Record levels of FX and equity futures activity in the run-up to UMR Phase 6, finds CME Group

With 100 days to go until the implementation of UMR Phase 6, all-time records of positions in FX and equity futures have been adopted by market participants.

An all-time record number of market participants are taking large open interest positions in FX futures, according to CME Group data, while interest in equity futures is expanding rapidly – 100 days out from the final phase of the Uncleared Margin Rules (UMR).

Holders of large open positions in FX futures reached a new record of 1,312 as of 10 May, following an all-time level of open interest in FX futures and options of over 3 million contracts (~$290 billion notional) which was reached earlier in the month.

Asset managers led the way in terms of adoption, with their positions increasing by two-thirds (60%) since the end of Q2 2020.

The data showed buy-side accounts holding the most open interest positions in cleared, listed EUR/USD FX futures (60%), with hedge funds and dealers also holding significant positions at 15.4% and 24.1% respectively. 

In terms of equity futures, Adjusted Interest Rate Total Return futures (AIR TRFs), which offer a total return exposure with an overnight floating rate built in, are trading around 5,000 contracts per day in 2022 year to date (up over 250% vs 2021 average daily volume). 

Elsewhere, dividend futures are trading at 4,348 contracts per day in 2022 YTD, an increase of 49% compared to 2021.

CME Group also found that E-mini S&P 500 futures are trading at 1.9 million contracts per day in 2022 YTD, an increase of 19% compared to 2021. Sector futures also saw an increase in Q1 2022 ADV, with 16,200 contracts traded per day, an increase of over 24% compared to Q4 2021.

In the lead up to the final phase of UMR in September, market participants have been subjected to increased margin requirements, which will compel fundamental changes in the way collateral is posted as initial margin (IM) for OTC derivatives.

Due to the nature in which ISDA SIMM is applied, OTC equity index derivatives and FX options will demand higher initial requirements.

“While certain FX instruments, such as forwards, are not in-scope products for UMR, they do contribute to the notional driving the qualification. This is a key factor as to why more asset managers are using FX futures as a replacement for some of their OTC FX Forward exposure as they do not count towards the rules,” said Paul Houston, global head of FX products at CME Group.

“The final phase of UMR, where the threshold reduces to $8 billion, will see many more firms impacted and this activity has increased correspondingly. For those firms subject to the rules, CME FX Options offer considerable efficiencies relative to ISDA SIMM, through clearing and netting exposures against a central counterparty.” 

Speaking on the increased appeal of listed futures, Paul Woolman, executive director, equity products at CME Group, said: “The capital efficient, transparent, liquid nature of these products, along with their ability to help clients mitigate counterparty risk, has led to the adoption of traditional futures such as the E-mini S&P 500. Increased demand for listed OTC alternatives such as AIR TRFs, dividend futures, and sector futures, shows that preparations are in full swing 100 days out from the deadline.”

With the approaching deadline of UMR Phase 6, CME Group has also seen a 59% increase in growth in volumes for cleared, capital efficiency FX swaps.

CME’s cleared electronic marketplace for FX swaps, CME FX Link, has experienced strong growth leading to orderbook depth increasing by over 200% in EUR/USD, while increased client participation has also led to top of book spreads being reduced.

“Phase six, perhaps more than its predecessors, will be pulling in numerous investment managers – many of whom will be trading on behalf of clients and thus facing reduced regulatory thresholds,” said Neil Murphy, business manager, TriOptima, OSTTRA.

“While some will have pretty vanilla portfolios, the more sophisticated quant hedge funds will possess more exotic portfolios with associated market data requirements creating new operational challenges. Getting hold of the relevant market data, identifying in-scope trades and correctly assigning trades to relevant risk buckets in a timely fashion is key to these firms calculating initial margin (IM).”