Articles tagged by options
After a number of years having to take reactionary measures in
response to new regulatory requirements, panellists at Profit & Loss’ Forex Network New York conference expressed
enthusiasm for a new wave of innovation that has the potential to re-shape FX
Clearing house LCH says its ForexClear service has seen 10 entities turn to actively clearing FX non-deliverable forwards in the past six months and that it has experienced a “significant” rise in cleared notional and trade count in 2016, with over $220 billion in notional cleared to date in September 2016.
As of 23 September, the firm says over $1 trillion in notional has been cleared in 2016.
“The uncleared margin rules that are coming into force across the world have been a catalyst for driving eligible and appropriate derivatives trades towards central clearing,” says Daniel Maguire, LCH’s global head of rates and FX derivatives.
They may both have been a long time in the pipeline, but the wait for CME and LCH’s introduction of OTC FX options clearing services is nearly over. Yet with both due to launch before the end of 2017, just how much appetite is there likely to be from the prime services sector to support these initiatives? Nicola Tavendale writes.
While there are many different ways institutions can try to reduce their capital costs, clearing is by far the most efficient, according to Paddy Boyle, head of ForexClear at LCH. And even before the advent of the uncleared margin rules, there were already significant benefits to clearing non-deliverable forwards (NDFs), both in terms of enhanced risk management and obtaining operational and capital efficiencies, he adds. “Since the uncleared margin rules were implemented in September 2016, clearing has become a much bigger priority for many firms,” Boyle says.
Galen Stops takes a look at whether the predictions of FX moving towards a centrally cleared model might finally be coming true.
Central clearing for FX has endured a number of false dawns in recent years. As long ago as 2011, Profit & Loss published an article, “FX Clearing – Are You Ready?” in which it was argued that Dodd-Frank was likely to drive FX options and NDFs products into clearing.
Then back in the first quarter 2014, staff at the US Commodity Futures Trading Commission (CFTC) indicated that the guidelines for the mandatory clearing of FX derivatives products, which included NDFs could be finalised within weeks. Indeed, Profit & Loss reported in mid-June 2014 that the CFTC was poised to fire the starting gun for mandatory FX clearing.
New data from the Futures Industry Association (FIA) highlights the lack of significant growth in the volume of FX futures trading over the past several years.
According to the FIA data, 2.1 billion currency futures contracts were traded in 2017, and while this represents a 302% increase from the 2008 volumes – which is as far back as the FIA data provided goes – this hardly tells the whole story.
The data shows that between 2009 and 2010 the volume of FX futures traded jumped 160%, from 950 million contracts to almost 2.5 billion. What drove this sudden spike in trading volumes?
Galen Stops takes a look at how and why Aston Capital Management is planning to scale up following its recent $100m investment.
Aston Capital Management recently received an injection of $100 million in AUM and an additional $5 million in seed operating capital from private investors. Following this investment, the firm’s CEO Isaac Lieberman is, perhaps unsurprisingly, bullish about its future.
“We have a goal through our strategic mandate and product development timeline to have capacity to be managing $2 billion in AUM within two years and I can actually see us achieving this goal quickly as this business accelerates,” he says.
To help achieve this goal, Lieberman has deliberately been structuring the firm so that it can easily scale up in the future. For starters, the firm has been getting a whole slew of regulatory and accountancy registrations in place.
Although there are clear drivers pushing more FX products into central clearing, this is unlikely to have a significant impact on market structure, says Paddy Boyle, the head of ForexClear, LCH.
“The pressure to clear for banks that are subject to bilateral initial margin rules is very, very high and we have banks who tell us they’ve been cut off by other banks because they weren’t clearing,” he says.
That, explains Boyle, is one of the negative drivers towards central clearing, while on the positive side there are lower capital costs, lower initial margin requirements and fewer credit line restrictions for firms that choose to use clearing services. As a result, Boyle predicts that cleared FX volumes will increase “pretty significantly” going forward.
Key to the announcement made today by BNY Mellon that it is launching an FX options desk is that the bank believes that this represents the next step in its transition to a “full-service” FX franchise.
“We’re transitioning from a custody FX business to a more traditional full-service FX provider,” Adam Vos, global head of FX at BNY Mellon Markets, tells Profit & Loss. “As such, FX options was a key deliverable along this journey because it means that we can now meet more of our
client’s trading and hedging demands. It’s very important that they no longer have to go somewhere else for this activity, they can trade options - as well as other products – directly with us.”
LCH has launched deliverable FX options clearing. The move incorporates the first physical settlement service for cleared FX products, which LCH has developed in collaboration with CLS.
FX options clearing will exist as part of LCH's ForexClear service, which currently clears around $70 billion in average daily volume.
Paddy Boyle, global head of ForexClear at LCH, says: "Clearing FX options is an exciting milestone for LCH and the FX market. The launch of this service extends the benefits of clearing to more products and participants in the FX market, enabling them to benefit from the risk management, margin, capital and operational efficiencies of clearing. We're delighted to partner with CLS to deliver this innovative new service."
CME Group is planning to change the time that its FX options expire to 10 am EST.
This change will begin with contracts expiring after June 9, 2019. Clients across time zones will be able to trade listed options that expire at the same time as most OTC contracts.
