The Chicago Mercantile Exchange’s (CME) near-dominance on exchange-traded FX futures has been challenged by Eurex - the world’s largest derivatives exchange - that last month started trading FX futures on Eurex US with the support of 20 market makers. The battle to gain market share in a segment that has recently seen significant increases in volume, will no doubt be interesting to follow.
The market for FX futures has been growing and developing since it was created more than 30 years ago. Today, the segment is emerging as a new asset class attracting interest from all types of investors, including corporations, asset managers, hedge funds and retail investors across the world.
Trading of FX futures started on CME back in 1972. These instruments were designed to help manage the risks of currency rates flotation as a consequence of the US dropping the gold standard a year earlier. Over the following decades the shape and size of this market has changed considerably and looking at recent growth figures the future looks positive.
Recent growth was probably one of the reasons why Swiss-German derivatives exchange Eurex decided to join in. Also this move can be seen as a new attempt by Eurex to gain market share in the US market, after the disappointing results of its US Treasury business.
In FX futures trading, Eurex will have to compete with a well-established market leader. Today CME is the world’s largest market for exchange-traded FX futures, and has access to around $40bn (€33bn) in liquidity each day.
The prospect of getting a piece of the action is extremely attractive and Eurex is ready to join the game.
The benefits of trading FX futures for market participants are found in the automated trading systems that provide continuous real-time pricing feeds from global FX market makers. Those trading on CME FX futures have access to 24-hour electronic trading on 16 currencies traded against the US dollar and 17 cross-rate products, appealing to a wide range of participants.
The arrival of Eurex in this market will bring more choice for clients and also more competitive prices, with Eurex pricing its future contracts at a lower rate than CME.
Eurex US transaction fees are 10 cents per side for members and 50 cents per side for customers’ orders. As another way of attracting more users, Eurex US will waive all exchange fees until the end of the year.
Significant backing
So far, Eurex seems to be happy with the support gained from the market. A total of 20 market makers – including global banks and proprietary trading firms – signed on to provide liquidity, whereas an additional eight firms agreed to act as Early Volumes Adopters (EVAs) providing a consistent amount of volume each day.
“We have established significant backing from market makers and we are delighted that this emerging asset class is already receiving such strong industry support,” says Satish Nandarpurkar, chief executive officer at Eurex US. “These firms recognise there is an opportunity to trade exchange-traded FX futures on a liquid and transparent market at a cost comparable to the over-the-counter (OTC) market.” This move marks Eurex’s extension of its global liquidity network to the new asset class, initially offering contracts in the six major US dollar currency pairs – euro, Australian dollar, sterling, yen, Swiss franc and Canadian dollar – and for cross currency pairs – euro/yen, sterling/yen, euro/Swiss franc and euro/sterling. Traders will benefit from open and equal access to Eurex US’s trading platform, global access points and a liquid and transparent market. In addition, they will be granted anonymity and low transaction fees.
The company expects to attract some of its current customers to the new FX futures contracts, competing with CME not just on price but also on accessibility to the European markets where Eurex is widely present.
Mark Warms, chief marketing officer at FXall, believes the futures market is particularly suited to smaller investors.
“CME has done very well in terms of its FX futures business, which targets smaller investors and retail customers,” Mr Warms says.
Mr Warms explains that in his view small hedge funds and retail customers are the ones more interested in FX futures. However, he says, large asset managers, corporations and larger hedge funds still prefer the flexibility that OTC products can give them, where there is no limits in size and participants can actually trade without using a prime broker.
“There is much more flexibility for larger institutional customers in the OTC market than there is in any futures market, “ Mr Warms adds.
When trading started on September 23, volumes were modest, but Eurex US is confident that as the FX market as whole continue to grow, FX futures trading on their exchange has a bright future ahead.
