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A structured approach to FX: New platforms for the new times.

Article Excerpt
Byline: Frances Maguire

Until 2008, the foreign exchange market was largely dominated by carry trades, where investors take advantage of the interest rate differentials between currencies. However the extreme volatility in the FX and interest rate markets prompted banks to offer alternatives through indices and baskets on which to offer investors structured products.

One of the first movers, last November, was BNP Paribas, which launched FX indices Galaxy Alpha and Alpha Plus as an alternative to the traditional carry trade strategies. The indices were designed to extract outperformance between a dynamic basket, selected every month based on the currencies with the highest interest rate differentials, and a fixed benchmark basket of traditional currency pairs.

At the beginning of this year, there were some high profile exits from the market, such as UBS's decision to close down its exotic structured products business within its fixed income, commodities and currencies division. Even so, interest in first- and second-generation exotic options structures showed signs of revival as clients looked to cut costs of vanilla options.

Also, in April this year, Credit Suisse launched its FX Factor index, designed to provide exposure to a portfolio of macroeconomic and market-driven FX strategies and offering structured products, such as Delta-1 trackers and capital-protected trades, linked to the index.

Exchange-traded products

Additionally, cleared exchange-traded FX products saw renewed interest as they offer investors price transparency and depth of liquidity, alongside the safety for investors in terms of counterparty risk. Several futures exchanges offer small-sized currency contracts, designed to attract the self-directed retail investor.

The CME Group offers trading in 41 currency pairs and from the outset the products were designed and sized with the individual trader in mind. Even though the standard currency contract size, at EU125,000, is considered small by institutional traders, CME has also launched e-mini contracts, half the standard size, for the dollar, yen and eurodollar contracts, in recent years to broaden access further. As a result, CME Group now has about 85% market share of exchange-traded FX products globally and about 97% in North America.

Bert Korevaar, head of retail and public distribution at Royal Bank of Scotland, says that there has been an increased interest in FX-listed structured products from retail investors since last October, when there was a lot of volatility in all currencies. He says: "Although the trend has slowed in the past few weeks because the volatility is moving away slightly, there is clearly significant interest in FX-related products on FX trading platforms, trading spot FX, CFDs [contracts for difference] and options, as well...

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