CME stakes out ground in emerging currencies

By Dow Jones Newswires-Wall Street Journal
Posted April 12 at 6:14 a.m.

CME Group Inc. is promoting the soundness of futures markets to build on growth in contracts linked to the Brazilian and Russian currencies, according to a senior executive with the exchange company.

The Chicago-based exchange group also is sounding out users of its renminbi-linked futures to ensure that the contracts meet customer needs, according to Roger Rutherford, head of global forex at the Chicago-based exchange operator.

Currency investors are gravitating toward listed futures and options to trade emerging-markets currencies. Exchange-trading is seen as a means to mitigate settlement risk in settling cash trades.

“That’s an industry debate that we’re picking up on today,” Rutherford said Monday on a media call.

Futures linked to the Russian ruble and Brazilian real are the fastest growing in CME’s suite of currency contracts, which last year outpaced its higher-profile agricultural futures complex in terms of total trading activity. While contracts on the yen, euro and U.S. dollar are mainstays of the market, Rutherford said that more investors are looking to trade “higher-yield currencies” of the so-called BRIC nations–Brazil, India, Russia and China.

Cash transactions in the $4 trillion-per-day foreign-exchange market, which take place mostly on the interbank market or on electronic trading platforms, are settled by London-based CLS Bank. Settlement is seen as the biggest transactional risk in forex trading, because deals involve the exchange of currencies in full.

CLS currently settles transactions in 17 major currencies, representing more than 75% of the daily value of interbank trading. But CLS doesn’t accommodate real-time settlement for dealing in currencies like the ruble or the real, providing an opening for CME’s regulated futures market.

“People are asking themselves, ‘if I’m hedging my currency risk or other trading risk that involves the ruble, or possibly speculating in that currency, do I need to take that physical delivery of rubles?’” said Rutherford, a former CLS executive. “Why not just take the futures?”

The migration has lifted the level of outstanding trades in ruble-linked contracts nearly as high as that of CME’s Swiss franc futures market, he said.

CME’s Clearport service, which lets traders convert off-exchange transactions into futures contracts, also has gained momentum from currency investors using the service to carry out large-scale trades in emerging market currencies, said Derek Sammann, CME’s managing director of forex and interest rate products.

The company on Monday held a “market exercise” centered on its five-year-old renminbi futures market to ensure the contracts are relevant to banks, hedge funds and trading firms. Growing trade in the renminbi futures is “a focus” for CME as it seeks to bring more customers into growth currencies, Rutherford said.

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