By Joe Morgan
By Joe Morgan

Exchanges bolt down FX risk as volumes soar

Exponential FX market growth – which has resulted in a turnover of about $5.1 trillion per day – coupled with increasing geopolitical risk and volatility is bolstering demand for centrally cleared, exchange-based FX services.

“The size and depth of the FX market makes it ideal,” says Les Male, CEO at Dubai Gold & Commodities Exchange. “It has become the largest and most liquid market in the world. For exchanges like DGCX that offer derivatives, we can deliver further value through more trading opportunities thereby allowing traders to capitalize on currency movements and price discrepancies across different markets.”

Meanwhile Julien Martin, managing director and head of fixed income and currency product development at Hong Kong Exchanges and Clearing Limited (HKEX), says exchange-traded FX volumes are increasing as investors hedge risks surrounding the current “dynamic” macroeconomic environment. “The stronger demand for on-exchange currency derivatives also stems from lower trading costs, as on-exchange currency products are more cost-effective with a single trading fee, while margin rates can be offset by the spread rate,” he states.

Julien Martin

Julien Martin

“The stronger demand for on-exchange currency derivatives also stems from lower trading costs, as on-exchange currency products are more cost-effective..”

Non-dollar currencies trading is increasing at MOEX

MOEX is the biggest global FX liquidity center for Ruble instruments offering a full range of services, not only in FX spot but also FX swaps, deliverable forwards and currency futures as well as IR and money market instruments.  

Following client demands , MOEX has continued its expansion into more RUB currency pairs. The Moscow-based exchange oversees trading in eight CCY/RUB pairs: USD/RUB, EUR/RUB, RMB/RUB, BYN/RUB, KZT/RUB, CHF/RUB, GBP/RUB, HKD/RUB. Furthermore in 2018, MOEX has launched two additional pairs, the Turkish lira (TRY/RUB) and Japanese yen (JPY/RUB). As far as new instruments are concerned MOEX also sees great potential to expand further its product range – planning NDFs, new currency futures and FX Fixings orders matching service.

Despite the fact that overall volume of the domestic Russian FX market may fluctuate due to various factors, i.e. volatility in energy prices., MOEX ADV of FX spot in all currencies rose in 2018 by 2 percent from $5,3 billion to $5.5 billion, and in Ruble terms by 11 percent.

Igor Marich, managing director FX, MM & Derivatives and Member of the Executive Board at Moscow Exchange (MOEX) in Moscow, points to the diversification of currences used for international foreign trade as an important trend impacting on FX trading on exchanges. “We see that the euro is gaining  as an international payment currency,” he says. The share of the EUR/RUB pair in the MOEX’s FX market has increased from 11,3 percent in 2016 to 13.9 percent in 2018,. “This happened at the expense of a reduced share of USD/RUB that shrank from 86 percent to 84 percent accordingly,” says Marich. “Apart from the Euro we also saw a high rate of growth in 2018 in the trading volume of other non-dollar national currencies against the Ruble which are used in bilateral foreign trade payments such as RMB/RUB, CHF/RUB, GBP/RUB,   KZT/RUB, TRY/RUB and JPY/RUB.”

KC Lam

KC Lam

“With FlexC, besides the cost of margining, we are also talking about lower clearing fees and keeping the bilateral nature of the trading relationship with the surety of CCP clearing. All these and the cost savings will add up quickly.”

Post-crisis rules

FX trading volumes on exchanges has been bolstered still further by requirements that put in place more stringent rules on margin clearing, as a result of the global financial crisis of 2008, notably the Markets in Financial Instruments Directive (MiFID) II. “The implementation of MiFID II provides investors with greater transparency, and access to more data and insights that will allow them to make more informed and educated investment decisions,” says Male. In particular, exchanges have benefited from measures to move FX derivatives contracts on-exchange. MiFID II requires that liquid standardised derivatives be mandatorily traded on exchanges or electronic trading platforms, pushing over-the-counter (OTC) trades on to the exchange-based model. “This has actually led to OTC trading being more restrictive and there is more friction in the market,” says KC Lam, head of FX and rates at the Singapore Exchange’s (SGX) derivatives business unit.

