New Change FX Unveils FX Swap Benchmarks, Indices

New Change FX (NCFX) has launched what it says are the world’s first live streaming benchmarks for FX forwards, the calculation of which has enabled the firm to simultaneously launch a set of currency beta indices that are designed to enable structured products to be created which offer asset managers an alternative to taking FX limits from a bank and then trading in the forward and swap markets. This means it is possible to buy a structured product that reflects the economic effect of the desired hedge.

As is the case with the existing NCFX benchmarks in spot markets, the new 38 benchmarks take data via a FIX connection from an undisclosed number of trading platforms, but the backbone of the new forwards benchmarks is a new interpolation methodology that accounts for the “turn” effects often seen in FX swaps markets round month, quarter and year ends. Initially the curve will be streamed out to six months but NCFX has plans to extend this out to a year in a second release.

As was seen repeatedly in 2019 – and indeed led to central bank intervention in cash markets – dollar funding demand around these “turns” created a blow out in repo market and FX swap spreads. As NCFX points out in a paper presenting the new methodology, the Covered Interest Rate Parity theory (which states that FX swap rates should accurately reflect the cost of borrowing in both currencies) often breaks down around the turns, as witnessed in 2019.

“In practice,” the paper states. “Basis (the difference between the cash and futures markets) seems to be here to stay.” It is hard to argue with that assertion given banks’ eagerness to reduce their month, quarter and year-end G-SIB (globally systemically important bank) rating which has led, as the Bank for International Settlements recently observed, to reduced liquidity around turns as the major banks in particular tend to step back from the markets.

To solve the issue, NCFX’ new methodology allows the firm to produce a price through these events and to provide, it says, a much more accurate measure to calculate month end and broken dates. It involves NCFX calculating the slope leading up to the month end, and for the month. It then computes the average points per day leading up to, and after, the turn and then takes the average points per day from both to interpolate the month end based upon the day count from the target month end to the settlement date of the near contract.

The same methodology is used to calculate broken dates, NCFX uses the month end as the far date contract to calculate to the broken date.


The creation of the FX forward benchmark rates has allowed NCFX to launch its Currency Beta indices that measure the systematic return available from investing in currencies, although the firm observes that whereas in equities or fixed income returns might exhibit 90% correlation to the benchmark, in FX, the correlation of a currency manager to a style index is around 60%. This means that even managers following a similar investment strategy can generate significantly different returns.

Asset managers now have an alternative route for hedging, rather than relying directly on the FX market to execute their hedges

Noting that this “style beta” only captures a subset of the opportunity from currency exposures, NCFX says it became evident that a better way to measure and mimic currency beta was needed. To meet this need the new currency beta indices identify the systematic return for currency exposure in 21 currency pairs with the dollar, euro and sterling as the base currencies, where the exposure is proxied by a long currency exposure versus those base currencies via one-month forwards.

The indices were re-based to 100 at an inception point on 29 December 2017 and returns are calculated on a daily basis, using NCFX benchmark mid-rates in spot and forwards, at 4pm London time. Each single currency index can be used for a bespoke FX benchmark and a group of indices can be weighted to reflect the beta that would have been obtained by taking the purchasing currency risk of any given asset allocation strategy. “This allows investors to accurately understand and measure the currency decision of their portfolios,” NCFX says.

An independent benchmark oversight committee of three has already been established by NCFX in accordance with the European Benchmark Regulations (BMR), to oversee the new benchmarks in addition to the spot benchmarks, this will also oversee the governance of the currency beta indices.

“The creation of forward benchmarks and a benchmark curve is a significant change for the market,” says Andy Woolmer, chief executive of NCFX. “It has not been possible to accurately separate out the skew of individual bank pricing and understand the cost of trading in FX forwards until now. The benchmark family means that FX forward users can now access a reliable set of benchmarks that explain their execution costs better than ever before’.

“In addition, the opportunity to create financial derivatives from the NCFX Currency Beta Indices means that asset managers now have an alternative route for hedging, rather than relying directly on the FX market to execute their hedges. NCFX believes that transparency in markets drives out cost and invariably increases activity in those markets. A competitor to the model of directly trading forwards is long overdue.”

Colin Lambert

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