Sterling based markets have seen increased volatility since the UK’s EU Referendum has come in to focus in recent weeks. Year to date, the Pound has been volatile in FX markets and the currency in trade weighted terms is -3.78%, whilst realized volatility in ICE Short Sterling futures has doubled since the start of June. And the contract volume and open interest reflect that, up 40% and 36% y/y on a month-to-date basis.
The price movements in ICE Short Sterling futures this week can be seen in Figure 1.1, which shows 15-minute traded prices for ICE Short Sterling and ICE FTSE 100 futures. Both Sterling implied interest rates and FTSE 100 futures have closed higher in recent trading sessions.
Figure 1.1: High Frequency ICE Sterling and FTSE 100 Futures Prices
Figure 1.2 demonstrates the increased trading activity and rising open interest seen in ICE Short Sterling YTD in 2016 as market participants hedge their price risk against future volatility.
"Sterling market volatility was not unexpected around the EU referendum. With volume up 40% month to day over last June, ICE Sterling futures and options are being used by investors looking to hedge and protect tail risk," says Chris Rhodes, Global Head of Interest Rates, ICE Futures Europe.
Figure 1.2: ICE Short Sterling Futures and Options Open Interest
Cash-settled future based on the LIBOR rate for three-month deposits
Option that delivers into the nearest three-month Short Sterling futures contract
Option that delivers into a three-month Short Sterling futures contract expiring in five years