FX Link: Use Cases for Request for Cross Allocation Based on BPVM Algorithm

If the price of the Request for Cross (“RFC”) represents a new best price level (both a bid price higher than the current bid and an offer price lower than the current offer), or if the price of the RFC is equal to the best bid or offer and the quantity of the RFC is greater than the quantity at that current best bid or offer at the time of submission of the RFC to CME Globex, and during the five-second period between the entry of the RFC and the cross occurring, a better price for either the buy or sell order has not been entered into CME Globex, the trade is eligible for a BPVM of 50%.

In circumstances where the price of the RFC is equal to the best bid or offer and the quantity of the RFC is greater than the quantity at that current best bid or offer, the quantity eligible for the BPVM is the difference between the RFC quantity and the quantity at that current best bid or offer.

Consider a bank trader who wants to buy EUR 100m (800 contracts) of the September 2020 EUR/USD futures-spot basis spread on CME FX Link at a price of 0.00227.

On checking the FX Link orderbook the trader finds the market to be 0.00226 bid – 0.00228 ask, and so the trader contacts their broker to see if they can assist in finding a better price directly from another counterparty.

To affect a RFC, the bank trader’s broker contacts a counterparty and successfully pre-negotiates the RFC price and quantity.  Once pre-negotiation communications are completed, the broker creates a ticket for the RFC and submits the trade to CME Globex, where a message is then displayed notifying all market participants that a cross in the September basis spread on CME FX Link has been committed to the market.  This message does not name the RFC’s two counterparties, price, or quantity involved – it just highlights that a committed cross trade in the September basis spread has been placed and will be filled in five seconds.  Once the broker has submitted the RFC ticket, a five-second pre-cross period begins when other competing market participants can place, amend, or cancel orders in the CME Globex CLOB.

At the time the bank trader’s broker enters the RFC to cross 800 contracts at a price of 0.00227, the current market for the September 2020 EUR/USD basis spread on CME FX Link is:

• 0.00226 bid for 1,000 contracts – 0.00228 ask for 1,000 contracts

At the submission of the Request for Cross by the bank trader’s broker, the RFC price of 0.00227 represents a new best price level for the September basis spread when compared to the CME Globex central limit order book, since the bid price of the RFC is higher than the current bid of 0.00226 and lower than the current offer of 0.00228.

In addition, a better price either to buy or sell the September basis spread has not been entered into CME Globex during the five-second period between the entry of the RFC and the cross occurring.

Since the Better Price or Volume Match percentage is 50 percent for all crossed FX link transactions, the quantity of the RFC eligible for BPVM equals 400 contracts – i.e., 50% of the difference between the RFC quantity (800 contracts) and the quantity at that current  best bid or offer (zero contracts) in the CME Globex CLOB, prior to the start of the five-second pre-cross period.

Thus, in the initial pass, CME Globex will immediately cross 400 contracts between the two RFC counterparties based on C-Cross protocols.

Initial pass

After this first pass, the RFC will interact with CME Globex if there is a better bid or offer in the CLOB or a competing market participant that has entered a better price to buy or sell during the five-second cross period. Since there are none, the RFC’s remaining balance of 400 contracts will cross between the two RFC counterparties based on C-Cross protocols.

Second pass

In summary, the RFC for 800 contracts of the September basis spread will transact at the RFC price of 0.00227 based on C-Cross protocols – with the bank trader buying, and the RFC counterparty selling 800 contracts of the September basis spread.

Summary of RFC transaction

Consider a competing market participant who improves the CME Globex CLOB by placing a better bid of 0.00227 for 200 contracts of the September basis spread on the CME Globex CLOB during the 5-second pre-cross period when the market is:

• 0.00226 bid for 1,000 contracts – 0.00228 ask for 1,000 contracts

The CME Globex CLOB will now show a new, updated market at the top of the order book for the September basis spread with a revised bid price and quantity:

• 0.00227 bid for 200 contracts – 0.00228 ask for 1,000 contracts

Since the RFC quantity to allocate via the BPVM percentage is determined at the time of the RFC submission (i.e., at the start of the pre-cross period), the quantity of the RFC eligible for BPVM is 400 contracts – i.e., 50% of the difference between the RFC quantity (800 contracts) and the quantity at that current best bid or offer (zero contracts) in the CME Globex CLOB at the start of the pre-cross period.

As a result, CME Globex will immediately match 400 contracts between the two RFC counterparties based on C-Cross protocols – with the bank trader buying, and the RFC counterparty selling 400 contracts of the September basis spread at a price of 0.00227.

Initial pass

Following this initial match, the RFC will then interact with the 200 contracts that were entered into CME Globex during 5-second pre-cross period at a price of 0.00227 – with the competing market participant buying, and the RFC counterparty selling 200 contracts of the September basis spread at a price of 0.00227.

Second pass

After the second pass, the RFC’s remaining 200 contracts will cross between the two RFC counterparties based on C-Cross protocols – with the bank trader buying, and the RFC counterparty selling 200 contracts of the September basis spread at a price of 0.00227.

Third pass

In summary, the bank trader is only able to buy 600 of the 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.  The bank trader’s unmatched balance from the RFC will remain in the CME Globex CLOB as a 200-contract limit order with a price of 0.00227 until the bank trader amends, replaces, or cancels the order. 

