The two companies this week launched the FTSE Cürex FX Index Series, a range of independently calculated, executable spot FX currency pairs and baskets, targeted at a broad range of asset sponsors and managers, custodians and sell-side banks. The index series will be published in real time during the hours of the institutional over-the-counter (OTC) FX market, from 17.00 ET Sunday to 17.00 ET Friday.
Additionally, snap indices will be published every 15 minutes, 96 times per day, providing independent, time-stamped valuation metrics to enhance net-asset-value (NAV) calculations, which the two companies hope will fuel the creation of new currency risk-management tools and investment products.
"As far as asset managers are concerned, we think they will use our price for NAV calculation, but what we''re seeing is that they will use this transparent and independent benchmark to create new types of currency investment and overlay products, and that''s where the interest lays," says Jonathan Horton, president of North America at FTSE Group.
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| Jonathan Horton: "Asset managers .. ..will use this transparent and independent benchmark to create new types of currency investment and overlay products." |
At the same time, adds Horton, sell-side banks will develop new sorts of hedging, risk-management and currency-overlay products, while an independent verified price will appeal to custodians, given the controversy in recent years with regard to the way they value client trades.
Trading platform
Cürex, for its part, has developed an electronic communication network (ECN), Cürex FX, which will provide a strong set of auditable price data to enable FTSE to construct a high-quality benchmark.
The firm, which was established in 2007, has been involved with the development of several trading platforms, including FXall, FX Connect and Citi''s Velocity.
"We''re creating not only ECN technology for the purpose of this solution but we are creating additional applications that make it easier for institutional liquidity to find new sources of buy-side demand for FX from other markets that aren''t easily accessed by institutional FX today," says William Dale, Chairman and Chief Executive of Cürex Group. Examples include listed products and some OTC products that might not be accessible in the electronic market place.
Cürex has built an Audit API into the ECN that audits the prices coming into and going out of the matching engine, to make sure they are the same prices and ensure that the integrity of the data is validated by an independent party.
The ECN allows Cürex to create 24/5 fixes to provide a valuation on 192 pairs, with the 96 daily fixes designed to give participants the flexibility to decide when they want to fix against the benchmark and also be able to match off with the close of every stock market exchange around the world.
For instance, as markets close in Asia, Delta One desks need to true up to an NAV strike at the end of day. However, with the 4pm London WM/Reuters (WMR) fix the predominant metric, there is a mismatch.
"We didn''t build it for that specific purpose, but if you''re going to solve the problem for the product, you have to address that NAV aspect of it and time-of-day issues," says Dale.
Cürex FX will have multiple depths, so participants will be able to see a price that equates to a volume-weighted average price (VWAP) depth of $1 million, another price that equates to VWAP $10 million and so on.
The companies declined to say which liquidity providers they have signed up, other than that there were a "bunch of providers", and several user agreements were in hand.
While the regular fixings appear to be in direct competition to the WMR service, FTSE''s Horton doesn''t see it that way.
"This is not built directly to target WMR," he says. "It is about FTSE providing a much broader range of benchmarks which support a range of both trading, risk management and investment activity."
Nonetheless, there is an important distinction between the FTSE Cürex FX and WMR, in that the former is creating a way for a sell-side trading desk to decide whether or not it wants to be on the other side of a benchmark execution or otherwise pass that off to the market, because it is an executable benchmark.
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| William Dale: "It''s more about putting a stake in the ground. As the RMB starts to pick up, it''s important to have a metric for the USD that includes RMB." |
Whereas with WMR, if a sell-side trading desk wants to execute on that, they have to take the other side of the fixing because there is no execution.
Potential investor interest
Dale says the potential demand for the benchmark varies geographically. For instance, Asia, where there is considerable demand for dual currency investments, the idea of the benchmark acting as a valuation metric seems to resonate quite strongly.
Furthermore, the overriding theme in Asia is the emergence of RMB, and there has been interest shown from some Asian investors to embed valuation metrics into dim sum bonds.
Horton adds that the indexes have seen a positive response from planned investment sponsors for a range of options, such as product creation, and how they might use the benchmarks for active currency strategies.
The venture is creating a new family of equally weighted currency baskets. Four USD indices include a G8 index, which contains 7 major currencies and adds the offshore RMB currency pair, CNH, and an emerging markets index called the E8.
"It''s more about putting a stake in the ground," says Dale. "As the RMB starts to pick up, it''s important to have a metric for the USD that includes RMB. These are all equal-weighted indices."