"Aligning to the 10 am New York OTC convention makes it easier for global clients to take advantage of CME Group's leading electronic FX options platform and transfer risk more seamlessly between OTC and our cleared, deliverable solution," says Paul Houston, CME Group global head of FX products. "As more institutions need to comply with uncleared margin rules, we're extremely focused on providing a regulated FX options solution that is capital efficient."
Much has been made of the struggles of speculators to make money in FX in recent years. Colin Lambert takes a look at data that suggests speculators are on the decline, and hedgers on the rise – and he sees some good news for the banks in this, if they can stay one particular course.
Spot FX is “over-broked” to use the market vernacular – there are so many market makers, many of whom are recycling liquidity, that differentiating oneself in this market is extremely difficult unless you are either at the very quick end of the spectrum or are handling plenty of large tickets that require care around the execution.
A storm is brewing in the world of FX derivatives. Driven by, surprise surprise, Brexit uncertainty and Trump - there’s a sizable chunk of activity in GBP/USD options relative to the other major currency pairs.
Now the geopolitical landscape is of course backed into the price of the underlying currency pair, as opposed to the activity of the options. But the challenge is that as volumes increase, investment banks have to inevitably pay more in interdealer broker (IDB) fees. And the bigger the volume, the bigger the brokerage cost. Already under intense scrutiny to reduce costs wherever possible, this is a major headache that any desk head could do without right now.
New data from the Futures Industry Association (FIA) shows a 20.2% increase in the number of futures and options contracts traded globally on exchanges in 2018.Futures volume rose 15.6% to 17.15 billion contracts traded, while options volume rose 26.8% to 13.13 billion contracts traded."The rapid growth in derivatives trading on exchanges around the world highlights the value that these products continue to provide for end-users and investors," says Walt Lukken, president and CEO of FIA.
The overall rate of growth was the highest since 2010, when rapid growth in Asia-Pacific and Latin America combined with a recovery in the North American interest-rate sector to produce a growth rate of 26.4%.
The latest round of FX turnover data from a group of the world’s FX Committees show that volumes dipped slightly in October 2018 compared to April last year when they hit a new high mark. Average daily reported UK FX turnover was $2.6 trillion per day in October 2018. Although this is the third largest turnover figure on record, it represents a 4% decrease from the record high of $2.7 trillion reported in April 2018. Turnover by instrument was mixed in the UK. Spot increased for the third successive reporting period, gaining 3% compared to April 2018 to reach $775 billion traded per day. This represents a 14.5% year-on-year increase in volume.
KACE, a division of Fenics Software, has released an update of its kACE Pro platform that will enable clients to stream FX options prices to internal and external clients, single-dealer platforms, execution venues and third party platforms.Richard Brunt, managing director, comments: "This new release allows our clients to stream FX options prices to internal users, sales teams, wealth managers, or directly to their clients. Our agnostic approach to front-end users means that our clients can distribute their prices via a wide range of channels and venues using a single kACE pricing and dealing engine. We have already successfully deployed this new release with several existing and new clients in Europe and have a strong pipeline to continue this rollout globally in the first quarter of 2019."
Although the latest FX committee turnover data hold no terrors for other channels, a longer term trend does seem to be confirmed that more volume is heading towards the multi-dealer model, especially those on a disclosed basis. Colin Lambert takes a look.The historically clichéd method for a customer to execute an FX hedge was to call three or four banks and ask for a price. Surprisingly, even as relatively recently as late 2017 customers were still telling Profit & Loss and other industry surveys that they still preferred to pick up the phone, but more recent data suggest this is no longer the case and that customers are moving to the e-channel for their FX needs.
CME Group is set to change the strike price listing for certain FX options contracts in a bid to offer more granularity.Essentially, the exchange is reducing the number of steps above and below the at-the-money strike, while also reducing the strike increments. So, for AUD/USD, instead of 21 steps at $0.50 increments above and below the at-the-money strike, there will be eight steps above and below at $0.25 increments and then 10 steps at $0.50 increments for all weeklies and front monthly contracts. For non-front serials and quarterly contracts there will be 10 steps above and below the at-the-money strike at $0.50 increments and then 10 steps after that at $1 increments.
Robert Bogucki, who was facing six counts of wire fraud and one count of conspiracy, was acquitted by a federal judge in Northern California today. Bogucki, the former head of Barclays’ New York FX operation was charged last year in an indictment for his alleged role in a scheme to front run client orders. Bogucki was alleged to have misused information provided to him by Hewlett Packard (HP), which had hired Barclays to execute an FX transaction – which required the sale of £6 billion of options– related to the planned acquisition of a UK-based company in 2011. Bogucki previously lost a bid to dismiss the case.
A new research note from CME Group looks at whether FX options skews can be used to predict where certain currencies will move relative to the US dollar.Written by Erik Norland, executive director and senior economist at CME, the research opens by explaining that options markets typically exhibit a skew, but that in different asset classes this skew can be in different directions.For example, Norland points out that out-of-the-money (OTM) put options on equity index futures are usually more expensive than OTM call options because investors fear a sudden decline in stock prices more than a sudden rise. However, the reverse is generally true for options on agriculture products because food buyers are more concerned with a sudden increase in the price of crops rather than a decline.