The FX market is still “completely under-futurised” right now, according to Carlo Koelzer, CEO of 360T and global head of FX at Deutsche Boerse Group.
Deutsche Boerse announced plans to buy 360T in 2015 and this deal can subsequently be viewed as part of a broader trend of large exchange groups buying OTC FX platforms.
This begs the question of whether these exchanges will try to replicate the “vertical silo” model that they have developed in other markets, whereby they effectively manage to keep customer transactions within their business silo for the entire lifecycle of the transaction by offering pre-trade data and analytics, execution and post-trade clearing and settlement services all in one venue.
Answering this question, Koelzer, says that he actually sees a mixture of vertical and horizontal models emerging in the FX market. He adds that the OTC and exchange-traded markets are meeting and forming an oligopoly structure, meaning that there is enough competition to prevent increased transaction costs. On the other hand, Koelzer says that venues need to have liquidity pools that are deep enough to avoid high surge costs.
“You will see the equilibrium of competition over depth of the liquidity pool,” he concludes.
Going on to discuss the FX offering that Deutsche Boerse has been building out since acquiring 360T, Koelzer highlights the credit mitigation solutions that it offers as one potential driver of more “futurised” FX products.
“My theory is that credit risk was not priced in [to the market] for many years and that’s why it’s completely under-futurised compared to the rates markets, the equity markets. $100 billion out of $2.5 trillion in spot and $5 trillion all together, it’s completely under-futurised right now. This will all change, it might not go to 50% or 60%, but it will go beyond 2.5%, 4%,” he added.