CME Group is to roll out its Committed Cross (C-Cross) functionality to FX Link. Subject to regulatory approvals the change is due to go live on July 27 meaning FX market participants will be able to communicate pre-execution to agree details of a transaction, including size, price and direction.

Unlike block trades which are negotiated and traded privately, under the C-Cross mechanism – which already exists in other CME markets – two parties can agree a trade through multiple channels, via broker or bilateral for example, and then FX Link notifies participants that a C-Cross is being negotiated, thus enabling them, if they wish to enter an interest (a request for cross, or RFC) and build depth of book. Other market participants will have five seconds to enter an RFC before the trade is executed.

CME is also increasing the better price matching (BPM) percentages on its FX futures products to 50% to bring them into line with thresholds on FX options. It has also enhanced its BPM algorithm to include a volume component. Under this process, a market maker seeking to engage with a C-Cross trade will be guaranteed a certain percentage of their order if they tighten top of book, or if their interest is larger than that at current top of book. Makers are notified what percentage of their RFC will be filled.

The latest development is an important one for CME as it seeks to build volumes and depth of book in FX Link, which, as was the case with most FX swaps markets, suffered in the March mayhem and has recovered, albeit sporadically, since. As OTC providers have found, building e-FX swaps liquidity can be a tough grind thanks mainly to the obstacles to negotiating a trade. Whilst a liquidity ladder exists, the vast majority of bank traders especially, like to trade at, or close to, mid, with the negotiating role taken up by the voice brokers.

CME’s change allows that process to take place still – but with the trade being executed on FX Link, thus bringing the capital benefits to the OTC participant. Additionally, bringing C-Cross to FX Link enables traders to cluster around interest points – thereby increasing top of book depth for specific interests – and also brings an OTC mechanism, negotiation, to the futures world.

If FX Link is to fulfil its potential there seems little doubt that it needs to attract the major trading banks – and that means bigger tickets, for while algorithmic execution and the slicing of big trades may come, the general consensus is, thanks to the negotiation process, it is still a way off. If the C-Cross mechanism succeeds in attracting good size interest to top of book, albeit on a quasi RFQ basis, another barrier to STIRT desks engaging with electronic or futures liquidity will be broken down.

Colin Lambert

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