Financial Risk ManageMent Foreign exchange Futures Market update

Transcription

1 Financial Risk ManageMent Foreign exchange Futures Market update February 2014

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3 contents executive summary 1 introduction 3 The global FX Market 5 Trend of major currencies 6 Exchange-traded FX derivatives 7 Increasing regulation in OTC markets 8 Foreign exchange futures 5 Introduction to FX futures What you should know about FX futures Comparing exchange traded FX futures against OTC derivatives Applications of FX futures Foreign exchange futures as a 9 derivative of choice Benefits of exchange-traded FX futures 15 Hedge accounting and FX futures 16 Frequently asked questions 12 appendix 14 Common contract specifications and 19 their definitions SGX FX futures contract specificiations 20

4 1 / Foreign Exchange Futures executive summary Foreign exchange futures and currency risk management As Singapore and Asian companies seek greater opportunities for growth, they have successfully expanded their presence in the overseas market. This success has brought about unintended consequences in terms of the higher volatility on the firms financials, attributable oftentimes to the sharp movements in foreign exchange (FX) rates. The need to efficiently and effectively manage this volatility has become paramount. FX futures offer a cost effective and transparent manner by which these currency exposures can be managed. Large corporations, medium and small sized firms, and institutional as well as individual investors can now access the foreign currency market directly without the need to set up a separate foreign currency facility with their bank. Exchange traded FX futures offer ease of access, lowered counterparty risk important in the aftermath of the global financial crisis, as well as higher transparency to effectively hedge against unfavourable FX movements. When carried out correctly, hedge accounting can be applied, thereby reducing income statement volatility by matching the FX exposure with the FX futures used for hedging. Benefits of a FX futures market Singapore is already the third 1 largest FX centre in the world, and the availability of FX futures in the local marketplace will provide both organisations and individuals greater and more transparent access to this important market. The FX futures market is standardised, regulated, transparent and liquid. Futures positions can be initiated or closed with relative ease with better transparency compared to the Over-The-Counter (OTC) market. Bid offer spreads are visible in real time. For non-banks, exchange trading of FX futures also eliminates the requirement to obtain the best price by comparing quotations from multiple counterparties, which is required when trading FX in the OTC market. An important benefit in trading FX futures on an exchange is the reduction of counterparty risk. Futures traded over an exchange are guaranteed by the exchange clearing house acting as a central counterparty. In the case of uncleared OTC FX deals, each counterparty faces the risk of default by the other party. Recent regulatory changes, such as the Basel guidelines, EMIR and Dodd-Frank Act 2 are adding pressure on OTC markets. Mandatory central clearing, increased regulatory reporting and new margin and collateral requirements that apply to trading in certain OTC derivatives, reduce the relative attractiveness of these OTC products vis-a-vis their corresponding exchange traded alternatives. Increasing demand in Asia The popularity of FX futures in Asia seems to be increasing, with exchanges across the region from Dubai to Japan reporting significant growth in the volume of FX futures traded. More exchanges are joining this group, including the Singapore Exchange (SGX). As the benefits of trading FX futures becomes more apparent, more organisations and investors are jumping on the band wagon to include them as another tool in their arsenal of derivative instruments, be it for investment purposes or to manage FX risk. Factsheet What s happening Singapore Exchange (SGX) has launched foreign exchange (FX) futures for trading from 11 November What FX futures are currently available on SGX? FX futures in the following currency pairs are listed on SGX: AUD / USD INR / USD AUD / JPY KRW / USD USD / SGD KRW / JPY What FX futures are currently available on SGX? Corporations, banks, hedge funds, asset managers, proprietary trading firms, retail professionals and sophisticated individual investors. Where can I find more information on SGX FX futures? More information can be found in Section 4 and the Appendix. 1 Bank for International Settlements Triennial Central Bank Survey 2013 Foreign exchange turnover in April 2013: Preliminary Global Results, September The Dodd-Frank Wall Street Reform and Consumer Protection Act

