SGX: Doing Things Differently

“It’s not rocket science, but it is a different approach compared to other exchanges,” says KC Lam, head of FX and rates at SGX, when discussing the exchange’s new FlexC FX futures, which aim to “futurise” certain OTC FX product offerings.

This is, of course, a reference to the recent product initiatives launched by various exchange groups in an attempt to bridge the gap between OTC and listed FX trading.

While Eurex has launched rolling spot futures, which mimic the trading of OTC FX spot contracts, combined with the daily usage of a tom-next (T/N) swap in order to roll over the value date of the spot position, and CME has launched CME Link, spot FX basis spreads offered on Globex to create a central limit order book (CLOB) between the OTC spot FX and CME FX futures markets, SGX is indeed taking a very different approach.

“A lot of people are doing something because they want to grow the exchange traded futures. We have the same ambition as well, but we’re actually using a very different approach because it’s not about bringing trading onto a CLOB or onto an exchange, it’s about enabling firms to trade in the manner that they want, while also leveraging the efficiency of an exchange,” explains Lam.

SGX’s offering is designed to enable firms to bilaterally negotiate trades with tailored expiration dates and then register and clear these trades like a normal futures contract. One thing that makes this different to the other approaches being taken by other exchange groups is that it means that the actual trade agreement can occur via a CLOB, RFQ, RFS, or even over the phone, and then once agreed, it is executed and cleared via SGX.

The essential aim behind FlexC FX futures is to provide all the flexibility of an OTC trade with the benefits of trading and clearing via an exchange – with SGX arguing that these benefits include greater capital efficiencies, eliminating the need for ISDA and CSA documentation and for bilateral pre-trade credit, increased access to new customer groups, and reduced overall trading costs.

Mimicking OTC

Importantly, FlexC FX futures won’t be reported immediately by SGX. The exchange will instead hold the data until the next trading session in order to prevent information leakage, which is especially important for the less liquid currency pairs. Lam also points out that this new offering will also allow market participants to effectively maintain the existing customer relationships that they have on the OTC side.

“This is mimicking the OTC environment,” he says, “You can create trades of any tenor – you can do a spot T+2 trade, you can do an overnight, a T/N, a one month. You could potentially do combinations – what could be interesting is if a firm was to trade something that is mostly traded by voice today, like a three-month swap, for spot CNH three-month they could go one leg long and one leg short potentially in the swap.”

One limitation on the flexibility of the FlexC FX futures is the expiration, which can be set for any business day, but only up to 100 days out. Although to be fair, Lam points out that there is pretty limited demand for longer-dated contracts on the currency pairs that SGX is offering FlexC futures on.

“When we looked at the data from DTCC, we found that over 65% of trades are concentrated in less than three-month contracts. Of the rest, 20% are on broken dates and although we don’t have an exact number for those, probably more than half of them are also within three months,” he says.

Lam also explains that the current 100-day limit was not imposed because of margining challenges and that the exchange could extend it in the future if there’s demand for longer-dated contracts, but wanted to focus on where the most trading activity is with this launch.

Industry buy-in

Another point worth exploring is how different firms can interact with SGX’s new products. The exchange has been quick to highlight the benefits of its FlexC FX futures for both the buy and sell sides, but it is also significant that the press release on Tuesday featured quotes from TFS Derivatives HK (Tradition), TradAir and BidFX, supporting the product.

From the release: “TFS Derivatives HK Ltd will act as an independent intermediary, operating our platform TradMatch, with institutional block-size participants providing liquidity on the SGX FlexC FX Futures. We will support a Central Limit Order Book on the outrights and the calendar spreads, while also running continuous and anonymous mid-market matching opportunities.”

Lam explains that the benefit of the FlexC FX futures for IDBs such as Tradition is that, because it eliminates the need for bilateral credit lines, it will enable them to interact with buy side firms, something that these firms have not traditionally been able to do.

BidFX operates a trading platform and, once the new futures are launched, its users will be able to stream the FlexC futures to one another.

“This brings better technical usage for the sell side firms because they can reduce the number of lines that they open up for that particular customer or they optimise it by doing a mixture of FlexC futures and OTC FX,” says Lam.

Meanwhile, Lam says that TradAir is looking at the FlexC FX futures as an opportunity to expand its offering, which is currently focused on spot FX, and open up a different distribution channel so that it can access more market participants.

The reason why the support of these firms is significant is because it shows that SGX is getting buy-in from the the broader FX community, who could in turn encourage buy and sell side firms to use the new futures products.

As is the case with the new Eurex and CME products, if the FlexC FX futures do gain traction in the market, it will take some time for them to do so. The targeted go-live date for the new futures is August 27, and Lam says that there remains a significant amount of heavy lifting on the back-end, including software installation, to be done by various market participants if they want to support this product.

But what is interesting is that all three exchange groups clearly feel like they’ve identified friction points in the OTC FX market that they can help address and, even if none of these products gets meaningful adoption, it’s certainly a positive step for the FX industry as a whole that new and innovative products are being developed to ease these perceived pain points in the market.

Galen Stops

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