Regulation Driving Increased Blocks, FX Clearing, at CME

CME Group says trading activity in blocks and exchange for related positions (EFRPs) across its listed FX products is up more than 280% for the year-to-date versus the same period in 2021.

The Merc says the activity has contributed significantly to the total average daily trading volume during March, with FX options volumes in contract terms increasing to 21.7% in 2022 compared with March 2021.

Over 20 liquidity providers are able to facilitate blocks, large privately negotiated trade orders, and EFRPs, whereby cleared, listed futures positions are exchanged for related OTC positions or vice versa.

CME says LPs can also gain potential benefits around margin, capital and freeing up of bilateral credit lines while still maintaining their client relationships and winning client trades. Regulations including the Standardised Approach for Counterparty Credit Risk (SA-CCR), reforms to how banks calculate their capital requirements for counterparty credit risk, and the Uncleared Margin Rules (UMR), which force significant changes to the way collateral is posted as initial margin for OTC derivatives, are also contributing to the growth in the utilisation of blocks and EFRPs, it adds.

“The ability to lean on OTC liquidity with chosen relationships in order to obtain a price to access clearing for FX forwards, NDFs and FX options is resonating with customers – especially in the real money community,” says Paul Houston, global head of FX, CME Group. “The execution style of trading a block or EFRP on a relationship basis with their chosen liquidity provider is synonymous with how many of these participants trade in the OTC market today.”

John Rothstein, CEO of Optiver UK, adds, “Block trading represents the best of both worlds, combining the liquidity and flexibility of OTC trading together with the central clearing that’s a benefit of the listed space. For institutional investors seeking to execute large transactions at a single price, it’s become a quick and convenient way of doing so, particularly when markets are volatile.”

FX futures blocks were up 187% for Q1 2022 versus Q1 2021, while futures EFRPs were up 457%. FX options blocks, as hinted at by the increased options volume, role 316%.

“The evolution of EFRPs and relevant use cases amongst institutional investors have expanded exponentially,” says Richard Condon, Morgan Stanley, head of hedge fund sales. “The value proposition in the FX space is clear – FX blocks and EFRPs present an opportunity to pair dynamic OTC execution strategies along with high quality market making, and then wrapping the result in a cleared product.”

Lee Spicer, global head futures & options high touch execution, BNP Paribas, points to changes in UMR as another driver, saying the bank has seen “a growing appetite” to trade listed futures, although it should be noted that in year-on-year terms, CME’s FX futures and options growth was beaten by every OTC platform to report, with the exception of EBS – as was the case with quarter-on-quarter numbers.

That said, it is an interesting shift perhaps, that CME is seeing more volume in products that have an OTC nature, ahead of more stringent regulation, a point reinforced by Chris Callander, head of FX futures sales and trading, Societe Generale, who says, “Using a relationship based “off-exchange” price provider to transact a block or EFRP gives you both the benefits of a listed product along with the liquidity and spread very similar to the OTC market.”

The increased use of blocks is also highlighted by Rafael Sogorb Diaz, European head of ETD and equity structured product sales, Santander. “As portfolio managers continue to increase their exposure to FX listed derivatives, usage of blocks and EFRPs in order to implement their investment strategies plays a key role,” he says. “Blocks offer the possibility to execute cross asset strategies and hedge FX exposure in an efficient mechanism directly with chosen LPs,” said,

Meanwhile, Yordan Marinov, senior FX derivatives trader at Susquehanna International Group, adds, “Block trading is complementary to the liquidity in the CLOB and allows us to provide competitive, single price executions on larger trades to relationship counterparties akin to RFQs in the OTC, but with the resulting trade benefitting from the capital efficiencies and risk mitigation of centrally-cleared futures products.”