5 FX futures offer a cost effective and transparent manner by which foreign currency exposures can be managed. Foreign Exchange Futures / 2

6 3 / Foreign Exchange Futures introduction The global FX Market The FX market continues to be the world s largest financial market, with trade turnover averaging USD 5.3 trillion 3 a day in April According to the Bank of International Settlement (BIS), this was an increase of 35% from the same period in G10 countries 3 made up 77% of the world s FX trade turnover for April Europe remained as the region with the highest turnover of FX trades with financial institutions forming the bulk of the trading parties as illustrated on the right. Trend of major currencies While the United States Dollar remained the dominant currency of global FX trades, BIS also reported rising trends in emerging market currencies. FX trades in the Mexican Peso and the Chinese Renminbi grew substantially and accounted for 2.5% 3 (about US$135 billion daily turnover) and 2.2% 3 (about US$120 billion daily turnover) of the world s FX turnover respectively, propelling both currencies into the world s top ten traded currencies. Other notable major currencies that grew 3 in market share were the Yen, Australian Dollar and Russian Rouble. Trading turnover in the Singapore Dollar has also grown significantly to reach US$75 billion per day and is the 15th most traded currency globally. A similar trend was observed for Indian Rupee, which has a daily trading turnover of US$53 billion and a global market share of 1.0% 3. Exchange-traded FX derivatives Exchange-traded derivative trades are clearly gaining popularity: In 2001, exchange-traded FX derivatives 3 constituted only 0.8% of the FX market. Twelve years later, this proportion has more than tripled to 3%. Considering the FX market has grown by around 250% from 2001, this represents substantial growth. For the quarter ending June , the FX market saw a larger number of FX futures being traded as illustrated on the right. Increasing regulation in OTC markets The global financial crisis of 2008 is sometimes attributed to the use of OTC transactions. This has prompted regulatory bodies worldwide to propose a regime shift in regulatory requirements and the involvement of Central Counter Parties (CCPs), all with the aim of reducing risks in the financial system and increasing transparency in the OTC derivative markets. These shifts demonstrate the underlying intent of stricter regulations on OTC derivatives transactions which can extend to include OTC FX forwards and swaps. The Pittsburgh G-20 conference in September 2009 earmarked the start of OTC derivatives market reforms and the key agreement from this conference can be summarised by the statement below: All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. G-20 summit agreement specified in FSB paper on OTC derivatives reform (refer right) Several international standard-setting bodies and regulators have subsequently published guidance documents and regulations on OTC derivatives market reforms. A few of these publications are listed below along with the publication month and a brief overview of the content: Market reforms for Otc derivatives July 2010: Title VII of the Dodd-Frank Act New requirements related to clearing, trading, margin and reporting of OTC derivatives - Mandatory clearing by regulated clearing houses, substantial liquid collaterals to fulfil margin requirements and enhanced recording and regulatory reporting. October 2010: Financial Stability Board (FSB) Implementing OTC Derivatives Market Reforms First publication to endorse the agreement of the Pittsburgh G-20 summit with details on the new requirements. august 2012: European Market Infrastructure Regulation (EMIR) from the European Securities and Markets Authority (ESMA) Enhanced regulations related to reporting and clearing obligations for OTC derivatives (including FX derivatives) and reducing counterparty risk from these transactions. september 2013: Basel Committee on Banking Supervision Margin requirements for non-centrally cleared derivatives Initial and variation margin for noncentrally cleared derivative which needs to commensurate underlying counterparty risk although FX forwards and swaps are exempt from this requirement as of now. 3 Bank for International Settlements Triennial Central Bank Survey 2013 Foreign exchange turnover in April 2013: Preliminary Global Results, September Bank of International Settlements Exchange traded derivatives statistics, updated 15 September Monetary Authority of Singapore Consultation paper Proposed Regulation of OTC Derivatives, 13 February Financial Stability Board Implementing OTC Derivatives Market Reforms, October 2010

