Dealers boost online emerging market forex options services

Bank of America is set to introduce prices for emerging market currency options on its electronic platform by early next year, said Alain Delelis, head of foreign exchange for Europe at the US bank. Citigroup also plans to add request-for-quote (RFQ) and automated dealing capabilities for the more liquid emerging market currency options on its CitiFX Options Online platform around the same time.

The currencies may include the Polish zloty, Hungarian forint, Mexican peso, Brazilian real, Czech koruna and South African rand, said Steve Reiter, global head of foreign exchange options at Citigroup in London, although the list has yet to be finalised.

Others have already taken this step in response to client demand, which has resulted in greater activity in emerging market derivatives this year. Interest has come from a range of market participants, including international investors looking to hedge exposures from local currency investments, and hedge funds and prop desks seeking to gain exposure to the currencies via options.

UBS began offering clients e-trading in emerging market FX options on an RFQ basis over its FX Options Trader platform in February this year. Supported products include plain vanilla options, as well as structured products such as dual currency deposits and simple barrier options on a wide range of emerging market currencies.

John Bartter, global products manager of foreign exchange derivatives at UBS in London, said the move was in response to client demand. "There's no question the amount of tickets we are doing online is growing," he said. "We wanted to be [in this market] because the appetite started to increase as people started to get more comfortable about trading emerging market options."

The Royal Bank of Scotland has extended coverage of forex options trading to include a number of East European and Latin American countries. "We are providing trading online in this area and continue to build the level of sophistication clients now require," said an official at the bank in London. "This has been the case for a number of months and was driven by growing client demand."

Among the emerging markets of Latin America and Asia, the Mexican peso currency derivatives market has gained the most from foreign investment. According to the most recent figures released by the Bank for International Settlement (BIS), peso derivatives volumes had almost doubled in the first half of the year compared with last year. At the end of June, it said the notional amount of all outstanding Mexican peso derivatives reported by the dealers stood at $535 billion.

Most over-the-counter derivatives trading was geared towards foreign exchange risk, with FX derivatives accounting for 86% of trading compared with 12% globally. Indicating the increasing sophistication of the FX derivatives market, the share of options in the notional amount of all instruments on the peso rose from 12% in June 2002 to more than 50% in June 2005.

But not all emerging market FX derivatives activity is taking place in the OTC market. Compared with the peso, the OTC market for FX contracts denominated in Brazilian real appears to be fairly underdeveloped, said the BIS. Instead, much of the FX derivatives business takes place over the exchange, Bolsa de Mercadorias & Futuros.