FX Options Activity Spikes at CME after Draghi’s New Plans

After a bleak summer of disappointing trading volumes in global financial markets, an unexpected move by the European Central Bank triggered a spree of activity. The Chicago Mercantile Exchange (CME) saw a sharp rise in trading metrics in its FX Options division yesterday, after the European central banker spoke about the future of the markets.

The Chicago-based trading venue saw daily volumes hit a new daily record high.

FX options reached $32.4 billion in notional value at the venue, with 231,307 contracts executed; the figure surpasses the previous record of $26.1 billion which was set on May 5, 2010. The exchange also noted that the majority of the volume traded was executed electronically, ninety-four percent of the options, or $30.7 billion traded electronically on CME Globex, as compared to the previous record of $18.2 billion.

The CME also captured a rise in currency futures volumes, in the underlying FX futures; market participants traded $149 billion notional, almost twice the August 2014 average.

FX Options are derivatives that are used by retail and institutional traders to speculate and manage risk in the global currency markets. They are defined as “a contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased.”

Apart from cleared volume, the CME also saw an increase in the amount of open interest in the segment, open interest in FX options increased $6.7 billion yesterday reaching a total of $125.4 billion.

FX Options have been growing sporadically; according to data published in the latest BIS FX Survey the segment increased by 60% in a three-year period. James Friedman of FX Bridge Technologies commented about the developments in the FX Options sector to Forex Magnates: “The FX Options trade volume is trending higher.”

Mr. Friedman believes that Options are the future as spot volumes are stagnating, adding: “Spot has matured and spreads are minimal, Options are not that complex and the great hidden benefit of vanilla options, is that they are so lucrative.”

FX Options are starting to gain traction in the retail FX market, commonly regarded as a sophisticated product for professional traders. Zoe Fiddes of ORE believes that FX Options have a strong role in the future of retail FX trading, she said: “Options are a natural product extension of a broker’s current offering, allowing traders to create new trading opportunities.”

New rules administered on the back of the G20 Summit in 2009, which dictated the future of OTC derivatives products, have mandated FX Options in the USA, the new rulings have migrated volumes onto the newly created Swap Execution Facility. Guidelines in Europe are yet to be outlined, however, participants believe the instrument will follow a similar path to its neighbours across the Atlantic.