7 Foreign Exchange Futures / 4 Within the Asia Pacific region, regulators such as the Monetary Authority of Singapore (Mas) 5, have proposed regulations for OTC derivatives that are aligned with those in leading countries. the Mas has retained most of the aspects of the initial FsB 6 paper such as mandatory central clearing for a pre-determined list of Otc derivative products. Daily FX trade turnover April 2013 By geography 20 % North America 1 % South America 18 % Asia 3 % 58 % Australia Europe By counterparty Financial institutions 52 % Reporting dealers 39 % Non-financial institutions 9 % Top five FX trade centers April % United States 41 % 6 % 5 % 4 % Singapore Japan Hong Kong United Kingdom Quarterly turnover (number of contracts in millions) of exchange-traded FX futures June June (9 trillion) 30x increase over the past 10 years June 2003 December 2005 June 2008 December 2010 June 2013 Source: Bank for International Settlements (BIS)

8 5 / Foreign Exchange Futures Foreign exchange Futures introduction to FX futures Like forwards, FX futures call for the delivery of a specified amount of one currency in terms of another currency at a specified date in the future. Except for an initial margin, futures contracts have a zero initial market value and do not require any upfront payment when a contract is initiated at the going market rate. Increased market interest in managing Asian currency exposures has led to listings of contracts in these currencies on several international and regional exchanges, a few of which are listed in the diagram on the bottom left. What you should know about FX futures Traded in organised and regulated markets with clearing houses Futures are traded on regulated exchanges that are governed by strict rules that are aimed at promoting market stability and transparency. Here in Singapore, FX futures are traded on SGX, which is regulated by the Monetary Authority of Singapore (MAS). Exchanges also have to conform to established standards. For example, SGX meets internationally recognised standards set by the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions (CPSS IOSCO). SGX is also a qualified central counterparty under Basel III standards. Understanding FX futures price quotations To use FX futures, it is essential to understand how to interpret futures prices that are quoted on the respective exchange. The diagram below shows an example of a quote of FX futures. examples of some recently launched asian FX futures globally Source: SGX, CME and ICE 7 november 2013 launched SGX FX futures: AUD / USD AUD / JPY USD / SGD INR / USD KRW / USD KRW / JPY Us Dollar / singapore Dollar FX Futures (Example) Month Contract month Mar 201X Jun 201X Open The price at the start of the trading day High/low The highest and lowest transaction prices for that trading day change Change in the settlement price between the present trading day and the previos trading day settlement The settle price on that trading day. (Usually representative of prices around the close of trading) January 2013 launched CME and ICE FX futures: INR / USD Volume Number of futures contracts traded on that day Open interest The number of bought or sold futures contracts that have not been settled Note: Figures in this diagram are for illustrative purpose SGX ( CME ( ICE (

9 Foreign Exchange Futures / 6 Margin requirements for FX futures Similar to any futures contract, FX futures are secured by margin placements from both buyers and sellers. Generally, the types of margins are an initial margin and a lower bound maintenance margin. Marking to market and settlement of a futures contract is done each trading day and the daily gains or losses are credited or debited to the margin account. Buyers or sellers of futures will be required to top up their margin accounts when the maintenance margin is breached. For futures contracts, this means that if a party defaults, the impact from the default is limited to the effect from the movement in rates from the previous trading day. Any losses prior to that day would have been settled via the margining process. Organisations should also factor in the operational requirements for the processing of daily settlements of futures contracts with clearing houses. The daily settlements and margin calls may have a short-term impact on cash flows. Because FX futures transactions are leveraged, relatively small market movements may have proportionately large impacts on the FX futures markedto-market values and hence a substantial gain or loss of margin funds. In a leveraged position, a relatively small market movement may have a proportionately large impact on the FX futures markedto-market value and hence a substantial gain or loss of margin funds Users of FX futures face the potential risk of receiving margin calls on short notice, in order to be able to maintain their positions, when rates move adversely. If market participants fail to provide the additional funds within the stipulated time, their positions may be liquidated at a loss and they would be liable for any resulting deficit, besides potentially losing a hedge for their underlying currency exposure. Leveraged positions can also work in favour of market participants when market prices move in their favour accumulated gains above the initial margin amount can be called back. SGX has also been focusing on offering so-called margin offsets at a time when customers fear that new trading and processing rules will increase their cost of doing business. These margin offsets between correlated products (such as between currency pairs which show similar trends) enable the customer to use the same margin account to offset gains and losses from different correlated trades through a pooled margining approach. Negotiated Large Trades (NLT) provided by exchanges such as SGX can be used for meeting certain situation and customer specific requirements such as those for longer maturity contracts which may not have screen based liquidity, or for large trading sizes to minimise slippage.

