Best Bank Awards: CME

Following a spike in overnight repo rates in mid-September, CME’s FX Link, the anonymous automated connection between CME FX futures and the over-the-counter FX marketplace, experienced its biggest day of the year on September 18.

Volumes reached a single-day record of 41,013 contracts traded, with a notional of $4.27 billion – a 21% increase on the previous record set on July 31.

Sunil Cutinho, president of CME Clearing, says he has nothing to add to the reasons already attributed to the surge in repo rates, which has been blamed on the unhappy coincidence of Treasury issuances and tax payments colliding to result in a drawdown of excess reserves at the US Federal Reserve.

But, Cutinho adds that from CME’s perspective, it was business as usual: “We don’t have a unique insight into what caused those rates to go up. We are monitoring them, but they presented no issues to us as a clearing house. In fact, as many of our members use the repo markets in order to finance their positions in the clearing house, the repo markets worked well from that perspective.”

Now in its hundredth year as a clearing house, CME touts FX Link as a key driver of recent client satisfaction – and one it plans to build on. Customers voted CME the Best FX clearing house at the 2019 FX Week Best Bank Awards.

Allowing firms to trade spot as a basis for listed quarterly futures, contracts equivalent to more than $343,415 billion in notional have been traded on the central limit order book since launch, with eight currencies live.

Cutinho says the exchange “continues to explore products” on FX Link, which was rolled out in the first quarter of 2018, and “in terms of FX, we will be looking to offer more products to relieve liquidity pressure”.

The solutions that we bring to the market are really valuable in terms of addressing market risk and counterparty credit risk

Sunil Cutinho, CME Clearing

By that, he means funding costs: “What our clients are looking for is a way to relieve them of their liquidity pressures and the pressures in the prime brokerage market, and they would like to use both futures and spot markets to achieve that. And that’s why FX Link is a great product. Our focus is to offer targeted FX products and link them with spot markets.”

“The solutions that we bring to the market are really valuable in terms of addressing market risk and counterparty credit risk,” continues Cutinho, “as well as liquidity in the sense of moving exposures to address funding stress.”

Within its product range, CME now offers 11 non-deliverable forwards (NDFs) and 13 cash-settled forwards, although the launch of cash-settled options, since 2017, has seen slower traction.

Cutinho says: “We still have the offering and will continue to provide clearing services for that, but at the moment we don’t have much activity in OTC cash-settled options.”

CME says that OTC NDFs picked up at the beginning of this year and the exchange has several clients using cash-settled forwards in G4 currencies – demand that has been stimulated by incoming non-cleared margin rules. The new rules have also led clients to assess FX futures and options as alternatives, as evidenced by the growth seen in large open-interest holders on CME.

International regulators eased pressure on the 2020 phase of the non-cleared margin rules, but prime brokers complain the new regime will drive up costs for their services through the mandatory posting of initial margin to both clients and executing brokers. Moving the affected trades into a cleared environment has been mooted as one potential solution.

Cutinho says: “There will be an imbalance that needs to be solved for prime brokers and we provide a suite of solutions. The most obvious is netting on both ends through cleared solutions – both FX futures and options.”

TriOptima partnership

Another way in which CME is assisting clients with the new rules is through its partnership with TriOptima.

“We have been helping clients over this entire period come into compliance with non-cleared margin rules from many perspectives,” says Cutinho. “We are essentially helping our prime brokers work with their clients and executing brokers to manage exposures periodically, so they reduce the cost of carrying those exposures without dramatically changing the risk profile.”

He explains: “It is about identifying their exposures that are subject to non-cleared margin rules, monitoring those thresholds and ensuring they stay in compliance. When their exposures cross the threshold and they have to comply, we provide a set of services that includes reconciliation, margin calculation and margin exchange – all through TriOptima.”

For those who want to optimise their exposures bilaterally, or use a cleared set of products along with bilateral exposures to optimise their services, TriBalance takes the next step in optimising counterparty risk exposures and margin across multiple asset classes – including the first-ever combined FX/gold cycle recently.

More broadly across its organisation, CME is ditching the ageing margin model known as a Span and moving to a historical value-at-risk methodology.

“Today, Span provides margin, rates and rules at product level, and offsets between products. But it does not have a concept of a portfolio. In the new world, what we are moving to is a portfolio-level risk calculation,” Cutinho says.

The first phase of the Span 2 release, for energy contracts, is targeted for the second half of next year. FX will be among the other asset classes within its futures and options marketplace being captured over the next three to four years.

The full list of winners of the 2019 FX Week Best Banks Awards