Martin of HKEX says the regulatory landscape has increased willingness among market participants to “shift positions” from the OTC market to on-exchange products, thereby obtaining the benefits of central trading and clearing benefits. “All in all, trading currency derivatives on exchange will help investors enhance their overall capital efficiency,” he says.

SGX oversees the longest trading hours in Asia
SGX oversees the longest trading hours in Asia

Lam says that in the US, the introduction of Swap Execution Facilities (SEFs) requiring platforms that provide pre-trade information and a mechanism for executing swap transactions through central clearing venues and reported to trade repositories, has resulted in some participants avoiding trading of SETs, leading to some bifurcation of the market, where liquidity is split into different pools. This is especially true for NDF currencies. He says Europe has witnessed a similar trend with the advent of Multilateral Trading Facilities (MTFs). “It has had the effect of reducing liquidity and the concentration of liquidity in the market,” says Lam. “That is one of the unintended consequence of market regulation, where regulation mandates that a certain contract is to be traded on a facility. Still, the recent mutual recognition of certain derivatives trading venues between EC and US CFTC will help with liquidity issue.”

Liquidity is continuing to migrate from OTC venues on to exchanges as a result of increasing trading costs, according to Lam. He highlights the growth in trading of index exchange-based products as a result of the lower costs of trading. This is especially true for non-deliverable forward (NDF) instruments, which he says are viewed by many regulators as a swap. “So you have to clear it or you have to have basically bilaterally margined it when the Uncleared Margin Rules kick in. That’s the reason why we’ve seen a growth in volumes with trading volumes in January at an all-time record.”

“There is a saying, liquidity begets liquidity,” says Lam. “There is a tipping point in liquidity especially for exchange-traded FX, once you reach that point, you have additional critical mass of participants jumping in. The market then will look to your venue for price discovery and event risk management. You will get more eyeballs on screen and with that more market participants that will trade and hedge on your venue. We are seeing a very strong increase in volume since July 2018” Singapore has cemented its position as Asia’s biggest FX centre by trading volume, behind London and New York globally. For Singapore Exchange (SGX), FX futures volume reached $105 billion in January, with notional volumes recording a 60 percent year-on-year increase. Average daily volumes at SGX grew to about 85,000 contracts from 68,000 in the previous year.

MOEX plans to standardize mark-to-market clearing sessions
MOEX plans to standardize mark-to-market clearing sessions

Contrary to the general trends of shifting flows from OTC market to the exchanges due to regulatory requirements MOEX sees clearly good potential in combining both exchange trading in its CLOB CCP model as well as offering OTC style products for market participants. MOEX operates a CLOB based market and the share is about 50% of the domestic market. In 2018 MOEX began offering new products typical to OTC style FX venues such as streaming of EUR/USD and GBP/USD prices from some global liquidity providers to Russian clients that have not had access to global OTC liquidity. More currency pairs are planned for the future.

Moreover, MOEX monitors all the latest changes in the ways liquidity is provided and traded, which is moving to more customized and tailor-made products to suit different types of clients, Marich says. There are plans to introduce more OTC-like mechanisms for price-discovery and execution in addition to existing on-exchange services. The anonymous or semi-disclosed chat-rooms and RFS services for corporate or bank clients that need large full amount execution will be combined with CCP settlements and unified margining so that MOEX provides a suite of services while leveraging its world class risk and collateral management systems.

The correct market structure is a core prerequisite for volumes to come to a venue, Marich continues. “Modelling and analysis is important but the venue also has to provide new liquidity parameters in actual trading without endangering the main order book. In April 2019 MOEX is launching a new experimental order book for USD/RUB, in which various different parameters, such as minimum lot size and speed bumps will be implemented.  We have had demand for this so it is going to be fascinating to monitor how it develops.,” he says.

