FX futures trading is exploding at the Singapore Exchange, with volumes more than double last year's level, as the exchange benefits from structural changes in the FX market that are driving more business to central clearing.
Recognizing this trend, the exchange is rolling out a new version of its FX futures contracts that provides more flexibility for OTC traders. The contracts has the same security and capital efficiency advantages as standard futures, but can be traded bilaterally with tailored expiration dates.
The new contracts, called FlexC FX futures, have been available for testing since Aug. 27 and the exchange expects live trading to begin in the fourth quarter. FlexC futures initially will be available for trades in Chinese renminbi, Indian rupees, Korean won, Singapore dollars and Taiwanese dollars, all against the U.S. dollar. The contracts can be negotiated on a bilateral basis and then submitted to SGX for clearing. In fact, the exchange has worked with several inter-dealer brokers active in Asian FX markets to offer the contracts on their platforms.
Singapore is the largest FX trading center in Asia and the third-largest in the world after London and New York. Traditionally that business stayed off-exchange, but with the introduction of new capital requirements on uncleared trades, many market participants are looking for ways to move their positions into clearinghouses.
SGX is reaping the benefits. In the first half of the year, the amount of FX futures traded on on the exchange reached $385 billion in notional value, up 133% from the first half of 2017. July proved to be even hotter; more than 1.7 million FX futures worth $93 billion in notional value changed hands that month, versus 760,000 contracts worth $34 billion in July 2017. The USD-CNH futures are growing especially rapidly. Monthly trading volume in this contract, which is based on the exchange rate for renminbi traded outside China, climbed from $29.7 billion in January to $61.5 billion in July.
Flexible Dates and Margin Savings
One of the key benefits of the new FlexC contracts is that they are not limited to the standard quarterly expiration cycle. K.C. Lam, head of FX and rates at SGX, said the ability to adjust expiration dates provides an advantage for customers looking for a more flexible hedge. “The issue with exchange-traded contracts is that most of them are futures contracts that expire at one particular day of the month,” Lam explained in an interview with MarketVoice. The expiry on FlexC contracts, by contrast, can be any date up to 100 business days after the start date.
SGX executives also stress that the contracts are a cheaper and more secure alternative to traditional OTC deals, which have become more expensive for many players in the wake of post-financial crisis rules. Since these contracts are futures, margin requirements are based on the standard one-day time horizon for estimating potential price moves, whereas the equivalent products in the OTC market are subject to a five-day margin period of risk even if they are cleared.
In July, Michael Syn, the exchange's head of derivatives, commented that market participants are finding it harder to get access to the OTC FX market because the major banks are tightening up their credit lines. "Access to counterparty credit, especially for tenors longer than spot, is increasingly scarce and expensive in the OTC FX markets," Syn said in a press release.
Although the contracts are technically available now, SGX said that clearing members are now engaged in user acceptance testing and cautioned that the onboarding process will take time. "This is not a vanilla implementation but a new way of trading, and participants need time to ensure that all systems are ready before accepting trades," SGX said in response to questions from MarketVoice.
The exchange is also working with platform operators in the OTC markets to smooth the way for the new contracts, and several firms endorsed the contract ahead of launch. Wessel van der Scheer, a managing director at TFS Derivatives HK, said his firm will support the new contracts on its TradMatch platform by providing a central limit order book on both outrights and calendar spreads.
"TFS Derivatives HK Ltd will act as an independent intermediary, operating our platform TradMatch, with institutional block-size participants providing liquidity on the SGX FlexC FX futures," Scheer said in a statement. "Tradition Asia has a long-standing relationship with SGX and we hope to develop this further with the SGX FlexC FX Futures."