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FX Trading is Set to Shift to Futures
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FX Trading is Set to Shift to Futures

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FX Trading is Set to Shift to Futures

FX futures have been around for more than 40 years. Their introduction in the form of the International Monetary Market changed the way foreign exchange was valued and traded. Since that time, several sectors of market participants – mostly financial users – have focused on swaps, non-deliverable forwards and options products to trade foreign exchange. But according to a new study from Greenwich Associates, we may be seeing a heavy shift toward FX futures sometime soon.

In their coverage of the research, Markets Media reported on some of the reasons for the shift:

While FX swaps and forwards received exemptions from trading and clearing requirements imposed on derivatives in other asset classes, they will still feel the impact of trade reporting requirements, anti-evasion authority, business conduct standards and Basel III capital requirements. These influences are likely to encourage a shift of some FX swaps and forwards business to futures.

NDFs and FX options did not escape the grasp of trading and clearing requirements and the high margin rates they bring, setting the stage for their users to migrate some of their trading to futures as well. Once these rules set in, trading these products will become more expensive. Greenwich Associates data shows that the trend away from NDFs has already started. Whereas over half of investment firms used NDFs in 2010, at the end of 2012 only 35% used them, with hedge funds leading the pull back.

CME Group FX Futures had a good year in 2013 with $101 billion (830,000 lots) in average daily volume, a slight increase over 2012. But according to the Greenwich research, even a small shift from FX over the counter products to futures could make big waves. In the press release for the study, Futurization of FX Derivatives, author Kevin McPartland estimates that a five percent move from OTC to futures, would result in FX futures volume growth of more than 50 percent.

On his blog, McPartland explains his reasoning behind the findings, and illustrates the depth of the evidence to support his points:

Based on data gathered via over 1700 interviews with FX traders and portfolio managers and analysis of the regulatory landscape, our research finds a clear trend exists towards growing demand for FX futures in lieu of traditionally bilateral FX derivatives. The latter will continue the make up the majority of notional trading volume, but as the economics of those products change at the hand of new global regulations investors will start to look for cheaper alternatives.

Along with more a more favorable regulatory environment, the switch to FX futures could be made easier by more currencies being made available to FX market participants. As CME Group Senior Managing Director of FX Products Derek Sammann points out, volume in CME futures contracts have had tremendous momentum.

FX Trading is Set to Shift to Futures | OpenMarkets

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