New Zealand Dollar/US Dollar FX Futures – Minimum Price Increment Reduction in Outright Futures

A lower cost and capital-efficient tool to manage your NZD/USD exposures

Based on the success of the minimum price increment (MPI) reduction in Australian/US Dollar FX futures (AUD), CME Group has announced an MPI reduction in outright New Zealand/US Dollar FX futures (NZD) from one tick (1) to one-half of a tick (0.5) that will go into effect on Monday, August 16, 2021. This MPI reduction will only impact NZD outright trades in Globex; block trades in NZD will continue to have an MPI of one tenth of a tick (0.1).

The MPI of futures contracts dictates the minimum difference between price levels at which a contract can trade, which in turn dictates the tightest bid-ask spread possible.

Each futures contract will have its own MPI, designed to create the optimal level of granularity for price discovery along with the right efficiencies of trading for both the liquidity provider and the liquidity consumer.

In November 2020, the Exchange reduced the MPI in AUD outright futures from 1 to 0.5 tick. Currently, this enhancement has resulted in a ~45% reduction in the cost of execution and an 8.6% increase in average daily volumes compared to precut levels. The increase in volumes was supported by the addition of over 20 new participants, comprised of a diverse set of over-the-counter (OTC) end-user customers.

This enhancement to NZD futures is designed to provide more granular pricing and to reduce the cost of execution for end user customers. Both effects should reinforce the role of FX futures as a complementary source of firm liquidity and cost-effective price discovery relative to other platforms and the wider OTC market.

The analysis of empirical data supports the decision to pursue this MPI reduction for NZD:

• Alternative venues for price discovery in NZD/USD are currently at a MPI of 0.5 or have recently reduced their MPI to 0.5, including leading interbank platforms such as EBS Market, which is currently at 0.5.
• Intraday price movement is approximately half of comparable currency pairs where CME Group previously reduced the MPI from 1 tick to 0.5 tick (JPY, EUR, CAD, and AUD), highlighting an opportunity to introduce additional price granularity.
• The order book top-of-book (TOB) depth in outright NZD futures is the highest of all G7 pairs, approximately ~1.5 times greater than average depth across JPY, EUR, CAD, and AUD pairs.
• Additionally, outright NZD futures TOB depth is three times greater than the 95th percentile aggressing order.
• Outright NZD futures TOB bid-ask spreads are comparable to the levels witnessed in other G5 pairs prior to the MPI reductions to 0.5 tick.

For more information on the reduction in outright New Zealand/US Dollar FX futures or CME Group’s broader listed FX offering, please contact FX. 

The SER communicating this MPI reduction can be found here