Summary of RFC transaction

The same but opposite results occur when a competing market participant improves the CME Globex CLOB by entering a better offer, rather than a better bid, of 0.00227 for 200 contracts of the September basis spread on the CME Globex CLOB during the five-second pre-cross period when the market is:

• 0.00226 bid for 1,000 contracts – 0.00228 ask for 1,000 contracts

As a result of the competing market participant placing a better offer, the CME Globex CLOB will now show a new, updated market at the top of the order book for the September basis spread with a revised ask price and size:

• 0.00226 bid for 1,000 contracts – 0.00227 ask for 200 contracts

Like before, the quantity of the RFC eligible for BPVM remains 400 contracts – i.e., 50% of the difference between the RFC quantity (800 contracts) and the quantity at that current best bid or offer (zero contracts) in the CME Globex CLOB at the start of the pre-cross period.

In summary, the bank trader will be able to buy a full RFC allotment of 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.

Summary of RFC transaction

The RFC counterparty, however, is only able to sell 600 of the 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.  The RFC counterparty’s unmatched balance will remain in the CME Globex CLOB as a 200-contract limit order to sell at 0.00227 until the RFC counterparty either amends, replaces, or cancels the order.

By improving the offer on the CME Globex CLOB during the 5-second pre-cross period, the competing market participant is able to sell 200 contracts of the September basis spread at a price of 0.00227, the same number of contracts that the competing market participant placing a better bid purchased in Scenario #2.

Consider a competing market participant with a resting best bid of 0.00227 for 200 contracts of the September basis spread in the CME Globex central limit order book.  The CME Globex CLOB will now show a new, updated market at the top of the book for the September basis spread with a revised bid price and quantity:

• 0.00227 bid for 200 contracts – 0.00228 ask for 1,000 contracts

The RFC price (0.00227) is equal to the best bid (0.00227) while the RFC quantity (800 contracts) is greater than the quantity at that current best bid (200 contracts) at the time of the submission of the RFC by the bank trader’s broker to the CME Globex CLOB.

Since the BPVM percentage is 50% for all crossed FX link transactions, the quantity of the RFC eligible for BPVM is 300 contracts – i.e., 50% of the difference between the RFC quantity (800 contracts) and the quantity at that current best bid (200 contracts) in the CME Globex CLOB at the start of the pre-cross period.  Unlike the first example, which didn’t have a better bid in the CME Globex CLOB, this example has a better bid that effectively reduces the BPVM quantity by 100 contracts from 400 contracts to 300 contracts.

As a result, CME Globex will match 300 contracts of the RFC between the two RFC counterparties based on C-Cross protocols – with the bank trader buying, and the RFC counterparty selling 300 contracts of the September basis spread at a price of 0.00227.

Initial pass

Following this initial match, the RFC will then interact with the 200 contracts that were already at the top of the CME Globex CLOB at a price of 0.00227 – with the competing market participant buying, and the RFC counterparty selling 200 contracts of the September basis spread at a price of 0.00227.

Second pass

After the second pass, the remaining 300 contracts of the RFC will cross between the two RFC counterparties based on C-Cross protocols – with the bank trader buying, and the RFC counterparty selling 300 contracts of the September basis spread at a price of 0.00227.

Third pass

In summary, as in example #2, the bank trader is only able to buy 600 of the 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.  The unmatched balance of the bank trader’s RFC will remain in the CME Globex CLOB as a 200-contract limit order at 0.00227 until the bank trader amends, replaces, or cancels the order.

Summary of RFC transaction

The same but opposite results occur when a competing market participant improves the CME Globex CLOB by placing a better offer, rather than a better bid, of 0.00227 for 200 contracts of the September basis spread.

When the bank trader’s broker initially enters the RFC into the CME Globex CLOB, the current market at the top of the CME Globex CLOB for the September basis spread is:

• 0.00226 bid for 1,000 contracts – 0.00228 ask for 1,000 contracts

However, as a result of the competing market participant placing a better offer, the CME Globex CLOB will now show a new, updated market at the top of the order book for the September basis spread with a revised ask price and size:

• 0.00226 bid for 1,000 contracts – 0.00227 ask for 200 contracts

As before, the quantity of the RFC eligible for BPVM remains 300 contracts – i.e., 50% of the difference between the RFC quantity (800 contracts) and the quantity at that current best offer (200 contracts) in the CME Globex CLOB.

In summary, the bank trader will be able to buy 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.

Summary of RFC transaction

The RFC counterparty, however, is only able to sell 600 of the 800 September basis spreads at a price of 0.00227 through an RFC transaction on CME Globex.  The RFC counterparty’s unmatched balance will remain in the CME Globex CLOB as a 200-contract limit order to sell at 0.00227 until the RFC counterparty amends, replaces, or cancels the order.

By improving the offer on the CME Globex CLOB, the competing market participant is able to sell 200 contracts of the September basis spread at a price of 0.00227, which is the same number of contracts that the competing market participant purchased by placing a better bid in Scenario #4.

For more information or to discuss any of the detail here, please contact us at fxteam@cmegroup.com

¹ The CME Euro/US Dollar futures contract has a notional size equal to €125,000.  An 800-contract position in CME EUR/USD futures is notionally equivalent to €100,000,000 (i.e., €100,000,000 equals 800 contracts x €125,000).