FX Futures are increasingly relevant in eFX technology stacks

Key Takeaways

• FX futures started slowly but growth has been strong in recent years
• Pool of implied spot liquidity available via FX futures too large to ignore
• eFX stacks with access to implied spot liquidity from futures will benefit

FX futures were first introduced on the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange, in 1972. For decades the volumes traded were very small, particularly when compared to the OTC FX market. Reasons included:

• Standardized nature of futures contracts (for example, in relation to the underlying amount, quality, and maturity).
• Greater flexibility in FX cash markets (spot, forward) to tailor executions to the specific requirements of users.
• Lack of liquidity in FX futures compared to the highly liquid FX market.
• Quotation format on some futures contracts was not consistent with market convention quotation formats (for example, JPYUSD in futures versus USDJPY market convention).
• Lack of regulatory drivers that might encourage FX market participants to move to the centrally cleared model of futures exchanges.

Significant growth in recent years in both OTC and futures 

The OTC FX market continues to grow strongly. Semi-annual surveys from the major central banks suggest that the next benchmark FX market survey from the BIS in 2025 will see average daily volumes (ADV) increase significantly from the USD 7.5 trillion reported in the 2022 survey. In that 2022 survey USD notional of exchange traded futures (and options) accounted for about USD 200 billion of the USD 7.5 trillion total. In 2024, we have seen ADV of FX futures regularly exceed USD 100 billion on CME (ADV for September was USD 110 billion).

While FX futures volumes on other exchanges (for example, Eurex, SGX, ICE, B3, Euronext) are significantly lower, it seems reasonable to assume that FX futures ADV of USD 200 billion or above will not be uncommon as we go forward.

Implied spot liquidity from CME FX futures exceeds spot ADV of any single venue

At first glance, one might think, well, that’s still a small percentage of total FX volumes, so why should we care?

In the 2022 BIS survey, FX spot accounted for USD 2.1 trillion of the USD 7.5 trillion ADV. Within that spot number, approximately USD 1.5 trillion was traded electronically, and this has likely grown significantly since then. Spot volume is executed across a broad range of venues. The share executed via primary venues (EBS and LSEG/Refinitiv CLOBs) has declined by about 50% in the past decade to approximately USD 100 billion ADV. The rest is executed across a broad and fragmented range of venues including Multi-Dealer Platforms (MDPs) and Secondary ECNs, Single Dealer Platforms (SDPs), Dark Pools and APIs with Principal Trading Firms (PTFs) and others.

The pool of implied spot liquidity available via futures now exceeds that available in the primary venues. In addition, CME’s FX futures ADV of USD 110 billion is also larger than the spot ADV on any of the other venues mentioned above.

Availability in eFX technology stacks

A bank’s eFX environment will typically have connectivity to a significant range of those OTC market venues for price discovery, execution and data for analytics. Although the primary venues have declined significantly in terms of volumes, they continue to be used for price discovery, execution and as a reference source.

While larger banks have integrated their eFX environments with FX futures for many years to access the implied spot liquidity inherent in FX futures, this has not been the case for most banks outside of Tier 1.

Banks who have chosen not to access implied spot liquidity from futures in the past will increasingly need to revise that decision. The pool of implied spot liquidity available via FX futures has become too large to ignore. Key factors influencing this growth include:

• Regulatory changes increasing the attractiveness of FX futures.
  • Margin efficiencies for buy-side firms subject to Uncleared Margin Rules (UMR).
  • Capital efficiencies for banks subject to Standardized Approach for Counterparty Credit Risk (SA-CCR).
• Removal of impediments to participation.
  • Improved access to futures liquidity in OTC spot form.
  • Relaxation of rules by futures exchanges.

Integration with futures invokes a range of considerations and challenges. These include extracting the implied spot liquidity from the futures liquidity in a reliable manner, addressing the non-spot aspects of executions, and factoring in the additional costs incurred (including exchange and broker fees).

The planned launch of CME FX Spot+ in 2025 will enable FX spot market participants to tap into FX futures liquidity in spot terms via a client limit order book (CLOB). Whether via integration with this venue or via bespoke integration to futures exchanges, the many banks who are not yet accessing implied spot liquidity from FX futures via their eFX environments will increasingly need to address that gap. The overall OTC market will continue to dominate but enabling the eFX stack to access implied spot liquidity from futures will offer increased opportunities and benefits.