10 7 / Foreign Exchange Futures comparing exchange traded FX futures against Otc derivatives A comparison of exchange-traded FX futures and OTC derivative contracts is summarised below: exchange-traded futures Otc Derivatives Regulation and governance Regulated market and governed by exchange rules Largely unregulated market clearing of trades Market supervision Central counterparty with straight through clearing Independent market and trade surveillance conduceted by the exchange Predominantly bilateral although certain OTC trades may be required to be mandatorily cleared in the future No independent market supervision Upfront capital commitment Initial margin required from clearing house Collateral required from banks for FX trade facility contract Specifications Standardised and defined by the exchange Customisable and agreed between the trade parties leverage Leveraged transaction Leveraged transaction settlement Basis Settled on daily basis with gains and loss made to the initial margin Settled upon maturity of the contract applications of FX futures Some of the typical applications of FX futures are found below: Large corporations, medium and small firms Large corporations may use FX futures as cash flow hedge, fair value hedge or net investment hedge to manage foreign currency risk. Proprietary trading firms may also use FX futures as an investment isntrument to earn a profit in addition to using it for hedging purposes. Financial institutions, hedge funds and asset managers Besides using FX futures to manage foreign currency risk, these firms may also use FX futures as an alternative trading tool. Asset managers can also use FX futures as an alternative investment instrument to diversify risk in their investment portfolio. individual investors Individual investors may trade in FX futures to earn a profit. They may also use futures to hedge against foreign currency risk.

11 sgx has also been focusing on offering so-called margin offsets at a time when customers fear that new trading and processing rules will increase their cost of doing business. Foreign Exchange Futures / 8

12 9 / Foreign Exchange Futures Foreign exchange Futures as a Derivative of choice Benefits of exchange-traded FX futures There are several benefits of using FX futures. Firstly, the bid-offer spreads on OTC derivatives can vary significantly depending on the client profile. Usually for small to medium companies which do not trade often and/or in large quantum, the large bid-offer spreads can mean costly OTC trades. Using futures contracts as an alternative may lead to lower transaction costs through a narrower bid-offer spread, even after accounting for commission costs. Secondly, an open FX futures position can be closed easily over an exchange at the current market price. In an OTC, unwinding of a position has to be done with the same counterparty at the terms dictated by the counterparty. This may lead to an increase in the cost of unwinding the position as dictated terms may at times be unfavourable. Thirdly, the FX futures market is highly transparent - real-time pricing of FX futures, traded volume and open interest data are published regularly by the exchanges. By comparison, the OTC market may be less transparent as statistics are generally compiled from polled estimates which may not be published regularly. This lack of transparency became more apparent in light of the recent MAS investigations 8 on several banks in Singapore in connection with rate-setting in the offshore nondeliverable forwards market. These investigations centred on whether exchange rates for certain major Asian currencies had been manipulated as part of a routine process by which a panel of banks set daily exchange rates which were used for the settlement calculations of nondeliverable forward contracts on maturity. The other benefits of FX futures are: Access to the FX market without the need to post collateral in order to obtain FX lines from banks, especially for small and medium companies. Reduction of counterparty risk in trading of FX derivatives. This is especially relevant for larger corporations who may deal with a few key banking partners. These benefits are summarised in the diagram below: Summary of benefits for FX futures users small and Medium High net worth large corporations and businesses individuals financial institutions Potentially lower costs than OTC depending on client profile Potentially less costly close-out positions Greater transparency and audit trail Access to FX markets without need to acquire FX lines and associated collateral requirements Reduction of counterparty risks legend: Highly relevant Less relevant 8 Financial Times Currency-fixing probe rattles Singapore, February 2013 by Jeremy Grant in Singapore and Alice Ross in London

