THOUGHT LEADERSHIP

Leaders in Trading 2023: CME Group FX takes home Outstanding FX Trading Venue Award

Paul Houston, global head of FX, CME Group, speaks to The TRADE about the business’ growth in 2023, planned product expansion for 2024 and the evolution of the FX swaps and options markets.

What do you think were the key drivers behind CME FX’s win at Leaders in Trading?

Having successfully migrated EBS Market onto CME Group’s Globex platform in May 2022, we have a uniquely integrated global FX trading platform spanning futures and options, cash (OTC) and cleared FX, which provides access to unparalleled price discovery, execution quality and transaction cost analysis to drive the greatest possible operational, margin, capital, and total cost efficiencies for clients.

Throughout 2023, we have continued to invest in technology and new products to provide our global customer base with trading efficiencies and unique liquidity across a wide range of currency pairs. This has accelerated customer adoption and cemented the role of futures and options within the global FX market. In 2022, volumes in CME Group FX futures and options were up 25% versus 2021, and the business saw over $40 trillion in notional cleared and more than 90,000 different traders involved. 

What do you expect your biggest drivers of growth to be going forward?

Volatility is a key driver of volumes within the global FX market, but macro factors such as interest rate uncertainty combined with regulations such as UMR and SA-CCR have changed the cost dynamics of a highly fragmented marketplace. 

From conversations with customers, there is clear interest to utilise and embrace differentiated liquidity pools, further automation in FX swaps and options, and leverage instruments that provide greater  transparency and the ability to separate liquidity from credit. We believe that products that offer solutions to these challenges will be the biggest drivers of growth moving forwards. In 2023, we experienced  growth in currency pairs where geopolitical drivers, macro economic events and market structure factors combined at the same time. For example, our MXN/USD FX futures have seen growth in volumes of 23.9% year-to-date in 2023 and growth in open interest of 49.1%, compared to the same period in 2022. 

As the NDF market evolves electronically and systems and processes become more robust, this provides a good opportunity to grow our product offering.  Much like swaps, interest rate uncertainty increases the need for trading firms to hedge their risk, which creates renewed interest in NDFs and provides a growth opportunity for the instrument.

What will CME FX’s product expansion focus be next year?

Year-to-date in 2023, more than 270 firms either started trading FX futures and options for the first time, or added additional currency pairs to expand their trading activities. Given the growing level of client adoption, we will continue to invest in our core products to ensure we have the right currency pairs, products and trading mechanisms to meet the changing needs of our customers. We also continue to invest in FX Link where volumes increased by 90% during 2022 versus 2021. 

Recently, we announced exciting plans to connect OTC and futures liquidity by launching CME FX Spot+ for client testing in the second half of 2024. For the first time, spot FX participants will be able to access CME FX futures liquidity in OTC spot terms within an open, transparent, central limit order book (CLOB) environment, while FX futures market users will see expanded access to OTC FX liquidity. Our goal is to increase access, transparency and trading opportunities across spot FX and FX futures markets, which will benefit market participants across both venues

On the EBS side, we continue to take on board feedback from bank and non-bank liquidity providers and have recently made enhancements to include a size priority matching algorithm and a modification to our price discretion order type. Looking to 2024, we are looking at faster EBS ultra spot and NDF market data channels and reduced conflation intervals for existing credit screened market data channels. We will deploy conditional price increments, which allows use of more granular sub-pip price increments subject to an extended minimum quote life, in select spot FX currency pairs. These enhancements and modifications are being made to reinforce the vital role that EBS plays as the primary market and source of price discovery for major spot FX and Asian NDF pairs.

How is the trading process changing in FX and what is CME Group FX doing to accommodate this?

FX swaps and options markets are at an important turning point and further electronification and automation of these products is now possible using the firm, lit, credit agnostic order books offered by CME Group FX. According to the BIS Triennial survey, FX swaps represent on average 50% of the $7 trillion global FX market, and at certain times up to two-thirds of the total market. Yet this critical market remains mostly traded on an RFQ or RFS basis. Interest rate uncertainty has created a renewed interest from customers looking at their FX swaps activity and considering ways to optimise trading.

A combination of FX Link and FX futures spreads provide complementary pools of centrally cleared FX swaps risk for both spot starting and forward starting positions – with the 23-hour orderbook showing prices out to 1y+. The growth in adoption for these solutions is coming from traders across the full spectrum of client types – with key drivers being the separation of liquidity from credit, transparency and certainty within a firm, the fact it’s a lit CLOB, and the efficiencies of clearing for margin, capital, and operational processing. 

Nearly all of these same dynamics already exist in FX options where our CLOB with pricing across the full volatility surface is already providing traders with transparency, complementary liquidity, and the ability to automate their trading processes to gain trading efficiencies and scale.