EFP FX: the best of both worlds


Maximilian Dannheimer

What is an FX for Physical (EFP) exchange?

Maximilian Dannheimer: This is a trade where you simultaneously execute an FX futures contract and an over-the-counter (OTC) trade in the opposite direction. It is a swap type transaction, involving a leg of over-the-counter and exchange-traded futures contracts. The OTC leg is traded bilaterally and can be customized according to OTC market conventions, while the FX futures leg is a standardized instrument traded on the regulated exchange Eurex.

david holcome: VET is a basic market between OTC and listed FX. There are different perspectives on why you would trade VET. Active traders most often think of it as an international money market (IMM) swap with the far leg centrally cleared, while on the buy side it is a translation layer between the OTC and Listed FX – a tool that allows you to utilize OTC liquidity and meet non-standardized value dates, while managing futures positions to secure the benefits of central clearing.

What are the benefits of using an EFP?

DH: While you can still trade currency futures directly on the exchange or bilaterally as block trades, EFPs allow companies to access the much larger global pool of currency spot liquidity seeking price improvement or greater size, while enjoying all the benefits of a cleared FX. futures position.

The transaction itself is quite similar to the standard OTC practice of turning a spot execution into a futures position with your bank, but the multilateral compensation you get from a cleared futures position means that with a VET, you only have one line to service per currency pair. , per month/quarter, rather than one line per forward, per date with each bank you traded against.

MARYLAND: This ability to tap into the two different pools of liquidity is why EFPs are so attractive to US-based commodity trading advisers (CTAs) and, increasingly, European asset managers. There is also a capital efficiency consideration here as well. By essentially moving OTC positions into clearing, EFPs can help firms manage the level of their uncleared derivatives exposures to ensure they remain below the threshold at which they need to start showing a bilateral margin with their trading counterparts under the Unmatched Margin Rules (UMR).

You mentioned that European asset managers are increasingly turning to FX VETs, what do you think is causing this?

MARYLAND: I think this is part of a general trend within this community towards trading in listed currencies, which is driven by multiple factors. Many more of these asset managers will enter the scope of UMR in September later this year and seek to mitigate the impact of these rules with approved solutions. These companies are looking for no-last-look sources of firm FX liquidity to complement their existing execution channels. These trends are happening at the same time as Eurex has become the European listed trading platform of choice, offering a wide range of exchange-based and centrally cleared FX products, including EFPs.

david holcome

DH: With FX futures offering firm liquidity as well as relational trading models with highly transparent pricing, and with netting allowing you to deal with new counterparties without the need for new bilateral credit or settlement relationships, Asset managers in Europe realize that these products are a great way to deepen their liquidity pool.

How exactly does the relationship between Eurex and 360T work for EFPs?

DH: Today, the OTC market for VET transactions still largely uses voice or chat channels. When 360T clients use our trading and trade execution tools for Eurex FX Futures, whether accessing the Central Limit Order Book (CLOB) or trading off-exchange via one of our models, they benefit from direct processing with Eurex which avoids all the booking errors and delays so frequent in manual negotiation processes. For FX futures trading models in 360T, the main benefit for EFP clients is of course the ability to have multiple liquidity providers compete for each order, which greatly simplifies their best execution load.

MARYLAND: It is a very transparent process, and at Eurex we have also simplified the reporting process for FX VETs to further streamline this trading activity. While we encourage our clients to utilize the various benefits of 360T for their VET execution, we do not limit where the OTC portion of the VET was executed. For Eurex, this is just another flagged trade, where we clear and trade the currency futures leg.

Do you see this growing interest in VETs as an indication that the gap between over-the-counter and listed FX markets is narrowing?

DH: The dye is poured – the electronization of the VET market has begun. 360T already has a streaming model for off-exchange block liquidity for Eurex FX, and a clickable EFP pricing ‘translation layer’ readily available to go from OTC to listed FX is already a point in time. agenda with many decision makers and takers.

MARYLAND: What is really important here is that there are symbiotic growth trends at play. The high liquidity of the OTC FX market is complemented by the advantages associated with a listed FX market which provides capital advantages, clearing and counterparty to warehouse risk, and thereby improves the FX trading capabilities of businesses as a whole.

How do EFPs fit into the broader Eurex FX offering?

MARYLAND: Eurex has now succeeded in building a liquid listed FX pool and secured commitment from various Liquidity Providers (LPs) who facilitate highly competitive pricing and the global Clearing Member community who support access. On top of that, we continued to innovate, expanding our Scandinavian currency offering and partnering with the Korea Exchange (KRX) to list some of its contracts during European and North American hours.

All of this helps support our market models, including screen trading, OTC block trading – which is traded bilaterally and then subject to trading and clearing with Eurex – and EFPs. EFPs perfectly promote Eurex’s product range as they allow clients to use multiple execution models combining Exchange Traded Derivatives (ETDs) and OTC FX markets so they can benefit from the best of both. worlds.

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