Igor Marich

Igor Marich

“MOEX tends to employ more OTC-like FX products implementing advanced up-to-date technologies and innovations that will give market participants greater convenience in both product offerings, execution patterns and risk management. Obviously, it brings us more clients who work both on Exchange and OTC markets.”

On-exchange renminbi trading

Lam highlights increasing volumes in SGX’s offshore renminbi trading as being indicative of the “growing ascendency” of China’s currency in the eyes of market participants. SGX’s USD/CNH futures trading – which reached $73 billion in January – has been driven by trading in financial centres located outside of Asia, notably London and New York. SGX oversees the longest trading hours in Asia. “When you do the volume and time analysis, you see that 50 percent of trading volume comes during London and US hours. This is a strong testimony to the internationalisation of RMB on the SGX venue,” he says.

SGX is building on its success with further product innovation. The Singapore-based exchange introduced SGX FlexC FX Futures in 2018, which offers participants a means of mitigating counterparty credit risk while retaining bilateral trading relationships. The contracts – which eliminate the need for onerous and costly documentation required in OTC transactions (eg. international Swaps and Derivatives Association (ISDA) and Credit Support Annex (CSA) documentation) – are available to global market participants. SGX FlexC FX Futures are designed to reduce margin costs and capital requirements, facilitate multilateral settlement netting while enhancing operational efficiencies. “This contract allows participants to bilaterally trade with each other and choose a date of their choice,” says Lam. “Then it is cleared through us as an exchange. The beauty of this is that it solves a lot of problems and reduces friction in trading of FX derivatives. People complain that trading on exchange is pretty rigid, with only one single day of expiry in a month or quarter. With FlexC, customers can choose a date as long as it is a business day within the next 100 days. They can organise a trade between two counterparties and then send the trade over for us to do the clearing.”

FlexC FX Futures reduce participants’ trading costs by allowing them to net margin their open position with other contracts. “Your cost of trading is lower because as a futures contract it attracts a one-day period of risk as opposed to a cleared OTC contract  that will require a five-day period,” explains Lam. “So we are talking about two over times more in terms of cost of margining. And moreover, on SGX if you are able to trade this contract along with another currency contract or even a different commodity that is correlated, SGX will offer you both the inter and intra margin offsets. “With FlexC, besides the cost of margining, we are also talking about lower clearing fees and keeping the bilateral nature of the trading relationship with the surety of CCP clearing. All these and the cost savings will add up quickly”.

Expanded data offerings

MOEX is leveraging its position as an international marketplace attracting participants from 115 countries, with more than 2.5 million end clients serviced by more than 420 direct trading members via sponsored market access technologies. The depth and breadth of MOEX’s client base is enabling the Moscow-based exchange to expand its market data offering. In September 2018, MOEX introduced a new technical solution for FX fixings delivery that has resulted in improved latency and data precision extension to six decimal points, according to the exchange.

MOEX plans to further expand its market data product offering in 2019 across its portfolio of repurchase agreement (repo) money market data streams, including General Collateral Certificates, Deposits with Central Counterparty and a variety of new indicators, according to the exchange. A new information service – containing the National Clearing Centre’s daily recalculated risk parameters in a machine-readable form – is also planned to go live this year. MOEX will also launch in 2019 the National Settlement Depository’s information services, which will be made accessible via MOEX’s trading infrastructure.

In February 2019 MOEX also launched its FAST Full Order Log Online service on the Derivatives market (also in FX derivatives) , providing participants with a high-speed, real-time market feed with nanosecond precision timestamps. “This way we eliminated information arbitrage between multiple market data sources to allow trading members to reduce their infrastructure costs,” says Marich of MOEX. “This year Moscow Exchange plans to further strengthen its partnerships with leading national and international market and reference data vendors aiming at expanding the data products dissemination channels.”

Rising Renminbi trading

SGX has cemented its position as the world’s leading exchange for USD/CNH offshore RMB futures trading, amid increasing demand among market participants for exposure to offshore renminbi futures products.

