CME Optimistic for FX Futures Despite Low Volatility

CME Group sees cause for optimism as it reached a new single-day volume record for its FX futures of 2.7 million contracts on December 11, amid what has otherwise been a broadly subdued year of trading in the currency markets.

Given that, aside from the Mexican peso, the majority of FX trading on CME takes place in G7 currencies and that the JP Morgan G7 Volatility Index has been near all-time lows this year, the exchange group has not been able to consistently rely on volatility as a driver of volumes.

However, not only did CME’s FX futures surpass the previous record of 2.5 million contracts set on June 14, 2017, but open interest on FX futures also reached a record 2.3 million contracts on December 11, 2019 and large open interest holders (LOIHs) in the futures reached a record high of 1,261, up 18% year-to-date in 2019 compared to the previous year.

Paul Houston, CME Group

Open interest represents the number of active positions that market participants are holding open without taking delivery or offsetting, a measure that typically increases during times of market uncertainty. LOIHs are a measure of market diversification.

“We’ve managed to grow the amount of asset manager, hedge fund and bank activity on our futures products. The records set in open interest and large open interest holders represent positive green shoots in a challenging year for FX volatility,” Paul Houston, global head of FX products at CME, tells Profit & Loss.

Houston attributes this spike in trading activity to a couple of different factors.

“The week in question was a roll week, which contributed to the high volume week,” he says. “But having built up record levels of open interest and large open interest holders over the year, we had natural interest to be rolled.”

In addition, Houston explains that one initiative that CME has undertaken over the past year has been to reduce the minimum price increments on its quarterly spreads for euro and yen from .5 to .2 a sizeable reduction of 60% and in sterling from 1 to .5.

“The sterling reduction came into effect in June and the euro and yen in September, so this roll has seen those reductions bed in, and so the cost of rolling positions is a lot less for end-users,” he says.

Houston adds: “I think that these changes are exciting as it makes our futures more accessible because there’s reduced cost for rolling positions. While FX futures can be physically delivered, most market participants roll it and so if it’s more cost effective to roll, then it makes our product more attractive. I’m also excited that the volumes record goes some way towards validating the analysis we did before reducing the minimum price increments, because this is not a decision that we took lightly. Structurally, we have changed the market and made it more cost efficient for end-users to join.”

Galen Stops

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