The introduction of the new capital regulation, Standard Approach to Counterparty Credit Risk (SA-CCR) may affect the cost of trading certain FX products, according to Paul Houston, Global Head of FX at CME Group.
SA-CCR is moving some of the capital costs, particularly around counter-party credit risk, on to a new calculation methodology.
“The absolute effects will differ from counterparty to counterparty, but what it does do is potentially make the cost of certain FX forwards and FX swap transactions more expensive and cleared alternatives cheaper,” Houston told Traders Magazine.
Also, since the Uncleared Margin Rules (UMR) went live in 2016, only a small number of firms have been impacted by Phases 1-4. But by September 2022, an estimated 1,000+ additional entities will be subject to UMR for initial margin on FX options and NDFs, as the reduced thresholds will capture more counter-parties.
“If you have to start posting margin on your trades for the first time, that obviously changes the cost profile. So, on a first order effect, it changes the cost profile of participants who have to pay margin, but it may have a second order impact on other participants through increased bid-offer spreads or changes in the cost of credit’’
“Over time there might be more trading of listed FX options. We might see more clearing of products like NDFs to try and mitigate some of those margin costs” he added.
In addition to regulation, there is also greater fragmentation in the FX market because of a multitude of different geographies and different venues, according to Houston.
“With that complexity of fragmentation, there’s increasing costs,” he said.
“In general, I see the trend for costs will go up and the need for innovation in the marketplace. I also see a greater focus on transparency from the buy-side,” he added.
Houston suggests that the way of navigating market fragmentation is generally around data and greater efficiency. Last week, CME updated its FX Market Profile to provide live and historical analysis for 18 FX futures markets and cash equivalents.
Building on the previous version of the tool, users can now access data from seven extra markets and analyse market conditions across the spot and derivatives markets for daily, weekly, or monthly averages over a historic period of up to six months. FX Market profile also now shows orderbook depth to 10 levels, whereas before the tool only analysed top of the book market data.
The tool uses CME Group’s listed futures market data as well as cash market data from EBS, combining all of the FX data available at CME Group. It is free of charge and just requires registration to CME Group.
“We feel that the CME FX offering is unique because it has listed FX and cash FX in one place. Tools like this can help FX traders, and the more data available to them means they can make more informed decisions,” he said.
Houston said that as a business CME FX continues to focus on offering the most cost-effective products as possible.
“Over the medium term, we’re bringing our cash and listed FX onto the same platform. The cash business we acquired with EBS is moving on to the same technology platform as the listed FX business, which should make access to both markets easier for customers, more cost efficient, and enable us to derive greater efficiencies,” he said.
