Time for FX swaps to grace the markets medal podium

Time for FX swaps to grace the markets medal podium

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By Phil Hermon, Executive Director, FX Products, CME Group

It is hard to believe the Olympics are just a matter of months away, where the world’s most elite athletes take centre stage as their years of dedication and desire are finally acknowledged. If a similar event were to take place in the world of finance, perhaps the successful transition to SOFR or the stability of the market during enormous volatility might have picked up the ‘gold medal.’

But despite being a cornerstone for countless traders, the FX swaps market would notably be missing from the podium. Even though they are the largest asset class by trading volume, FX swaps lag behind other trading types in terms of development. Recognising swaps’ critical importance, the time is right to address the challenges faced by institutional traders and make lasting improvements for the benefit of the marketplace.

The statistics are staggering, with the Bank for International Settlements (BIS) reporting nearly $4 trillion (£3.1tn) in new FX swap contracts traded on an average day. This constitutes about 50% of the total global FX market. On high-volume days, such as those witnessed in April 2022, FX swap volumes surge to around $5 trillion, comprising roughly two-thirds of total trading activity in the global FX market.

However, despite their pivotal role, FX swaps seem to be trailing behind spot, forwards and non-deliverable forwards (NDFs) in terms of development. Trading inefficiencies exist within the FX swaps market because the ecosystem is reliant on fragmented request-for-quote (RFQ) and request-for-stream (RFS) liquidity pools, in which clients need credit with a given liquidity provider to see or trade a given price. This reduces transparency and certainty of execution, makes automated trading activity harder and, ultimately, creates potentially worse trading outcomes for clients.

According to the BIS survey, 46% of FX swap volume is still traded via voice, significantly higher than forwards (35%) and FX spot (26%). This creates a barrier for greater automation. To unblock it, there needs to be an injection of transparency and certainty in the FX swaps market. If this were a Olympic success story, the gold medal winner on the podium would be an all-to-all central limit order book (CLOB) firm, with no last look pricing and operating 23 hours a day.

Recognising the dominance of US dollar (USD) in nearly 90% of FX swap activity and the substantial portion of flows with maturities of one year or less, there is an opportunity to centralise liquidity. Focusing on key FX swap dates and structures can pave the way for higher levels of automation and efficiency.

The intertwined nature of credit and liquidity in over-the-counter (OTC) traded FX swaps presents another challenge for many market participants. Typically, both counterparts in a trade need an ISDA agreement and sufficient bilateral credit to proceed. One way to get around this is to separate credit from liquidity, eliminating the need for documentation or a credit line between trading counterparts.

The tools are already in place to develop this market - designed to solve many of these challenges and play a critical role within the evolution of FX swaps trading. Liquidity on standardised points along the swaps curve enables algorithmic and API trading, while still providing options for manual trading through various front-end interfaces. However, the key to achieving meaningful evolution will be the continued adoption and investment from clients, and in particular, banks.

Key stats

$7.2bn record trading volume day in FX Link

$6bn @ 0.2 pips (average top of book for EUR/USD calendar spreads during the March-June 2024 roll)

+21% volume growth of calendar spreads outside the roll


While the year-on-year growth of volumes and customer adoption of spreads of FX futures is very promising, the true Olympic equivalent test lies in whether a broader part of the market will join a wider push to drive the evolution and efficiency of FX swaps trading. The aim is clear: transform good intentions into lasting change for the FX swaps market for the benefit of all audiences.

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