Today, I looked at packages of FX NDF trades on the SDR, expecting to be able to find some basic packages, or even just logical groupings of trades such as:
- FX NDF Swaps. These would have a near & far leg, and the price differs by some forward points.
- Par Forwards. These are a structure of FX forwards that share the same contract price despite the different delivery dates. Effectively, these are blended rates to cater for a clients need for simplicity. However I vaguely recall that regulators do not like these structures as the individual legs are off market.
- Auto-Hedges. If indeed FX NDF trades automated or high frequency, perhaps we’d see trades with the same value date with either a fee or price difference.
However, what we find however is not so obvious.
Background
Headline Statistics
I grabbed data for the month of August 2017, and took the 4 most active USD ccy pairs on the SDR (BRL, KRW, INR, and TWD).
After processing all of the cancel corrects, and only looking at NEW trades, we see over 100,000 trades for August, so roughly 4,100 per day.
I defined a “Package” loosely for this exercise; a package FX NDF is any group of trades having the same time-stamp (down to the second) and the same currency pair. Using this logic, I found 14,627 package trades, accounting for 48,330 trade legs. Hence nearly half of the trade legs we see are part of a package of some sort. In numbers, for our month of data across these 4 currency pairs:
So packages of NDF’s seem prevalent. I had anticipated most packages to be 2-legged swaps. So I then broke down these packages by the number of trades contained within them:
So here I am thinking that the 2-legged packages are FX NDF Swaps, and the packages containing 3 or more would be Par Forwards.
I should clarify that yes, there were 119 distinct packages of trades that each had 10 legs. There were even some packages of 130 and 135 trades!
So I dug into some of these structures a bit more.
2-Legged Packages
The oddest finding here is that 60% (5,900) of the 2-legged packages had the same value dates! So they are not Swaps. And slightly concerning here is that the 90% of these (5,200) had the same dates and price. Prime Brokerage? And of these, 60% (3,000) have the same dates, price, and notional. Duplicate trades? Maybe, possibly, auto-hedging, but at the same price and with no reported fee? And what are the trades with the same dates and prices, but different notionals? Maybe:
- Allocations? I didn’t think those got reported. And only 2 legs seems light for an allocation.
- Partial trade offsets/hedges? But at the same time? I wouldn’t think so.
However on the bright side, this does leave us with roughly 4,000 packages that we could call real NDF swaps. And probably 3,000 that can be called Prime Brokerage (back to back, same price and dates).
Last comment here, the vast majority of the swaps we see were fixed USD notional. I would have expected some FX NDF swaps to roll out the foreign currency amount from one date to another. For example if the near leg is 1mm USD vs 64mm INR, I would expect the INR amount to stay the same (64mm) and the USD notional change. However this accounts for precisely zero trades in our sample set.
EDIT: Some readers have told us that FX NDF swaps are often traded as a single contract, but booked as separate legs, which might cause different execution times.
3-Legged Packages
Of the 1,809 packages here, 1,450 of them had the same delivery dates. I could only describe these as allocations. Although a surprising number have the same rate and notional. Could these be duplicates instead?
The other 350 trades had just two delivery dates. So for example, 30-Aug, 30-Aug, & 29-Sep. Very odd.
So what were the massive trade packages?
The 135-leg package was a strip of forwards, with 29 different value dates. Very similar was the 130-leg package. Those do not fit the Par Forward model. Nor do they resemble a straight allocation.
A real mystery.
Summary
I have to leave it there and open this up to our readers to chime in with their thoughts. Either public comments below, or privately to us.
In summary, we attempt to assess package trades in FX NDF and find:
- Nearly 50% of all reported FX NDF trades belong to some sort of package, as we have defined it (same trade time & ccy pair)
- The most common package is 2-legged. However only 40% of these resemble an NDF swap. Another 30% seem to be Prime Brokerage.
- We find many 2-legged packages that have the same price, notional, and rate. Could these be auto-hedges? Or duplicates?
- Averaging trades. I suppose its possible that some of the larger packages with the same delivery dates are trades that are averaged into over time during the day, eg VWAP pricing. But I wouldn’t expect to see these as legs.
- Packages of 3 trades often are identical (Notional, Price, and Rate), so a mystery.
- Many of the large packages do not seem to have any structure whatsoever.
- I found no examples of Par Forwards
- I generally conclude, against my better belief, that many of these are simply allocations.
Is it possible that some firms are reporting NDF’s in batches throughout the day with the same timestamp?
If anyone has any better ideas, we are all ears.