Electric Dreams: Automating OTC-style Trading of Cleared FX Forwards, NDFs, and Options

With the growth in client adoption has also come the need for evolution of trading flexibility. The central limit order book (CLOB) is a critical cornerstone to the CME FX offering, providing firm, no-last-look pricing 23 hours per day for truly all-to-all, credit-agnostic price discovery and risk transfer. The CLOB continues to offer unique liquidity for both establishing, rolling and closing risk across a range of currency pairs and products covering FX forwards, NDF and options risk (find more details on CME CLOB liquidity and activity here). But while critical to the offering, the CLOB is not how every trader wishes to interact with the market. Depending on the trade size, market conditions, currency pair, and the immediacy of a trader wanting a risk transfer price, traders may instead wish to utilize disclosed, OTC-style trading with chosen liquidity providers who can lean on OTC liquidity to price a given transaction. 

This OTC-style trading of CME cleared FX products saw large scale growth during 2022, with overall activity up 76% and also the panel of liquidity providers offering the service growing to a list of over 20 names (directory of those names available here). Both FX options and FX futures across over 25 currency pairs were traded in this manner during 2022, which helps further illustrate that pairing OTC-style execution with the benefits of a centrally cleared wrapper for the resulting risk is a topical and relevant mechanism for traders to be aware of.

While the post-trade processing of all cleared trades remains highly efficient and automated irrespective of how and where a trade was traded, the execution process for these OTC-style trades (referred to as “blocks” and “EFRs/EFPs” in Exchange terminology) historically has been somewhat manual. The customer has contacted their chosen liquidity provider or broker to start the negotiation process, with dialogue typically happening on a one-to-one basis either on the phone or over an electronic “chat” service. Once a price was agreed upon and a trade executed, the liquidity provider would then typically manually key the trade details in to both their risk system and also into a GUI to communicate the trade details to CME for clearing. While this process worked, and continues to work today, it also had some inherent limitations on scale, and for clients who wished to automate their trading activity.

Growing volumes along with growing demand from both hedge fund and asset management customers have combined with other catalysts such as SA-CCR, which motivates dealers to capitalize on central clearing to benefit from the netting and treatment of margin to reduce the impact of winning client trades (in particular, FX forwards) on their balance sheets. The combination of these points has resulted in more investment, and so more choice, for customers in their execution “handshake”. There are three main areas that highlight this investment and the execution flexibility now available to traders.