13 Foreign Exchange Futures / 10 Hedge accounting and FX futures FX risk is associated with the unanticipated movement in foreign exchange rates between any two currencies and may impact the financial well-being of an entity or individual. FX risk was voted as one of top risks 9 faced by companies in FX futures along with other FX derivative instruments can be used as risk management tools to manage FX risks. Once an FX exposure is identified and quantified, FX futures can be used to hedge the exposure. By fixing the rate of exchange of two currencies at a future date, the inherent uncertainty and hence the risk of adverse movement in exchange rates is mitigated. However, the accounting treatment requires the marking-to-market of derivative instruments, including the FX futures trades that are used as hedges. Taking the impact of the gains or losses from FX futures to the profit and loss account may result in significant volatility in the income statement. Hedge accounting allows this volatility to be minimised if certain conditions are met. International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement, or the local equivalent Singapore Financial Reporting Standards (SFRS) 39, which govern hedge accounting, does this by matching the effects of the fair value changes in the hedged items (such as a USD forecasted payment) and the hedging instruments (such as a USD/ SGD FX futures contract) and recognise them as a net profit or loss at the same period. The intended result is to lessen the volatility in the income statement. In order to qualify for hedge accounting, FX futures, if used as the hedge instruments, are eligible for hedge accounting if all conditions under ias 39 are met the hedged items and instruments need to meet the eligibility requirements prescribed by the International Accounting Standards (IAS) 39. IAS 39 also stipulates other criteria that an enterprise has to comply with in order to qualify for hedge accounting. When correctly applied, hedge accounting allows companies to minimise income statement volatility when using FX futures to hedge against adverse foreign currency movements. Consultation with professional advisors is strongly encouraged if one is unfamiliar with the application of hedge accounting. illustrative example Let us consider a simple hypothetical scenario as shown in the figure below:: Forecast payment of US$1 million to be made in 1 month Supply of goods or company a services in 1 month supplier (singapore) (Us) Company A deems the forecasted transaction as highly probable in occurring and realises that it is exposed to fluctuation in USD/SGD exchange rate. Company A decides to hedge this exposure using a onemonth USD/SGD FX futures at a forward rate of S$ per USD. 9 J.P. Morgan Asset Management Global Liquidity Investment Survey 2011

