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New Margin Rules Could Trigger Shift in FX Options Trades From OTC to Exchanges

The final phase of uncleared margin rules (UMR) could trigger a shift in FX options trading from OTC to exchange-based trading, according to research firm Greenwich Associates.

UMR, which is being gradually applied to market participants by region and market volume over a five-year window ending in 2020, has increased trading costs for OTC FX options and will meaningfully disrupt the prime brokerage industry.

“Despite the fact that many if not most market participants eventually will be subject to the rules, only one-in-five buy-siders report that they have begun to examine the impact that UMR will have on their trading costs,” says David Stryker, Principal with Greenwich Associates Markets team, and author of FX Options in the Age of Uncleared Margin Rules.

The new Greenwich Report examines the impact of UMR and evaluates steps market participants can take to avoid cost increases or disruptions.

The results of the analysis demonstrate that the buy side has an alternative available that can provide meaningful cost savings to trading in FX options in the OTC market. In fact, under some circumstances, trading listed FX options could reduce trading costs by upward of 70%. And with exchanges such as CME evolving their product offerings to better align with client trading behavior, the friction associated with shifting positions to a listed environment is lessening quickly.

Greenwich Associates expects a combination of regulatory pressures and investments by exchanges will cause the buy-side to take a more aggressive approach in investigating listed options as a viable complement to their OTC activity. “Over the next two years, the interest in listed options will only grow,” says Stryker. “We have seen exchange-traded products gain significant traction in other asset classes and expect FX options will be next in that evolution.

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