THOUGHT LEADERSHIP
THE OFFICIAL NEWSPAPER OF TRADETECH FX 2023
DISPELLING THE MYTHS AROUND FX FUTURES LIQUIDITY
CME FX futures and options have seen significant growth in both volumes and participation over the last few years . In 2022 , on average over $ 80 billion of FX futures traded every day , with a total of $ 40 trillion notional centrally cleared across 40 currency pairs .
The benefits of centrally cleared futures in FX are increasingly being recognised . Drivers include margin efficiencies relative to non-cleared derivatives for buy-side firms caught by Uncleared Margin Rules , and capital efficiencies for banks under SA-CCR .
However , a common misconception that arises from discussions with clients surrounds liquidity , with many believing that FX futures are not liquid enough for them to transact and that OTC venues remain “ better ”.
While there is clearly a role for both futures and OTC venues in liquidity provision , it is useful to place the CME FX futures market within the context of the leading OTC FX venues , using traded volume as a proxy for liquidity .
Figure 1 compares CME FX futures daily volume with spot FX volumes on the leading OTC venues – the primary markets plus major ECNs . This chart illustrates that although OTC volumes are higher than
CME GROUP unpacks the benefits associated with centrally cleared futures in FX and how best to target liquidity in the highly fragmented global FX market .
futures in aggregate , CME FX ranks as one of the top individual venues by volume across the whole FX landscape .
This is reinforced further by a recent BIS working paper1 , which found that “ a growing number of market participants of all types now seem to consider currency futures traded on the CME as at least a close cousin of the primary [ spot FX ] CLOBs .” Furthermore , trading volume in CME FX futures “ now often exceeds OTC FX spot trading volume in the primary market ” leading some to argue that “ FX futures do , in some cases , lead price discovery in FX spot .”
Having considered OTC markets , it is also instructive to place CME FX in the context of the exchange traded FX futures market . Figure 2 shows the average daily volume for exchange traded EUR / USD futures globally , highlighting that CME Group is the natural home for trading FX futures in major currency pairs .
Liquidity means more than just volume though . Topics including reject rates , market impact , the ability to trade passively , and diversity of the trading ecosystem are also hugely important .
The majority of CME FX futures are traded on the central limit orderbook
16 THETRADETECHFX DAILY