The global FX market is experiencing a demand for regional trading capabilities in exchange-traded derivatives as well as post-trade services such as clearing and reporting.
Customers are choosing FX futures as a way to transact emerging market risk. "They're standardized contracts, and people know the contract size and expiration," said Derek Sammann, senior managing director at CME Group. "It allows for standardized trading which typically lends itself to lower spreads."
Within the past year, CME has launched clearing for OTC interest rate swaps through CME Clearing Europe and a multi-asset class European Trade Repository, which coupled with the launch of CME Europe provides a platform for expanding product offerings within Europe in addition to extending its footprint within the Asia Pacific region.
"Historically, we approached the market with our all-in U.S. solution, but as regs are starting to shift and starting to bifurcate the global FX market, our clients require the ability to choose between a European regulatory landscape and a U.S. regulatory landscape," Sammann said. "We needed to represent that as a service we can offer to our clients, and I believe that the choices that we've made are very consistent to how other service providers are looking to service an increasingly global customer base who is increasingly impacted by regional regulatory changes."
In Europe, asset managers are required by MiFID 2 to fulfill best execution requirements for FX transactions. “In equities, that’s a relatively straightforward process in that there are mature and well-understood tools for transaction cost analysis,” John Adam, head of product management at Portware, told Markets Media. “It’s a bit more of an evolving technology on the FX side.”
Among institutional asset managers, most aren’t concerned about having to have a physical presence close to the banks that are generating my quote, with the exception of proprietary traders. “When a buy side firm is interacting with an FX ECN, it tends to chop their order size and execution size back because they don’t know who is on the other side of the trade,” Adam said. “You could potentially have an element of high frequency trading or arbitrage going on.”
While it's likely that the largest global participants will participate equally across all regulatory jurisdictions, regional firms that do business in one particular region are interested in how they can be in compliance with regional regulations. "We're regionalizing our infrastructure and building capabilities to support what is becoming, quite frankly, quite a regional yet global FX market," Sammann said.
As the Dodd-Frank mandates are unfolding, and as the Basel III and BCBS/Iosco capital principles are rolled out globally, "there's some significant impacts to the cost structure around foreign exchange as it relates to product choice-- whether you trade bi-laterally, or whether you clear a swap that's an OTC instrument, or whether you trade directly on exchange," Sammann said.
In addition to futures, CME is offering post-trade services such as clearing and trade reporting. "We're providing clearing services for customers that want to stay in the OTC world, and non-transactional services like trade reporting services," Sammann said. "We're in the middle of an unprecedented amount of regulatory change, and it's moving at different speeds between Europe and the U.S and Asia."
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