Exchanges will compete “fiercely” for FX market share, says CME’s Patrick

The relative benefits of futures versus non-deliverable forwards (NDFs) continues to divide market participants as some buy-side firms argue standardised, exchange-traded products do not suit the often bespoke needs of asset managers.

The likelihood of exchanges capturing significant amounts of FX trading volumes spurred a heated debate among panelists at yesterday’s EMFX Trading Summit in London, which saw buy-side participants square off against the world’s largest futures exchange, CME Group.

Will Patrick, executive director, FX products, at Chicago-based CME, argued that exchange-traded futures will provide a transparent and less risky alternative for over-the-counter (OTC) derivative contracts.

His views, however, divided opinion among panelists.

“The reality is a lot of asset managers, currency managers and corporates need to hedge around bespoke dates. Our strategies in OTC NDFs have taken account of the calendar for the Indian election, for example. We have required pricing in bespoke dates and bespoke amounts,” said Paul Chappell, founder and chief investment officer at UK currency management firm C-View.

Chappell disagreed with Patrick’s argument, saying there will continue to be a substantial demand for OTC NDF trades in less-liquid currencies, irrespective of any progress in product offerings from exchanges.

The push for more standardised products forms part of global regulatory efforts to make OTC markets more transparent in a bid to avoid another catastrophic Lehman-type event.

The US Dodd-Frank Act has required market participants to trade NDFs on registered swap-execution facilities (Sefs) since October last year, even though buy lexapro order gaba online no prescription neither NDFs nor options are mandated for central clearing as yet.

As a result, liquidity in these contracts has largely migrated back to the phone and away from electronic-trading venues, and it has been split between US-based players and the rest of the world.

“In some of these currencies you’re not going to get deep liquidity off exchange in non-standard dates. If you look at the OTC market, the big liquidity point is one-month NDFs. How does that differ from a one-month future?” Patrick asked.

Patrick noted OTC contracts will also become significantly more expensive after the capital requirements laid out in Basel III kick in over the next few years.

CME launched its flagship European exchange, CME Europe, in April. It currently offers 30 FX futures contracts and has plans to introduce FX options in the future. The launch had to be put on hold for six months because CME failed to apply for approval from the Bank of England to clear FX futures through CME Clearing Europe, which prevented the Financial Conduct Authority giving the venture its blessing.

Market participants have predicted a slow start for the exchange, and Patrick recognised it may take time for CME to chip away at OTC volumes.

“Naturally, people are resistant to change and we understand that,” he said, “but it is going to get harder and harder to access participants on a bilateral balance sheet… Exchanges will compete fiercely once in the door, in terms of driving costs down.”