Additionally, SuperDerivativesâ numerous users will be able to view indicative volatility levels for CMEâs FX options contracts. The large, liquid and sophisticated FX options market is currently concentrated in the OTC market.
"Around 90 percent of the banks active in FX options use SD-FX," said David Gershon, chief executive of SuperDerivatives. "The venture between SuperDerivatives and CME will form a bridge that will help provide greater price transparency between the OTC and exchange-traded FX options markets," he added.
"CME is at the forefront of the emerging convergence of the OTC market and the exchange FX markets," said Rick Sears, managing director, CME Foreign Exchange. "Services like SuperDerivatives and our just launched, CME FX on Reuters, will result in more dynamic and efficient FX markets. Our new Euro FX and Yen options offer market users European-style expiration, which mirrors the OTC market for options. With SuperDerivatives providing indicative options pricing in volatility terms, these new CME FX options products will be more accessible to a global base of users."
Sears added, "We share SuperDerivativesâ commitment to market transparency, greater market liquidity and efficiency. We are pleased to have this opportunity to work with them and become part of this benchmark foreign exchange options pricing system."
SuperDerivatives will initially provide a new page on SD-FX displaying indicative volatility as generated by its benchmark pricing model, for CMEâs options on FX futures. This can be critical, as the real market price for even vanilla options can deviate substantially from the theoretical value produced by Black-Scholes type models. In the second phase, SuperDerivatives will add trading functionality to allow its customers to buy and sell CME FX options contracts through SD-FX.
"Exchange-traded FX options are quoted in a slightly different way from what is standard in the OTC market. To avoid confusion, end users need access to a system, such as SD-FX, which provides a real-time comparison between the two markets. SD-FX lets them quickly and easily find out where the best price or trading opportunity is," explained Gershon.
"The new service SuperDerivatives is providing will appeal to many end users, but particularly the numerous banks, hedge funds and commodity trading advisers that are active in both the OTC and the exchange-traded markets," added Gershon.
John McAuliffe, Director, Foreign Exchange, Bank of Montreal/Harris Nesbitt, and a user of the system, said: "SD-FXâs enhanced capability will allow us to quickly and accurately assess CME market opportunities using the same pricing platform that we already use for OTC options."
"SD-FX converts real-time volatility prices into CME tick prices, which not only saves us time but also greatly enhances the transparency between the OTC and exchange-traded markets," added McAuliffe.
"Using FX options is one of the most effective ways to manage currency exposure or to express a trading view. Currently, FX options trade predominantly in the OTC market. Although the market is now far more transparent than it was, in part thanks to SuperDerivatives, many more potential users are likely to use options if there is sufficient liquidity on a well-regulated exchange. Potentially, this is a very significant development," concluded Gershon.
CME offers the largest regulated FX trading complex in the world, providing users with liquid, transparent markets, guaranteed execution and central counterparty clearing risk management on 36 individual FX futures and 21 options on futures products. CME received FX Weekâs 2004 eFX award for the best electronic futures platform. Last year, over 51 million FX contracts with a notional value of over $6.2 trillion traded at CME.