NCFX Extends FX Forward Benchmarks to Broken Dates
Posted by Colin Lambert. Last updated: June 8, 2021
Following the launch in standard tenors last year, New Change FX has extended its regulated FX forward benchmark curves to broken dates.
The firms says it has become apparent that buyside clients are very often exposed to currency risk on non-standard tenor dates, hence the launch of broken date benchmarks in a universe of pairs. Data is available to NCFX TCA clients as part of the service, to API users and to users requiring a desktop calculator via the web.
The firm observes that market participants have always struggled to benchmark forwards, in particular on broken dates. This is because the only available data on forwards are the generic, pillar, ‘on the run’ or standard tenors.
It acknowledges there is some additional information from IMM dates, however adds these tenors are broadly for the purpose of market makers clearing their risk with each other, and that most dates needed by end users are broken dates that meet the specific need of the customer; to match a liability or hedge a future cashflow.
“Forward traders distil a considerable amount of risk factors into the prices that they quote to the market” NCFX says in a release. “Two yield curves, cross currency basis, jump dates, special dates, turns, supply & demand as well as personal bias all play a part.
“To view the forward curve correctly one cannot simply interpolate between all the standard tenors and assume that any given date will be near this line,” it continues. “It is possible, however, to reconstruct the curve in the same way a forward trader looks at the risk of a portfolio. By undertaking an enormous amount of research and working with forward traders, NCFX has been able to pinpoint special dates with accuracy. Once those dates are known NCFX can deliver an accurate benchmark across the entire curve.”
NCFX reinforces its message with data from EUR/USD markets at the end of 2020, which indicates a 2.5bp error using straight line interpolation around turn events. “Considering that swaps are trading at spreads of 0.4bps or less, a 2.5bp error in the calculation of cost creates a significant error in the TCA,” it observes. “Being able to quickly and easily access a regulated benchmark for the FX forward curve is a significant advantage for traders on both the buy and sell-side of the market. The ability to access data derived from streaming forward prices and benchmarked standard tenor data offers a significant improvement in transparency.”