14 11 / Foreign Exchange Futures impact to income statement (scenario analysis) Month event UsD/sgD spot rate UsD/sgD futures rate for 17 May 201X impact to income statement (Profit and Loss) Scenario 1: Without hedge accounting Scenario 2: With hedge accounting 18 april 201X Forecast Payment No impact No impact of US$ 1 million on to P&L to P&L 17 May 201X Hedge the No impact No impact payment by buying to P&L to P&L a 1 month USD/ SGD FX futures contract at S$ per USD 30 april 201X FX futures Loss of S$10, No impact to P&L contract is from the FX (Loss of S$ 10,000 revalued at futures contract from the FX month-end futures contract is recongised in OCI) 17 May 201X FX futures Gain of S$20, No impact to P&L contract is from the FX (Gain of S$20,000 from revalued 10 on futures contract the FX futures contract settlement date is recognised in OCI) FX futures No impact to P&L No impact to P&L contract is settled Goods are No impact to P&L No impact to P&L received and (Final net gain of S$10,000 payment is made previously recognised in at the same time OCI from the FX futures contract is transferred to Inventory On 30 April 201X, the appreciation of the SGD against the USD had resulted in a loss of S$10,000 from the FX futures contract. Economically, this loss is offset by the gain arising from the favourable effect on the forecasted USD payment. Without hedge accounting (Scenario 1), normal accounting standards require Company A to record the loss of S$10,000 arising from the FX futures contract in the income statement while the offsetting favourable effect from the forecasted payment cannot be recorded. This accounting mismatch results in adding income statement volatility arising from Company A s hedging activity. With hedge accounting (Scenario 2) and assuming that all requirements under IAS 39 have been met, Company A is allowed to record most, if not all, of the S$10,000 loss arising from the FX futures contract in its Other Comprehensive Income (OCI) on the balance sheet rather than in the income statement. On 17 May 201X, the gain of S$20,000 from the FX futures contract has to be recorded in the income statement without the use of hedge accounting (Scenario 1). With hedge accounting (Scenario 2), this gain of S$20,000 from the FX futures contract is recognised in OCI. When the goods from the supplier are received and are recorded in the accounts, the final net gain of S$10,000 in OCI is transferred to Inventory on the balance sheet. 10 In practice, futures are marked-to-market daily with adjustments made to the margin account if necessary. For illustration purposes, any changes in margin account are ignored in this example. 11 Loss in FX futures contract on 30 April 201X = S$( ) x U$1,000, Gain in FX futures contract on 17 May 201X = S$( ) x U$1,000,000

15 Foreign Exchange Futures / 12 Frequently asked Questions 1. Where can i get information on FX For an organisation, the implementation 4. What will be the initial and futures prices listed on sgx? of a treasury management system to maintenance margin required to SGX publishes market prices (time capture FX futures trades will facilitate trade FX futures on sgx? delayed) of all its futures and options contracts on its website at this link 13 : the continuous monitoring of FX futures positions, including the marking-to- The initial and maintenance margins for SGX FX futures are prescribed by market values, vis-à-vis position limits the clearing house from time to time. home/marketinfo/derivatives/delayed_ or marked-to-market limits that have The latest margin schedule can be prices. established by the organisation. obtained from the SGX website at this link 13 : Real-time price information on all SGX An electronic payment system (or cash sgxweb/home/clearing/derivatives/ futures and options contracts can be management system) that is linked to operational_information. obtained through any of SGX s licensed an organisation s bank accounts will data vendors which are also listed on this SGX website 13 : also increase operational efficiency in the processing of payments from 5. How will settlement be made for sgx s FX futures? wps/portal/sgxweb/home/services/ margin calls or call-back of excess SGX FX futures contracts are cash market_data/our_data_vendors. funds from the margin account. settled. The settlement currency will depend on the type of currency 2. in terms of infrastructure and it 3. What are the costs to trade FX pair. There is no physical delivery of systems, what will be required to futures on sgx? currencies. More details of SGX FX start trading in FX futures? Exchange clearing fees are levied on all futures are found in the Appendix. This will depend upon the kind of futures contracts traded on SGX. arrangement you have with your broker. For brokers that provide an The detailed clearing fee schedule is published on the SGX website 13 : 6. When hedging against foreign exchange risk, what are the hedged online trading portal, a basic computer items that qualify for hedge should be sufficient. Otherwise, trade orders can be provided to brokers home/clearing/derivatives/operational_ information. accounting? Qualifying hedge items include 14 : through a call or via s depending Financial assets and liabilities which upon the nature of service provided by Any additional charges will be in the are exposed to foreign currency the broker. form of broker commissions. movements 13 Current as of publication date 14 IAS 39:78 to 79

