Paul Houston, Global Head of FX, CME Group, writes that buy-side firms are trading CME Group’s FX derivatives in record numbers.
Asset managers hold more than USD200 billion in FX futures positions, while hedge funds hold USD100 billion. As of September, open interest in FX futures and options sat at a new record of 4.4 million contracts, a rise of over 200,000 since July.
While geopolitical events and imbalances in government policy have made many markets volatile during 2026, FX has been relatively subdued. Measured by FX volatility, these have remained close to historic lows for extended periods throughout the year. Rather than managing market volatility, the rise in buy-side FX futures activity is driven by structural factors.
When trading an FX future, the resultant position is cleared against a regulated central counterparty, and from this, multiple benefits accrue. These efficiencies centre around the netting down of exposures that drive capital costs, counterparty credit risks and processes such as settlement and collateral management. In many instances, these benefits make it more efficient for buy-side firms to hold positions in FX futures rather than bilaterally. A further catalyst has been regulatory change, such as the introduction of uncleared margin and changes to counterparty capital rules, alongside more opportunities for cross-margining that enable buy-side firms to trade FX futures more efficiently, offsetting their FX positions with holdings in other asset classes, such as interest rates and gold.
The push towards cleared contracts has also benefited banks that provide liquidity to the market and are looking for more capital-efficient trades as the Basel III endgame approaches. Several banks have automated and integrated these workflows within their FX offerings.
Connecting exchange-traded and OTC markets
Asset and fund managers traditionally engage with the FX market in over-the-counter trades with the dealer banks. Exchange for Related Position (EFRP) contracts are now connecting the exchange-traded and OTC markets.
EFRP volumes have doubled each year over the past two years, with asset managers trading them due to their familiar OTC workflow. They can continue to leverage their bilateral relationships with their preferred dealer banks while gaining margin and capital efficiency by offsetting risk through a cleared FX future. These positions crucially don’t impact their bilateral credit limit or add to their exposure in non-cleared OTC positions, leaving room for other less standardised products.
Banks have been active promoters of EFRPs due to the introduction of the Standardized Approach for Counterparty Credit Risk (SA-CCR), as well as broader capital-rule changes under the Basel III endgame. At a high level, this means that for many banks directional counterparty credit risk becomes more of a driver of capital costs. As a result, facing a regulated central counterparty with the ability to net down exposures drives greater capital efficiency. EFRPs are especially attractive because they allow banks to continue to price their customers as they do in the OTC market but benefit from the result of clearing as a capital-efficient FX future.
By linking off- and on-screen trading, both the buy- and sell-side can now manage their FX positions in a more capital-efficient way.
Though FX volatility remains low, asset and fund managers are increasingly looking outside their home markets for new opportunities and diversification. It is now easier and more efficient for these firms to trade FX futures and options as they manage a growing global portfolio.
