, on 27 January, during a tech stock sell-off, over 750,000 contracts traded outside of US market hours.
Given the growth of digital asset derivatives, what do you expect the future of regulated crypto futures and options to look?
Digital assets are evolving into a more mature and resilient asset class. We see increased institutional trading in our products and the deployment of sophisticated trading strategies. Exchange-traded derivatives are now an essential component of price discovery, providing a regulated and transparent market with standardised reference rates.
February was a record month for CME’s cryptocurrency products, with an average of 221,000 contracts traded each day, up over 200% year on year. Looking ahead, we’re excited to be expanding our offering beyond Bitcoin and Ether with the launch of Solana futures this month.
What key advancements are being implemented in the derivatives space to enhance market efficiency?
Futures and options are highly efficient instruments, which is why they are so widely used across the trading ecosystem. However, all our clients face significant capital constraints driven by regulatory requirements or the need to deliver risk-adjusted returns in highly uncertain times.
It is a significant benefit for clients to be able to offset related positions when calculating margin requirements. We’ve expanded the range of savings available, for example by expanding our cross-margining programme with the FICC to enable more buy-side market participants trading US Treasury futures to benefit directly from these natural offsets.
We also see clients transitioning positions from OTC to exchange listed products because of the ever-changing regulatory treatment of capital – from SA-CCR to uncleared margin rules, to the recent changes in the G-SIB calculations. This has led to increased usage of products that help clients move positions easily between OTC and listed products.