In the FX market, the WMR 4:00 p.m. fixing rate was created in the absence of an official closing price in 1994 to provide asset managers and index providers with a rate that would enable their assets to be more easily valued and compared with those of their peers. As both the number and size of passive index-tracking funds have grown over the years, so has the use of the WMR 4:00 p.m. fix to re-value assets at the end of a day, month, or a quarter. Asset managers use this benchmark for their FX swaps and forwards hedges to reduce tracking errors and adjust the sizes of these positions in line with periodic valuation changes. They do so via fixing orders, in which a dealing bank is responsible for delivering on the fixing price and often, in exchange for a pre-agreed spread. However, the fix is now also used as the settlement rate in a variety of derivatives trades, and as a widely accepted and transparent price on which to execute FX trades. Therefore, the most accurate exposure to the 4:00 p.m. fix rate is very important to asset managers and has only been available in the OTC market up until now.

CME Group’s BTIC and BTIC+ function allows direct exposure to the WMR 4:00 p.m. fix via a cleared, regulated, all-to-all FX futures order book and provides traders access to the rate hours or days in advance. It provides OTC participants with a complementary pool of liquidity to execute their trades in a regulated marketplace. Not only are they able to trade on the firm liquidity in the CLOB but they are also able to privately negotiate block trades to execute at a single price.

Both BTIC and BTIC+ transactions provide the bridge between the published benchmark fixing rate in the OTC market and the futures market. At any point during the trading session a buyer and seller agree to a basis, which represents the spread between the futures and the official fixing rate. Once the fixing rate is published, the futures trade occurs at the closing index level plus the agreed-upon basis.

BTIC will be traded as the futures basis to the next published WMR 4:00 p.m. London fixing rate and will deliver into a EUR/USD FX futures contract on the same day immediately after the rate is published. The basis level will vary depending on the number of days between the BTIC trade date and the expiry date of the underlying future. The level will be firm and highly transparent via the CLOB. BTIC on FX futures trades executed by 3:40 p.m. London time will be included in that day’s clearing cycle.

Assume it is month end, usually the time when many institutional investors evaluate their portfolio performance.  An asset manager is rebalancing their portfolio and is looking at their euro currency exposure. They would like to trade out of their exposure to rebalance at the well-known WMR 4:00 p.m. fix rate but want to use FX futures. They can place the order with their chosen counterparty to execute like usual.

They are currently short and need to buy 2000 contracts (€250,000,000 notional) to rebalance their portfolio.

Let’s assume that the EUR/USD BTIC (the basis spread) is currently trading at 0.002290 bid at 0.002295 offered (0.002290/0.002295). The trader lifts the 0.002295 offer, prior to 3:40 p.m. London for 2000 contracts (notional amount of €250mn). Futures contracts are then created by CME Clearing, which references the current value for EUR/USD as the preliminary fill. Come 4:00 p.m., this contract will then be assigned the final price as the WMR fixing rate, of 1.08915 plus the basis of 0.002295, making the final rate 1.091445

The asset manager would then have rebalanced their portfolio back to the asset allocation target, with the €250M futures position being included, and can take comfort in having executed in a regulated marketplace.

For more information about this product, or any of our other offerings, please contact fxteam@cmegroup.com or visit cmegroup.com/fx

This material is directed only at, persons who are: (i) investment professionals (as that term is defined in article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”)), (ii) high net worth companies (as that term is defined in article 49 of the FPO) or (iii) any other persons to whom it may lawfully be communicated. Accordingly, persons who (i) do not have professional experience in matters relating to investments or (ii) are not high net worth companies, should not act or rely on this material. The financial instruments and / or services detailed in this material will only be available to high net worth companies or investment professionals (as defined above). If you are not a high net worth company or investment professional (as defined above) you cannot invest directly and are unable to gain access to the relevant financial instruments. CME GROUP DOES NOT REPRESENT THAT ANY MATERIAL OR INFORMATION CONTAINED HEREIN IS APPROPRIATE FOR USE OR PERMITTED IN ANY JURISDICTION OR COUNTRY WHERE SUCH USE OR DISTRIBUTION WOULD BE CONTRARY TO ANY APPLICABLE LAW OR REGULATION.