Block by Block (Revisited)

The size of positions held in FX futures by buyside firms has never been higher, with net open positions from asset managers surging to all-time record levels of approximately $160B earlier this year.

These real money customers are turning to FX futures in part due to the increasing awareness of margin efficiencies offered by cleared FX for those subject to UMR, but also because execution methods have aligned with their existing workflows.  

Blocks allow institutional firms to execute large trades at a risk-transfer price with their chosen liquidity provider(s), enabling them to lean on existing OTC relationships and workflows but hold the resulting risk within a centrally cleared environment. 

Meanwhile EFRPs enable a client to ‘flip’ or ‘backload’ existing FX risk from a bilaterally held OTC spot/forward position into futures. The OTC position may have been established hours or even days previously, or immediately prior to the EFRP in the case of an ‘Immediately Offsetting EFP’ (IOEFP).

We have also seen increased interest from buyside customers to use EOOs (EFRPs of options) to backload existing FX option risk into clearing, given the outsized impact options can have on a firm’s uncleared derivative notional.  With an extensive range of listed expiry dates and strikes, firms can switch positions from bilaterally held OTC to cleared options on futures with minimal residual market risk.

For more information on Blocks and EFRPs see the quick reference guide.

Trading blocks and EFRPs has historically been a relatively manual process, with customers contacting their chosen LP(s) and negotiating over phone or electronic chat platforms. Once a price was agreed, the LP would typically enter the trade details into their risk management system and submit to CME Group for clearing manually.

However, the strength of demand from both hedge funds and asset managers in recent years has led multiple bank LPs to invest in automating the workflow for block and EFRP trades. These banks now provide automated end-to-end solutions for their customers over API or their single dealer platform, removing the manual elements of the process. Some even facilitate algo execution of the OTC spot leg of IOEFRPs, and orders via a client’s order management system (OMS).

Find out more on the automation of OTC-style trading workflows.

CME Group lists over 40 currency pairs of FX futures and 25 currency pairs of FX options, with more currencies due to be launched in 2025.

The central limit orderbook (CLOB) is the critical cornerstone of liquidity for most of those currency pairs, with tens of billions of notional trading every day and 23 hours/day firm streaming prices. 

However, blocks and EFRPs allow customers to access additional liquidity by leaning on OTC relationships, which can be particularly important during times of low market liquidity or in currency pairs that generally do not trade on the CLOB.

An example of this can be non-deliverable currency pairs (NDFs) such as KRW/USD and BRL/USD, positions of which may have greater UMR implications for customers than deliverable FX. As a result, cash-settled futures at CME Group FX are increasingly being used to hedge NDF risk, with some customers choosing to execute via blocks and EFRPs.^[3]

Our FX futures market is primed to continue to grow exponentially over the next few years, as more and more hedge funds and asset managers discover the benefits of trading FX products that are centrally cleared at the point of execution, and/or of backloading OTC risk into futures post trade via EFRPs. 

UMR thresholds are reviewed regularly, so the operational and regulatory burden of holding uncleared OTC risk is only likely to increase for many buyside firms as regulators adjust the relevant UMR thresholds. 

As LPs invest in their systems, execution workflows will continue to electronify – automating the trade lifecycle from order messaging through to central clearing. With LPs now fully recognizing the benefits to both themselves and their clients to trading cleared FX futures, dealer-to-client trading will only increase alongside CLOB liquidity.

FX futures and options at CME Group – established, liquid solutions for buyside central clearing.

1. Source: Futures Industry Association (FIA), data for full year 2023

2. The CFTC defines ‘large’ open interest holders as having at least 400 open contracts in major currency pairs.

3. Note – while “regular” EFRPs are allowed in all currency pairs, “Immediately Offsetting” EFPs are not permitted where the OTC leg is an NDF or option All EFRP trades are subject to Exchange Rule 538.