Currency exchanges remain RFQ (non-automatic) for the people

By Phil Hermon, Executive Director, FX Products, CME Group

The foreign exchange swap market is booming. Over the last three triennial surveys by the Bank for International Settlements, the total global foreign exchange market has grown from around $5.3 trillion per day in 2013 to $6.6 trillion per day in 2019. Thus, the percentage of the market represented by foreign exchange swaps increased from 42% in 2013 to 49% in 2019.

One of the reasons for this strong growth is that FX swaps can be quoted from any date to any date and the standard structure is point to future date. In some cases, the two legs can also trade as futures contracts, for example, a futures date on a futures date. While most FX swaps trade for three months and less, clients who span all trades, hedge funds and asset managers can trade anywhere on the curve (up to 2 years and more).

While spot FX, forwards and options have all undergone some degree of electronicization and trading through mainstream platforms such as the CME FX and EBS Market Limit Order Books (CLOBs) for price discovery, the FX swap market remains more decidedly two-sided. This is due to the variety of transaction types, structures and complexity of liquidity providers (LPs). As such, FX swaps typically require STIR traders to make quotes to their clients, or banks to pass prices to their clients on a bilateral basis through their single dealer trading platform or through aggregators. multi-dealers.

In a recent article, Digitech suggested that “pricing in the FX swap market is predominantly bilateral and therefore non-transparent.” Although there have been new entrants to the market, the model still seems to be largely customer-dealer and with customers relying on multiple requests for quotes (RFQs) from their LP panel to understand where the market. In this relationship, the buy-side client end-user remains the taker with the LP (usually always a bank) as the maker, with some hedge fund clients choosing to postpone or run their currency exchange activity with their broker principal at a “captive” cost. base. Large clients have often told us that the spreads they are quoted can be very competitive, especially on short-term trades, and so while not perfect, this pattern is not necessarily broken.

The interbank market continues to be well served by a combination of voice brokers and electronic matchmaking platforms, but still relies on sufficient credit and capacity of the network of names involved at any given time. Given the standardized nature of interbank transactions, the frequency of transactions, and the focus on bank balance sheets, this business could be better served by an electronic solution that solves automated credit while optimizing the use of capital.

For the FX swap market to change significantly, banks need to invest in improving their trading algorithms to support FX swaps. However, for them to devote time and resources to it, there needs to be a catalyst for change that so far has been lacking. From the CME Group side, we are starting to see green shoots of investment and change. FX Link, which provides an electronic CLOB for FX swap risk where the near leg is spot OTC and the far leg is a cleared FX futures contract, has seen several banks use algorithms to provide bilateral market making throughout long trading multiple currency pairs. This is alongside other banks using algorithms to trade in the market, although they do not provide bilateral pricing. Increased dealer involvement has ultimately improved currency liquidity with tighter spreads and increased depth), as a result trading volume has recently increased by 59%. However, this growth has taken time and investment from institutions, so it is no surprise that the major tier one banks active on FX Link participate on a purely manual basis where the trader must point and click in the frontal system of his choice.

While bank participation within an FX Swap CLOB is a small step in the evolution of the FX Swap market, for the first time ever, the FX Swap market now has increased transparency and certainty through a firm pricing available on a credit independent basis. Although currently limited to monthly or quarterly spot IMM dates compared to the standardized dates for the remote segment and therefore not the full range of dates available in the OTC market, this is a positive development for the market. It is also backed by Refinitiv, Bloomberg, Fidessa, and Trading Technologies who have integrated with FX Link to provide pricing directly to their clients. As the ecosystem of participants using the FX swap CLOB grows, there will be new opportunities to provide peer-to-peer and passive trading; possibilities that historically did not exist in FX swaps but are common in cleared FX forwards.

As we look to the next BIS triennial survey later this year, it will be interesting to gauge what will really accelerate change within the FX swap market. The most obvious catalyst for change in any market is customer demand. For FX swaps, this could be driven by large buying clients looking for greater transparency, certainty through firm pricing and still competitive spreads, especially around the “year-end turn”. Clients can also benefit from netting the remote part of the FX swap to remove the gross notional from the aggregate average notional amount (AANA) calculation of the UMR as well as the operational and netting benefits of facing a central counterparty (CCP). However, given the importance of large brokers in the FX swap market, more support from LPs is needed. The impact of SA-CCR and continued dealer pressures on balance sheets that force banks to re-evaluate how and with whom they do business to optimize capital and improve returns may be the catalyst for this change. Having an electronic CLOB for distribution, combined with the far leg being a cleared currency futures contract, can provide dealers with significant capital savings while helping with broader sources of friction such as release of lines against interbank counterparts.


  • FX swaps account for approximately 50% of the global FX market and have grown significantly in size between 2013 and 2019
  • The FX swap market remains largely a dealer-versus-client ecosystem, with clients comparing multiple LP quotes to understand where the market stands
  • Banks currently remain essential to this ecosystem, providing large and competitive quotes to customers, especially for short-term transactions.
  • New venues that enable price transparency and certainty are available, but require investment by LPs in trading algorithms (bank and non-bank) to enable true scale
  • Combining a CLOB for price discovery with central clearing can help provide benefits and catalysts for change for end-user customers as well as bank and non-bank LPs
  • An electronic trading solution that uses netting to help resolve credit issues like FX Link can potentially add value to both the interbank segments and the client segments of the foreign exchange swap market.
  • There are multiple potential catalysts for change, but perhaps the most powerful is the evolution of LP’s capital regime and their quest to optimize the use of their balance sheet while continuing to serve their customers.
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