Currency futures are better By Dave Schulz & Scott Brusso
There is no question that the FX market continues to see tremendous growth. The continued uncertainty and market volatility caused by macroeconomic events such as the Eurozone sovereign debt crisis and the U.S. quantitative easing policy have been contributing factors to the more recent spikes in volumes. But over the longer term, the FX market has seen growth due in part to the marketplace's global nature, as well as the evolution of technology and electronic trading that allows a wide breadth of customers to participate.
The Bank for International Settlements (BIS) triennial survey provides the most comprehensive information on the size of global FX markets and gives the best view into global trends. According to the most recent study, the global FX market grew 20% from April 2007 to April 2010. In contrast, CME Group FX volumes grew 94% during that same time period. Similarly, looking back to 2001, the numbers show a three-fold increase in the global FX market. Currency futures' growth from 2001 to 2010 show a staggering 18-fold increase. Additionally, the report shows the overall FX options market decreased 2%, while the CME Group FX options market increased 226%.
While we do not make predictions on the future growth of asset classes, the expansion of international trade and global investment certainly will keep FX at the forefront of investors' minds because it is a key in cross-border trading across all asset classes. So why has the exchange-traded FX market seen such staggering numbers compared to the underlying cash market? The catalysts for growth are clear: Deep liquidity, competitive pricing, diverse customers, speed of execution and risk mitigation.
Today, CME is the largest regulated FX marketplace with more than $125 billion in daily liquidity. In 2001, we averaged $10 billion a day. It is this deep liquidity that is crucial during volatile market conditions and enables traders to get in and out of markets quickly and easily.
In addition, FX options on CME Globex are the single largest pure electronic liquidity pool for FX options, whether exchange-traded or over-the-counter (OTC).
Level playing field
Whether you are a large institution or an individual trader, everyone is on equal footing when it comes to pricing currency futures. Best price wins, it is as simple as that — something that is not always the case in the fragmented OTC FX market where market participants' credit ratings determine available executable prices. Outside of FX futures, there is very little transparency with trade data in OTC FX. As a result, market participants can look only to Commodity Futures Trading Commission data. Because of the global financial crisis and impending regulation, the market is now realizing how tremendously important transparency of market data is alongside central counterparty clearing.
The futures markets' equal access creates a diverse trading community in addition to access to a diverse FX product suite. Trading activity among market participants outside traditional commercial banks, especially proprietary firms, hedge funds, pension funds, mutual funds and insurance companies, is contributing to growth in the FX markets. Unlike some cash markets, these different customer groups all trade in one central trading system, which offers the same tradable prices with complete anonymity in all bids and offers.
There are 54 futures and 31 options contracts based on major and emerging-market currencies, such as the Brazilian real, Chinese renminbi, Korean won and the Turkish lira. Market participants have the ability to mitigate risk with currency futures' longer dated currencies and benefit from the significant margin offsets available. As noted, the options quickly outpaced the OTC market last year as hedging tools, and customers also have benefited from trading the underlying futures of these options within the same platform. Furthermore, currency futures have seen strength with all 20 different currency pairs, while the spot market tends to provide strength in major currencies only.
There has been a big jump in the cross-currency pairs. FX cross rates hit record volumes in June, particularly the Swiss franc, which was up 261%, indicating the market's concern over the euro.
E-micro FX contracts are one-tenth the size of standard FX futures with one-tenth the risk exposure. The contracts allow for exact offsets with corresponding standard-size FX futures.
CME's currency futures are traded on the CME Globex electronic trading system. These trades are executed and confirmed instantly, and traders can access Globex through approximately 1,000 direct connections in more than 85 countries and foreign territories, providing fast, efficient trading on all our products.
Safety and security
Since the 2008 crisis, market participants have a greater appreciation of the counterparty and credit risk in cash markets. The importance of a guarantor and clearing method are key to today's FX markets. FX futures offer backing at clearinghouses and risk is shared among clearing members, protecting investors in the case of a default, guaranteeing every transaction and virtually eliminating counterparty risk.
The recent growth illustrates the need and desire for counterparty risk mitigation and the central counterparty clearing model that exchange trading offers. CME Group's perfect record of never having a default or loss of customer funds resulting from a failure of a clearing firm is exactly what market participants need when mitigating their risk.
The steady, strong growth of volume in FX and currency products at futures exchanges resulted from an increased desire, both on the sell-side and the buy-side, to mitigate counterparty risk.
Currency futures have very competitive pricing, deep pools of liquidity, a diverse range of counterparties across all segments of the FX market and benefit from the diversity of product range at the exchange — such as fixed income and equities, alongside agricultural and commodity trades. These intriguing benefits have enabled currency futures to become an attractive alternative to spot FX.
Scott Brusso and Dave Schulz are directors for FX products at CME Group.