Dec 6, 2012

ICE Unveils Two New FX Futures Contracts: Examining the Market Impact

In this video blog, James Jockle, SVP of Marketing, and Udi Sela, 20-year FX veteran and Vice President of Client Solutions discuss the launch of two new FX  futures contracts on Intercontinental Exchange Futures U.S. (ICE) – the Indian rupee/U.S. dollar and Brazil real/U.S. dollar. Udi elaborates on the rising importance of emerging economies and how ICE will benefit from bringing these particular pairs to market. Udi notes the implications for these currencies on collateral and the significant role they will play in the years to come.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section below.


Blog Transcript: ICE Unveils Two New FX Futures: The Market Impact

Jim Jockle (Host): Hi and welcome to Numerix video blog I’m Jim Jockle your host, with me today Udi Sela, FX Expert and part of Numerix’s client solutions group here at Numerix good morning Udi how are you?

Sela: Jim, good to be here again.

Jockle: IntercontinentalExchange introduced two new FX products earlier this week and one of them in particular is extremely interesting, the first ever Indian Rupee futures contract and the other is a Brazilian Real. Why don’t you give us a little bit of an overview about this move and why is this the first ever in the U.S. at this point?

Sela: So obviously ICE is trying to capture more flows of the foreign exchange market. We know that historically most of the volumes trade in the OTC market but now with the increasing regulation and drive for transparency exchanges are trying to capture more business. Now specifically with the Indian Rupee this mostly reflects the growing share of India in the world economy, of course coupled with Brazil and just to mention the Indian economy has grown at an annual rate of 7% over the last fifteen years while we look at Brazil, the Brazilian economy is now the sixth in the world before even the UK. In essence it’s just reflexing the shift in balance of powers between economies and the rising role of emerging economies.

Jockle: And thinking about the OTC space we’re moving toward a standard CSA and within that there are 17 silos of potential currencies that will be used for collateral obviously the Rupee and Real are part of that. What is the impact of having the ability to trade the futures now that one is expecting a collateral crunch if you will now that these currencies are now both accepted as collateral?

Sela: In terms of collaterals it will still remain to see whether on account of the country rating, these two currencies or assets in these currencies could be accepted as eligible collaterals. But definitely it increases the supply of assets that could serve as collaterals as we know we see estimations between 2 trillion to 10 trillion worth of dollars of collaterals that are needed for initial margining.

Jockle: So the benefits of ICE clearly coupling clearing and trading as it relates to the contracts what are the other benefits in terms of coming to market with the introduction of these two new pairs?

Sela: I would say that the main benefit is the fact that when you trade the futures in a neutral exchange you gain two things. One thing is of course price transparency because there’s no price discrimination between participants and the second thing is worrying about local currency regulations so if you look at Brazil or China and India you have off-shore markets and on-shore markets for instance if you have receipts from trading and want to take them out without authorization and you need to clear it from a regulation perspective with the local authorities when you trade financially if you like with the ICE Exchange you’re not liable to any off those regulations. So that’s a very clear way to avoid all these regulatory hassles.

Jockle: Looking ahead just thinking about the economies themselves so you mentioned the off-shore in Brazil and I think a lot of off-shore money had been coming in especially as it relates to the commodities market, from a macroeconomic standpoint where are you seeing both countries in the near term?

Sela: Well I think that we’ll just see the role of these economies increasing further. For real economy reasons because the growth of both economies is much more significant that traditional western economies whether if it’s in the Euroland or the U.S., though in the U.S. we may see increased growth next year and from a financial standpoint these currencies offer a higher yield. Buying properties at higher interest rates ... and that the Indian Rupee or Real about 8% of the yield currently … most currencies have weakened significantly against the U.S. dollar offers now an interesting entry point. I would say that both of these reasons we’ll see more flows in to these two economies and why not see more institutional money invested in those countries and so forth.

Jockle: So one last question for you, earlier this year you did a webinar with us on Double-No-Touch options and strategies in this low volatility market how are these economies in terms of volatility, and how does that play in to some of those strategy recommendations you talked about earlier this year?

Sela: With regards to the strategies that we suggested at the time the anecdotal evidence is that they actually performed very well. So those invested in both strategies would have performed very well just as reminder that was Dollar-Yen and Dollar against the South African Rand in both of them, at least one would have doubled his or her investment in those strategies, though the implied volatility was very low. 

Now if we look at the implied volatility of both currencies the Real trades between 8-9% if I’m not mistaken and the Indian Rupee around 10% which is about 1 to 2 vols above the G7 currencies. So again if we look at the Real it’s currently trading at 2.10, so 2.1 Real per 1 US Dollar and Indian Rupee around 55.20 most of them really weakened against the US Dollar recently, the last 6 months or so, so perhaps now it’s at a good level to put on trades which take a significant range maybe 2.30 on the upside for the Real maybe something like 1.85 on the downside on the 3 months bet and 57 upside for Dollar Rupee and downside something like 53 again trade for 3 months and we could price that and even suggest what the payout levels are.

Jockle: Udi thank you so much for you insights and of course I’ll be following up as this comes to market I believe that date is early January when these contracts will starting trading – January 28, 2013 and we’ll absolutely be watching this. Udi thanks you so much for your time today again follow us @nxanalytics on twitter.com and we want your feedback let us know what you’re thinking and please feel free to reach out to us at any time and enjoy our blogs as well. That will do it for today, see you next time.

Sela: Thank you very much.

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