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America’s drive toward on-exchange FX spreads to Europe as CME Europe prepares to make its debut this Sunday, citing cost-efficient execution in light of imminent regulatory changes as driving factor
On-exchange FX is has become a poignant program for some prestigious executing venues, some of which are aiming to offer exchange-traded FX to international traders.
The most recent exchange to follow this direction is the Chicago Mercantile Exchange (CME.O) which is preparing to launch its European operations on Sunday subsequent to receiving its regulatory approval for its entire range of asset classes on Wednesday this week.
CME Europe is based in London, and makes its entrance to the market as per its proposed schedule, which was set as April 27 when its intention to establish an FX exchange venue was reported by LeapRate recently. Initially, it will make its debut by offering 30 FX futures products as well as biodiesel futures.
Alongside other major venues such as NASDAQ OMX which recently began to consider extending its services to incorporate FX, CME Europe represents an extension of the services offered by its North American parent and Chicago-based peer IntercontinentalExhange (ICE.N) which already clear FX order flow on the other side of the Atlantic to London’s renowned financial center.
In the advent of the regulatory changes which are set to be invoked under MiFID II and the European Market Infrastructure Regulation (EMIR) and the Basel III directove, all of which stipulate stringent trade reporting requirements for OTC derivatives, processing orders via an exchange represents an effective means of not only complying with the rulings, but also ensures greater transparency and removes the need for expensive technological and methodological changes to the infrastructure within institutional FX firms by allowing the exchanges to process the order flow.
“Europe trades 60% of the global FX market and the OTC market is very strong here,” said William Knottenbelt, senior managing director, EMEA at CME Group in a report by buy-side journal The Trade News. “However, Basel III is increasing the margin cost of trading OTC, which means futures are the cheapest way to trade FX and this will lead to growing demand to trade FX futures.”
“After receiving regulatory approval to launch CME Europe there were several smaller issues we needed to tackle and this has now all been signed off by the BoE,” added Knottenbelt.
The exchange will launch on Sunday night to prepare for trading on Monday. CME said there is also significant interest from Asian traders and the exchange’s London time zone means it is well placed to serve that market.