Foreign-Exchange Futures May Double on New Rules, Greenwich Says

Foreign-exchange futures trading has the potential to more than double as regulatory measures push investors out of options and non-deliverable forwards, according to Greenwich Associates.

“Trading volume will shift to futures because, under the new rules, futures will provide a cheaper means of accessing the FX market,” Kevin McPartland, head of market structure and technology advisory service at Greenwich, said in a press release. “Investors are already comfortable with the products and now they will have a big incentive to make much more use of futures.”

Options and forward contracts have fallen under greater scrutiny and are now facing more stringent trading and clearing requirements, according to McPartland. A 5 percent reallocation from over-the-counter foreign-exchange derivatives to futures would result in growth of more than 50 percent in the latter category, he said.

While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange forwards, spot dealing is exempt. More heavily-regulated assets command higher margin rates, making them more expensive.

Capital and liquidity rules for banks, known as Basel III, were enacted by international regulators in 2010 in a move to help protect the global economy after the worst worldwide financial crisis in decades following the collapse of the U.S. subprime mortgage market. Dodd-Frank, which includes the Volcker rule which seeks to curtail proprietary trading by banks, has added additional requirement to banks also working to meet Basel III regulations.

Trading in over-the-counter foreign-exchange options totaled $48 billion today, from $65 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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