A trade dispute between the US and China has been watched closely by traders, with the two countries close to a trade deal that could lift most or all of US tariffs. Chinese officials made clear in a series of negotiations with the US earlier this year that removing levies on $200 billion of Chinese goods quickly was necessary to finalise any deal, said two people familiar with the discussions in a Bloomberg News report.

Lam says the exchange’s CNH futures has been a “stellar performer” amid increasing levels of volatility, with trading volumes growing at a “really fast pace”. He highlights the protracted trade dispute between China and the US as bolstering levels of volatility – and trading volumes – in exchange-trade renminbi contracts.  “A lot of Asian economies are directly affected by both these giants,” says Lam. “The whole Asia and EM story ties very closely with this. So we see the [Trump] tweets and news on whether the trade negotiations have been successful or not and this can weigh heavily on the movement of a currency. This has been reflected upon trade on SGX.”

Martin of HKEX highlights the increased pace of “RMB internationalisation” in recent years, which he says has contributed to more market demand for RMB-related derivatives products. HKEX’s USD/CNH (offshore RMB) currency futures and options contracts first exceeded a yearly volume of 1 million contracts in 2018, with 1,785,197 contracts with a notional value of $179 billion traded during the year, an increase of 140 percent from 2017.   HKEX is upgrading its core trading systems such as the Genium derivatives trading platform and the Orion Trading Platform, which will enable after-hours trading of RMB currency futures contracts to be extended to 3am Hong Kong time.

At MOEX Chinese renminbi-ruble spot FX instruments have been traded since 2010 and RMB/RUB futures since 2015. Marich says: “Development of MOEX trading and clearing and settlement infrastructure for RMB denominated products is a strategic priority of Moscow Exchange. We see increasing volumes in RMB/RUB trading resulting from developing Sino-Russian foreign trade and investments. It’s crucially important to create links between the Russian and Chinese financial markets in order to support the constant growth in economic collaboration between countries.”

Bolting down credit risk

MOEX has been a pioneer in the creation of a reliable and robust trading and settlement marketplace since 2010 when the exchange introduced a system of anonymous trading with obligatory central clearing for all trades in all markets including FX. “MOEX FX Market strength lies in its CCP clearing setup: The ability to trade RUB FX safely against all Russian and international participants via a single credit arrangement,” says Marich. “MOEX’s long standing anonymous FX CLOB dominates global RUB FX liquidity and provides integrated trading, assured net settlement and regulatory compliant reporting.”

MOEX will this year implement a series of projects relating to the separation of trading and clearing membership statuses on the exchange’s derivatives and securities markets. This will result in FX, derivatives and securities being made available to participants on all the main markets of the exchange. “Our objectives for 2019 are to draw further on our CCP and FX CLOB infrastructure strengths to develop OTC capabilities encompassing evolutions in international style and disclosed bi-lateral counterparty trading,” says Marich. “Coupled with our safe credit intermediation and margin clearing tools we offer the natural home for safe trading of all your RUB risk across all asset classes with obvious reductions in net risk, net margin and net settlement.”

DGCX is cementing its position as a global trading hub
DGCX is cementing its position as a global trading hub

Platform upgrades

Meanwhile, DGCX in 2018 upgraded its Cinnober integrated trading and clearing solution to the latest version of the TRADExpress platform, with the aim of enhancing the effectiveness and speed of business development capabilities. “The upgrade also has the benefit of a more refined trade and market data protocol, which consequently leads to improved bandwidth usage,” says Male.

In addition, DGCX’s clearing house, the Dubai Commodities Clearing Corporation (DCCC), obtained recognition in 2017 from the European Securities and Market Authority (ESMA), thereby broadening its capacity to offers services to an increasingly global base of market participants. “This recognition has presented us with many collaboration opportunities within the wider GCC region, and we are confident that it will contribute favourably to DGCX’s future growth and success,” says Male.

