Regulation to Drive Changes in FX Derivatives Market
Changes brought on by new regulations will drive trading activity in foreign exchange (FX) away from options and non-deliverable forwards (NDFs) to futures, which will become a much bigger and more important part of the FX market, predicts Greenwich Associates.
In its report, entitled ‘The Futurization of FX Derivatives’, the US research and consulting firm says the movement of trading activity to futures will require investors to rethink how they access the FX market, dealers to revamp business models to facilitate trading in a profitable way, and technology providers to offer solutions to help all market participants adapt and succeed in the new market.
“A conservative 5% move out of over-the-counter (OTC) FX derivatives into futures would cause FX futures volume to grow by over 50% – a huge boon for futures exchanges,” said Greenwich Associates principal Kevin McPartland, head of market structure and technology advisory service and author of the report.
Three Reasons for a FX Derivatives Victory
The report identifies three drivers of the coming shift of FX trading volumes to futures:
“The bottom line is that some trading volume will shift to futures because under the new rules futures will provide a cheaper means of accessing the FX market,” said McPartland.
“These are not exotic products. FX futures contracts have existed for years providing exposure similar to that offered by OTC contracts, and among the major global exchanges, FX futures liquidity has steadily grown over the past few years. Investors are already comfortable with the products and now they will have a big incentive to make much more use of futures.”