16 13 / Foreign Exchange Futures Non-financial assets and liabilities which are exposed to foreign exchange movements Firm commitments 15 denominated in foreign currency Highly probable forecast transactions with exposure to foreign exchange movements A net investment in a foreign entity Held-to-maturity debt instruments Not all hedged items qualify for hedge accounting and companies are encouraged to seek consultation from qualified professionals with hedge accounting experience. 7. What are the criteria for hedge accounting when using FX futures to hedge against foreign currency risk? In order to qualify for hedge accounting, the following conditions 16 have to be fulfilled: The company is exposed to foreign exchange risk that could affect the income statement The FX futures contract is specifically undertaken to hedge the underlying foreign exchange exposure The hedge must be highly effective The effectiveness of the hedge can be reliably measured The hedging relationship must be formally documented at the inception of the hedge If companies are uncertain of the conditions listed under IAS 39, it is advisable to consult qualified professionals with experience on hedge accounting. 8. What is hedge effectiveness and when should it be assessed? In accordance with IAS 39, hedge effectiveness is the extent to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument. Hedge effectiveness must be assessed, which means: The hedge is prospectively expected to be highly effective during the period in which the hedge is designated The actual results of the hedge are within the range of percent (retrospective effectiveness) 9. What information should be documented in relation to the hedging relationship between a hedged item and the hedge? The documentation 17 should include: The company s risk management objective and strategy for the hedge A description of the nature of the risk that is being hedged The type of hedge - be it a cash flow hedge, fair value hedge or net investment hedge Identification of the hedging instrument and the hedged item or transaction The company s approach to measuring hedge effectiveness, frequency of the assessment and confirmation that the hedge is expected to be highly effective. 15 As defined by IAS 39:9 16 IAS 39:88

17 Foreign Exchange Futures / 14 appendix Table A-1: Common contract specifications and their definitions contract term Contract Size Standard Quoting Convention Minimum Tick Size Last Trading Day Trading Hours Block trade/ Negotiated large deal size Position Limit Final Settlement Price Contract Month Final settlement date Settlement Method and Currency Definition Notional amount of each contract. For example, a USD/SGD FX futures contract offered on the SGX is for USD 25,000. In the FX markets, many currencies are quoted in USD. Many Exchanges quote exchange rates between currencies using the American terms i.e. in terms of USD per unit of foreign currency. The European convention is to quote how many units of foreign currency per USD. The minimum unit that the price of a futures contract can move. Often stated as a decimal, for example, for SGX s AUD/USD FX futures, the tick size is USD per AUD. This translates to a tick value of USD 2.50 per futures contract of AUD 25,000. Generally, trading stops two business days before the expiration date. Actual delivery takes place on the second business day after the expiration date. Trading hours of the respective FX futures contract. Certain exchanges may also state the trading hours of the Last Trading Day if it is different from normal trading days. Minimum threshold of a futures deal that is privately negotiated and subsequently reported to the exchange and/or clearing corporation for clearing and settlement. Meeting such deals, certain conditions prescribed by the Exchange must be met. Daily limit on the highest number of futures contracts a single party is allowed to have on one underlying security. Position limits are created for the purpose of maintaining stable and fair markets. Contracts held by one individual party with different brokers may be combined in order to accurately gauge the level of control held by one party 17. Basis for deriving at the final settlement price of the futures contract. This varies depending on the FX futures Contract and the exchange it is traded on. Delivery month in which the futures contract expires. Expiration date of the futures contract, which may vary depending on the Exchange. For example, some of the FX futures contracts traded on SGX settle on two business days prior to the third Wednesday of the contract expiry month. Varies depending on the FX futures contract and exchange. For example, FX futures on SGX are cash settled and actual delivery of the currencies does not occur. 17 Investopedia Definition of Position Limit

