Currency Crossroads: A Spotlight on FX Futures Deliveries

CME Group transformed global finance when it introduced the world’s first financial futures – FX futures – in 1972. It was a radical concept that has grown into the world’s largest FX futures market and now serves as the global benchmark. Most customers trade out of or roll their position (on CME Globex or using blocks and EFRPs) prior to delivery, but an efficient and reliable delivery system is essential to the contracts’ fair pricing. For those who hold their position through the last trading day, they must ensure their clearing firm is fully funded to facilitate physical delivery: the actual, physical exchange of the underlying currencies (e.g., British pounds for U.S. dollars).

Most FX futures contracts go through a physical delivery process on the third Wednesday of the contract month. This occurs four times a year (March, June, September, and December) for most contracts including Offshore Chinese Renminbi (CNH). However, the major currencies – Euro, Japanese yen, British pound, Canadian dollar, Australian dollar, Euro/British pound, Mexican peso, South African rand, and Singapore dollar – are traded and delivered on all twelve calendar months. Some currencies – Brazilian real, Russian ruble, Indian rupee, onshore Chinese renminbi (CNY), Chilean peso, Korean won, Indonesian rupiah, and Thai baht – are traded monthly but are not physically delivered. Instead, the contract is marked to a final settlement price determined by CME Clearing, and only the net profit or loss is exchanged between the long and short position holders.

With a few exceptions, trading ends on the second business day immediately preceding the third Wednesday of the contract month (e.g., Canadian dollar trading terminates one business day prior to the third Wednesday). Cash-settled futures terminate at various times: Brazilian real at 9:15 a.m. CT on the last business day of the month preceding the contract month; Korean won at 3:30 p.m. Seoul time on the third Monday of the contract month; and Indian rupee at 1:00 p.m. Mumbai time, two business days prior to the last Indian business day of the month.

The value date for all physically-delivered FX futures is the third Wednesday of the contract month. If that Wednesday is a holiday in the country of delivery or a bank holiday in Chicago or New York, the value date is the next business day. The final settlement price determines the value of the physical delivery and is calculated based on market activity at the end of trading. For example, the British Pound final settlement price is the Volume-Weighted Average Price (VWAP) of all trades on CME Globex during the final 30 seconds of trading (9:15:30 a.m. to 9:16:00 a.m. CT). A British Pound price of 1.2400 would result in a delivery value of $77,500 ($1.2400 x 62,500 GBP/contract).

What really happens when an FX futures contract goes to delivery? Let’s discover the distinct roles of CME Clearing, clearing firms and customers, the must-do checklist for both buyers and sellers, and the clockwork precision of the delivery itself.

CME Group deliverable FX futures contracts are required to be physically delivered through the CLS (Continuous Linked Settlement) Bank System when both the trading unit currency and the price increment (minimum fluctuation) currency are supported by CLS delivery procedures. CLS is a real-time global settlement process which allows for both sides of a currency transaction to be settled simultaneously through a CLS settlement bank. For CLS-eligible currencies, CME Clearing utilizes the paired delivery process to match up clearing members who then facilitate the physical exchange of currencies through their own CLS settlement bank arrangements, and which also allows the cash movements to be netted as part of the main CLS cycle.

A clearing firm using CLS must submit a CLS instruction to its settlement bank but is not required to submit an Order-to-Pay (OTP) or wire transfer. An OTP is an irrevocable agreement whereby a clearing firm’s bank will pay funds on the delivery date to the CME Clearing’s agent bank while a wire transfer is an electronic method of moving funds from one bank account to another. Current CME Group FX futures eligible for CLS deliveries include the Euro, Japanese yen, British pound, Canadian dollar, Australian dollar, New Zealand dollar, Swiss franc, Mexican peso, Norwegian krone, Swedish krona, South African rand, Israeli shekel, Hungarian forint and the Singapore dollar. 

However, if the delivery exposure for a clearing firm is less than $25 million for any one currency or below $50 million across all CLS-eligible currency contracts then delivery through CLS is not required. A clearing firm with delivery exposure below these thresholds choosing not to use CLS to facilitate delivery may be obligated to submit an OTP or a wire transfer for the value of their delivery based on the specifications of the currency contract and a clearing firm’s designation in the deliveries system.  

For non-CLS currency deliveries, the completion of the currency delivery process depends upon the establishment by CME Clearing of banking facilities in both the U.S. and the local country for each traded currency. CME Clearing contacts an agent bank to act on its behalf and establishes two accounts with the agent bank, a U.S. dollar account to facilitate the delivery of dollars, and a foreign currency account at the agent bank's branch or a correspondent bank (acting under contract with the agent bank) in the country where the foreign currency will be delivered. Current non-CLS currencies for deliverable FX futures include Czech koruna, Polish zloty, Turkish lira and offshore Chinese renminbi.

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