Since its inception, DCCC has overseen clearing at DGCX, leveraging its position as the only CCP in the Middle East that offers clearing services across multiple asset classes, including FX, precious metals, hydrocarbons and equity derivatives. In 2018, DCCC implemented a variety of add-on services to its offering, aimed at providing a clearing service that is in line with industry best practice, according to Male. As a member of CCP12, a global trade body for CCPs, DCCC is also looking to further enhance its default management procedures in the event of a clearing member default.

Les Male

Les Male

“The implementation of MiFID II provides investors with greater transparency, and access to more data and insights that will allow them to make more informed and educated investment decisions,”

A bigger footprint in commodities

DGCX is cementing its position as a global trading hub with the launch of new products and services to satisfy a client base with an increasingly global footprint. For example, the Dubai-based exchange is expanding its portfolio of metal products and recently launched aluminium and zinc futures contracts in response to demand from market participants.

“We are currently looking at more FX products covering a wider geographical area as well as a mini gold product for retail investors, and we plan on introducing new products based on whether they bring greater liquidity, accessibility and tradability to the DGCX marketplace,” says Male. “When products are in the early stages of development, we undertake a member-led approach to predict whether this volatile market will have an interest in them before we pass them on to our partners and to the public.”

MOEX, which has been offering market participants access to precious metals since 2013, continues to expand its presence in the provision of commodities trading across a client base that includes 45 banks and 13 brokerage companies. In 2018, the trading volume for precious metals in spot and swap instruments at MOEX reached 102.3 billion Rubles. The volume of the spot market increased more than three-fold in comparison with 2017 to 17.0 billion Rubles, according to MOEX. “Trading in precious metals is implemented on the technical platform of the foreign exchange market using a unified system of margining and risk management,” explains Marich. “NCC acts as a central counterparty, clearing and settlement organization. The metal is delivered to the metal accounts of the clearing participants opened at the NCC. Post-trading operations include operations with precious metal ingots at the NCC depository in Moscow, as well as the possibility of using precious metals held in the accounts of participants in corresponding banks in London and Zurich as collateral.”

Bitcoin futures

The launch of Bitcoin futures on Chicago behemoths, CME Group and Chicago Board of Trade (CBOT), didn’t open the doors to a flood of institutional capital into digital assets. Both exchanges have reported very modest trading volumes since the contracts were launched in December 2017.

Terry Duffy, chairman and CEO of CME Group, is awaiting the green light from regulators – which may lead to the approval of a Bitcoin Exchange Traded Fund (ETF) – to trigger increasing trading volumes in Bitcoin futures. “I really think the key to the success of any currency – whether it’s fiat or crypto – is going to be associated with the government,” said Duffy in an interview with Bloomberg News.

The failure of a Bitcoin ETF from VanEck Partners and Solid X to obtain regulatory approval, along with regulatory concerns regarding crypto assets meeting know your customer and anti-money laundering requirements has stymied a flow of institutional capital into crypto. “The bottom line is that until governments really start to accept cryptocurrencies… it’s going to be very difficult for the major commercials to come in here and get gung ho on Bitcoin or any other cryptocurrency,” said Duffy.

Meanwhile, CME Group is leveraging its position as the world’s leading and most diverse derivatives marketplace to implement technical advances in its Bitcoin futures offering. For example, CME Group has changed the strike price listing for certain FX options contracts to increase the granularity of the products. The exchange has reduced the number of steps above and below the at-the-money strike, while also reducing the strike increments.


The great financial crisis of 2008 and subsequent regulatory push to steer OTC FX trading on to exchanges continues to benefit exchanges. FX trading volumes are growing steadily amid markets that continue to show jitters in response to increasing levels of geopolitical risk. The capacity of exchanges to put in place a robust model for the central clearing of risk has made the venues key players in the global FX ecosystem. Furthermore, a willingness to launch new products and services, and innovate with new technologies such as blockchain, is enabling exchanges to readily meet the varying needs of FX market participants.