November 14, 2012 6:34 pm

Bloomberg set for FX derivatives trading

Bloomberg is to enable derivatives trading on its foreign exchange trading platform – a move that underscores how sweeping reform of the derivatives industry is reshaping currency trading venues.

The US-based financial data provider and broker has signed up 14 banks to its automated options pricing engine on its FXGo platform. Two are live, with three more expected by the end of the year. Historically, FXGo has been used to trade the cash markets.

Its move illustrates how market infrastructure operators are gearing up to exploit opportunities arising from new rules governing derivatives markets.

Incoming rules in the US Dodd-Frank act are set to push more of the $640tn over-the-counter derivatives market on to electronic trading platforms and through clearing houses – a move that Bloomberg, along with rivals such as Thomson Reuters, IntercontinentalExchange and CME Group, is keen to exploit.

Although the final rules have still to be determined, parts of the foreign exchange market are expected to be exempt from some rules. However, foreign exchange derivatives, or so-called “non-deliverable forwards”, are likely to come under the new legislation.

Foreign exchange contracts such as forwards and swaps are the second largest asset class traded off-exchange, behind interest rate swaps.

Their use has grown in the first half of the year, according to figures released on Tuesday by the Bank for International Settlements. The amount of outstanding notional value of foreign exchange contracts at the end of June rose to $66.6tn from $64.7tn in the same period a year ago, BIS said.

Bloomberg said its platform would be able to clear trades through all main clearing houses, such as ones operated by LCH.Clearnet, CME and ICE.

However, the launch comes at a generally quiet time for trading FX options. Investment banks say that with currency market volatility at five-year lows, corporates are doing less hedging.

ICAP, the inter-dealer broker, on Wednesday said revenues for the six months to September 30 from its foreign exchange business had fallen 10 per cent to £156m.

“I think because the markets are going sideways at the moment it’s reduced demand for hedging, so derivatives have fallen too,” said Tod Van Name, Bloomberg’s global business manager for foreign exchange, economics and commodities.

He admitted there had been a certain reluctance on the part of the industry to move to pricing options electronically, with investment banks making money on spreads on option pricing.

However, the coming competition in the market meant “we wanted to allow clients to do this before regulators force them to”, he added.

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