Back-Load to the Futures
How can hedge funds back-load FX options into central clearing via options on futures?
- FX option positions can be initiated via existing OTC workflows, and then moved to central clearing post-trade.
- Even where listed options do not exactly match OTC positions, utilizing a portfolio overlay can significantly reduce margin costs.
- New independent analysis from OpenGamma finds that FX options on futures from CME Group are up to 81% more margin efficient than ISDA SIMM.
Since the final stage of Uncleared Margin Rules (UMR) went live in 2022, the cost of posting margin on FX derivative positions has become a key focus for hedge funds.
Centrally cleared options on futures have long been traded by these funds in interest rates, equities and commodities. But an increasing number are now also realizing the benefits of holding some or all of their FX option risk in exchange traded contracts.
New independent analysis by OpenGamma, a leading margin optimization firm for derivatives, shows that holding FX option risk in options on futures can result in significantly reduced initial margin obligations versus the equivalent position held bilaterally under ISDA SIMM.1
Source: OpenGamma
In addition to the above savings, we also now apply cross-asset margin offsets between FX and Interest Rate futures and options. Up to 60% margin offsets are automatically available between FX and Treasury futures and options, meaning holding positions in exchange traded FX products could actually reduce margin obligations for firms already active in fixed income.
Other benefits of FX options on futures include:
- No need for bilateral credit line or ISDA documentation, freeing up credit lines and/or allowing access to new liquidity providers.
- Automated expiration process based on transparent fixing methodology.
- Operational benefits of holding positions alongside fixed income, equity or commodity risk.
Back loading to options on futures in practice
For more information, contact an expert today at fxteam@cmegroup.com.
References
- Analysis compares initial margin requirements for portfolios of EUR/USD options with one month to expiry, except the straddle spread which is a one month versus three month calendar spread. Analysis correct as of Q1 2025.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
