Derivs - FX

Stephan Wolf, chief technology officer at Interactive Data Managed Solutions in Frankfurt, has been appointed ceo of the Global Legal Entity Identifier Foundation.

The International Swaps and Derivatives Association has published recommendations for an updated version of the Financial products Markup Language, also known as FpML version 5.7.

BlackRock’s iShares exchange-traded fund division has launched two ETFs on the New York Stock Exchange, one of which uses derivatives to hedge currency exposure.

Market participants have raised concerns that more stringent regulations relating to high-frequency trading could be applied to the use of algorithms in non-financial classified instruments, such as spot fx.

Banco Central Do Brasil is increasing its use of currency swaps to sell the US dollar in order to provide support to the Brazilian real. The central bank is using currency swaps as a tool to bring liquidity and stability to the country's currency.

Market participants have been active in trading options on the euro against the US dollar, playing the view that the currency pair will move lower. The highlight of the flow was one investor picking up a sizeable at-the-money straddle on the pair.

Investors have been picking up calls and risk-reversals on the sterling against the US dollar as the former currency continues to strengthen.

Markit is developing a service that will manage the exercise processes and provide electronic legal trade confirmation for fx options. The post-trade service will also help participants reduce operational risk and become more efficient in their management of fx options trades.

Structures such as forward volatility agreements that capture lower volatility carry rolldown relative to outright short vol positions, but are protected from broad based moves in higher fx vols, are expected to gain traction in the continued low vol environment.

The first electronically-traded and cleared yen swap with a Japanese bank has been executed. The transaction between Bank of Tokyo Mitsubishi and Deutsche Bank used an intention-to-clear facility provided by Tradeweb to indicate that it would send the trade to the Japan Securities Clearing Corporation for clearing.

Investors should consider volatility swaps should the correlation between euro/sterling and sterling/dollar turn positive, therefore widening the volatility spread between the two currency pairs. Sterling/dollar has recently been skewed to the upside, while euro/sterling has dropped since Bank of England governor Mark Carney threatened to hike interest rates earlier than the market expected; meaning the correlation between the two currency pairs has been strongly negative.

Volatility risk premium strategies, such as volatility and correlation swaps, are becoming increasingly popular as investors look for alternative strategies to the over-crowded carry trade in the current low volatility environment.