18 15 / Foreign Exchange Futures Table A-2: SGX FX futures contract specificationscurrency pair/contract sgx UsD/sgD sgx aud/usd sgx aud/jpy Contract size USD 25,000 AUD 25,000 AUD 25,000 Contract Months 12 monthly 12 monthly 12 monthly Minimum Tick Size S$ US$ JPY 0.01 Tick Value S$ 2.50 US$ 2.50 JPY 250 Trading Hours (Singapore time) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) Last Trading Day Two business days prior to the third Wednesday of the contract expiry month Trading Hours on Last Trading Day T session: 7.40 am 2.00 pm T session: 7.40 am 2.00 pm T session: 7.40 am 2.00 pm Daily Price Limits Nil Nil Nil Position Limits 10,000 contracts 10,000 contracts 10,000 contracts Settlement Method and Currency Cash settled (SGD) Cash settled (USD) Cash settled (JPY) Final Settlement Price Equal to midpoint between the bid and ask prices of the WM/Reuters Intraday Spot Rates for USD/SGD published at 14:00H SGT, rounded to four decimal places Equal to midpoint between the bid and ask prices of the WM/Reuters Intraday Spot Rates for AUD/USD published at 14:00H SGT, rounded to four decimal places Cross calculation of: midpoint between the bid and ask prices of the WM/ Reuters Intraday Spot Rates for AUD/USD published at14:00h SGT; and midpoint between the bid and ask prices of the WM/ Reuters Intraday Spot Rates for USD/JPY published at14:00h SGT; the result rounded to two decimal places Negotiated Large Trade Minimum 50 lots Minimum 50 lots Minimum 50 lots Contract Symbol US AU AJ Price Information Thomson Reuters: Thomson Reuters: Thomson Reuters: (Vendor: Ticker) SDUS:<F3> SDXU:<F3> SDXJ:<F3> Bloomberg: Bloomberg: Bloomberg: XSDA <CURNCY> CT XUAA <CURNCY> CT XAYA <CURNCY> CT Disclaimer: The WM/Reuters Intraday Spot Rates are provided by The World Markets Company plc ( WM ) in conjunction with Reuters. WM shall not be liable for any errors in or delays in providing or making available the data contained within this service or for any actions taken in reliance on the same, except to the extent that the same is directly caused by its or its employees negligence.

19 Foreign Exchange Futures / 16 currency pair/contract sgx inr/usd sgx krw/usd sgx krw/jpy Contract size INR 2,000,000 25,000,000 Korean won 25,000,000 Korean won Contract Months 12 monthly 12 monthly 12 monthly Minimum Tick Size US cents US$ JPY 0.01 Tick Value US$ 2.00 US$ 2.50 JPY 250 Trading Hours (Singapore time) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) T session: 7.40 am 7.35 pm T+1 session: 8.15 pm 2.00 am (next day) Last Trading Day Two business days prior to the last business day of the contract expiry month Two business days prior to the third Wednesday of the contract expiry month Two business days prior to the third Wednesday of the contract expiry month Trading Hours on Last Trading Day T session: 7.40 am 2.35 pm T session: 7.40 am 2.00 pm T session: 7.40 am 2.00 pm Daily Price Limits Nil Nil Nil Position Limits 10,000 contracts 10,000 contracts 10,000 contracts Settlement Method and Currency Cash settled (USD) Cash settled (USD) Cash settled (JPY) Final Settlement Price Equal to the reciprocal of the RBI USDINR Reference Rate at SGT, multiplied by 10,000 to convert such spot exchange rate to United States Cents per 100 Indian Rupees, rounded to two decimal places Equal to the reciprocal of the SMBS USD/KRW spot exchange rate published at 1400h SGT, multiplied by 1,000 to convert such basic exchange rate to United States Dollar per 1,000 Republic of Korea Won, rounded to four decimal places Cross calculation of: reciprocal of the SMBS USD/ KRW spot exchange rate published at 1400h SGT, multiplied by 1,000 to convert such basic exchange rate to United States Dollar per 1,000 Republic of Korea Won, and WM/Reuters Intraday Spot Rates for USD/JPY; the result rounded to two decimal places Negotiated Large Trade Minimum 50 lots Minimum 50 lots Minimum 50 lots Contract Symbol IU KU KJ Price Information Thomson Reuters: Thomson Reuters: Thomson Reuters: (Vendor: Ticker) SDIU:<F3> SDKU:<F3> SDKJ:<F3> Bloomberg: Bloomberg: Bloomberg: XIDA <CURNCY> CT XUWA <CURNCY> CT XWYA <CURNCY> CT Source: SGX

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