CME Sees New High in FX Open Interest: Cites UMR
Posted by Colin Lambert. Last updated: May 24, 2022
CME Group says it is seeing a new high in market participants holding large open interest positions in FX futures and options, observing the growth comes at a time when the time to implementation of the Uncleared Margin Rules (UMR) reaches 100 days. The Merc has also seen good growth in its FX Link marketplace for FX swaps.
CME says that as of May 10, 1,312 holders of large FX open interest positions were registered, following what it says is a new high for open interest in all FX futures and options of over three million contracts, with a notional of over $290 billion.
The exchange says Asset manager adoption led the growth, with their positions growing by 60% since the end of Q2 2020, adding buyside accounts held the most open interest positions in cleared, listed EUR/USD FX futures (60%), with hedge funds and dealers also holding significant positions at 15.4% and 24.1% respectively.
“While certain FX instruments, such as forwards, are not in-scope products for UMR, they do contribute to the notional driving the qualification. This is a key factor as to why more asset managers are using FX futures as a replacement for some of their OTC FX Forward exposure as they do not count towards the rules,” says Paul Houston, global head of FX products at CME Group. “The final phase of UMR, where the threshold reduces to $8bn, will see many more firms impacted and this activity has increased correspondingly. For those firms subject to the rules, CME FX Options offer considerable efficiencies relative to ISDA SIMM, through clearing and netting exposures against a central counterparty.”
The Full FX View
While there is little doubt that UMR and regulation in general is grabbing more and more attention, and that listed products represent a good solution to alleviate the pain, there does not seen to be a discernible shift in that direction. Yes, CME is seeing new highs, but it should be noted that it hit the three million open interest mark in March 2020 and was at 1,260 in December 2021, therefore growth is there, but it is not exactly a surge.
Equally, in terms of large OI positions, CME reported notional of $293 billion in December 2021, so while the latest mark may be higher than that (it was cited as over $290 billion), again the pace of trend growth may not be as high as suggested.
Finally, it is worth putting these numbers into some sort of perspective with what is happening in OTC markets. Looking at the first four months of 2022, CME’s overall FX futures and options volume is up 9.4%. This compares to spot platforms such as CboeFX, Euronext and Refinitiv all having growth between 13-19%. 360T’s spot growth is 6% while, somewhat ironically given it is part of CME Group, the only platform seriously underperforming is EBS at -3.3% across those four months.
What is interesting, and perhaps more pertinent, is that while 360T has seen a 27.7% surge in non-spot volumes (at a constant exchange rate), Refinitiv non-spot, which is much more mature saw only a fractional increased of 0.6%.
Looking at FX Link data for this year – year-on-year comparisons are difficult to find (mainly because yours truly lost 2021 data) – volumes seem to be tracking largely in line with Refinitiv, if not 360T, which is in growth phase. This may not be exactly what CME wants at this time, but it is notable that in keeping track with mainstream public OTC markets it is clear that in FX swaps as well as spot, more traders see CME as a viable alternative.
I remain positive as to the potential for FX Link and listed products generally in FX, however, as noted when it launched, it will not take over the FX world, and progress will be slow thanks to the existing market structure. Probably the best CME can hope for at this time is steady progress ahead of UMR VI – after that, however, if the model is to truly succeed it will probably need to demonstrate quicker growth.
Meanwhile, the exchange group says that FX Link, CME’s cleared electronic marketplace, has seen order book depth in EUR/USD increase by over 200% and top of book spreads reduce by around 30%. It has achieved single day records in USD/CAD ($1.48 billion) in March and NZD/USD ($470 million) on 28 April. The Merc adds that overall volumes have increased by 59%, although it is not clear over what period, it is possibly comparing May 2-11 2022 against February through April 2022, and CME has been approached for clarification.