CME Narrows the OTC vs ETD FX Options Gap
Choices for FX traders have been between the simplicity of exchange traded options and the flexibility of OTC options with a gap between the two. CME have provided listed options for some time, but have moved to decrease or eliminate the differences to bring the best of both worlds.
Over the past 18 months CME have updated their product attributes to make them near to being an OTC proxy including:
- Moving from American to European style exercise dates
- Moving the expiry timing to 10am New York
- Adding new maturities on the Monday, Wednesday and Friday of each month
- More granular strike pricing
- Allowing quotes in price or volatility terms
Greenwich Associates conducted a study comparing the two markets, looking for the economic differences between the two, given that the CME venue is a central limit order book rather than pure OTC. The full report is available for free here https://www.cmegroup.com/trading/fx/greenwich-tca-study-fx-options-in-the-uncleared-margin-rules-age.html and shows their analysis from a variety of dimensions.
To assist in the transition CME created an FX Options Vol Convertor tool which is free to access here: https://www.cmegroup.com/trading/fx/cme-fx-options-vol-converter.html - this provides a route for traders to map OTC FX trades into the equivalent CME Exchange Traded products. The tool has been back-tested over a 2 year history to ensure accuracy, and uses prices from the CME exchange directly for registered users, or a 15 minute delay for web-based users.
A short video explains the Converter tool here:
Given the regulatory push for margin on cleared or uncleared trades, this move by CME provides new options for FX market participants to optimize their trading activity.