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To: pallmer who wrote (9738)	1/22/2004 2:12:24 PM
From: pallmer	Read Replies (1) \| Respond to of 29602

22 Jan 2004 14:06 ET =DJ With Dollar's Fall, Forex Futures Attract More Attention By Christine Marie Nielsen Of DOW JONES NEWSWIRES CHICAGO (Dow Jones)--While many investors look to the futures markets in Chicago for a gauge of where interest rates or stock indexes are heading, the city's foreign exchange pits are usually less prescient. Currency futures represent only a tiny percentage of the $1.2 trillion traded every day in the world's foreign exchange markets, and take a far back seat to currency swaps and forwards for hedging large currency positions. As such, they are rarely used on an intraday basis to forecast future movements in currencies. But they have their own role in Chicago - and that is increasing. In fact, just this week, the Chicago Mercantile Exchange Inc. announced it set a new trading volume record for foreign exchange futures trading on its electronic trading platform. Volume in the contracts hit 162,721 Tuesday. The notional, or face, value of the contracts was $20.6 billion. Thanks to the recent focus on the sinking dollar, currency futures are seeing an influx of dealers who normally trade the smaller electronic versions of the major stock index futures but who find the one-directional nature of the stock market right now provides few intraday trading opportunities. Business in the foreign exchange futures market "should grow because (the foreign exchange market) is now on people's radar screens," said Yra Harris, an independent currency futures trader. The addition of electronic trading at the same time that the pits are open - called side-by-side trading - in April 2001 led to a landmark surge in trading volume, said Richard Sears, managing director for foreign exchange products at the CME. That created an arbitraging opportunity between the electronic and open outcry markets that also boosted volume. Forex Futures A Little Different Experts say Chicago's currency futures are mainly used for speculating since there is insufficient activity to accommodate the needs of the global currency markets for needs such as hedging by corporations to insulate themselves against future movements in currencies. The potential for exaggerated price movements in markets dominated by speculators also makes the currency futures pits less reliable, observers say. But some institutional firms occasionally use currency futures for hedging smaller interests, said Lisa Finstrom, senior currency analyst for Citigroup Global Markets. She said while market investors may not look to futures price movement to extrapolate sentiment in the much bigger spot market, they do keep an eye on open interest records. The Commitments of Traders data, released weekly by the Commodity Futures Trading Commission, outline changes in positions by a variety of users and are watched to see whether investors have become more bullish or bearish. The data potentially tip off coming trends or sharp reversals of direction in spot foreign exchange movements. "Because it is a regulated market, you have transparency which is helpful in giving a read on the market," said Finstrom. She said it's simply not possible to get that kind of information on the over-the-counter market. Forward contracts differ from futures in that they usually trade over the counter, don't require cash payments until maturity, and are made directly between two parties with no clearinghouse between them. Swaps are between two parties in which one side promises to make payments in one currency and the other promises to make payments in another currency. But even though foreign exchange futures aren't used for the majority of hedging purposes, they do have their own niche. Foreign exchange futures were the Chicago Mercantile Exchange's first financial futures contracts. They began in the early 1970s after some CME commodity traders complained they didn't have access to the interbank foreign exchange markets that the big banks and investment houses enjoyed. With the breakdown of the Bretton Woods Agreement in the 1970s, that resulted in currencies being able to float in value against one another, there was more of a need to protect against adverse movements. The main user types of foreign exchange futures are small commodity trading advisers, hedge funds looking to cover exposure to foreign currency risk, or individual international customers seeking to protect themselves against movements in the dollar. Rich DeFalco, managing director of West Cooper Asset Management Group LLC in Philadelphia, said one high net worth Canadian client of his firm uses futures to protect his returns when he repatriates U.S. dollar proceeds back into Canadian dollars. West Cooper Asset Management Group is a privately-held investment consulting firm which specializes in alternative investment strategies. It also sometimes uses the forward market to hedge currency risk, said DeFalco. He said more time-sensitive trades are done in the OTC market. The CME used to offer currency forward contracts which traded in conjunction with CME rolling spot currencies. Neither of those contracts really garnered much interest among the futures trading population, and they were quickly delisted by the CME. Trading Like The E-Minis Right now, retail trading in the foreign exchange futures market is occurring mostly as it would in the market for E-mini contract, the mini S&P 500 futures contracts that are offered by the CME, in trades of one to five contracts, said Krystian Kling, chief dealer for the foreign exchange division at Peregrine Financial Group. He said contrary to how his customers were positioning late last year, he now has more customers long the euro versus the U.S. dollar. -By Christine Marie Nielsen, Dow Jones Newswires, 312-750-4117; christine-marie.nielsen@dowjones.com (END) Dow Jones Newswires January 22, 2004 14:06 ET (19:06 GMT)