LCH.Clearnet winning race to become FX market CCP of choice

By:
Russell J. Dinnage
Published on:

London-based LCH.Clearnet is poised to become the backstop of choice when the FX market has to meet EU and US mandates for shuffling non-deliverable forward (NDF) trades through central counterparty clearing (CCP) houses.

That is according to data from the leading companies competing in the space, as collected by EuromoneyFXNews.

Through its risk management framework, ForexClear – LCH.Clearnet’s FX clearing service – the company has cleared more than $210 billion notional since March in over-the-counter FX NDFs amounting to more than 15,000 trades, says ForexClear CEO Gavin Wells.

ForexClear is also set to add five more currencies – COP, IDR, MYR, PHP and TWD – before the end of September to its existing list of cleared NDF currencies: BRL, RUB, INR, CNY, CLP and KRW, says Wells.

 
 Gavin Wells:
"Clients haven’t
stated their intent
yet, but they do
want to ensure
they are ready to
clear both in the
US and in Europe."

Comparatively, CME Group has cleared $9 million in notional OTC FX volumes since it launched its clearing service for the products through CME ClearPort in April, says company spokesman Allan Schoenberg.

In addition to the $9 million notional in OTC FX, CME ClearPort has cleared $750 billion notional in OTC IRS and $148 billion notional in OTC CDS since the service was launched, says Schoenberg.

In April, CME ClearPort cleared its first OTC FX NDF trade in the BRL.

It now also offers clearing for 12 OTC FX NDFs: USDBRL, USDCNY, USDKRW, USDINR, USDMYR, USDPHP, USDIDR, USDTWD, USDCOP, USDRUB, USDPEN and USDCLP.

CME also offers 26 cash-settled FX forwards (CSFs), and it is planning on offering clearing for the NDF pairs and the CSFs on CME Clearing Europe in 2013, pending regulatory approvals, says Schoenberg.

The CME’s market for exchange-traded deliverable FX forwards has "significantly outstripped" the growth of trading in the market for OTC FX NDFs, says Schoenberg.

Meanwhile, the Singapore Exchange (SGX) has not provided volumes figures for its clearing of Asian OTC FX NDFs.

In October 2011, the company began offering clearing for CNY, INR, IDR, KWR, MYR, PHP and TWD, says SGX head of OTC clearing Lui Hong Kian.

"We will continue our market engagement to grow our fledgling Asian FX forwards clearing business," says Lui.

Meanwhile, IntercontinentalExchange (ICE) clearing services for OTC FX NDFs have not launched yet, says company spokeswoman Kelly Loeffler.

ICE has registered 10 initial clearing members for OTC FX NDF clearing including Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JPMorgan, Morgan Stanley and UBS, says Loeffler. The banks are testing ICE’s facilities for OTC FX clearing, and the testing is proceeding well, she adds.

"We anticipate being ready for [OTC FX NDF] clearing when mandates go into effect, including both dealer-to-dealer and client clearing, subject to regulatory approvals," says Loeffler.

LCH.Clearnet "leading the market"

ForexClear’s Wells says in an interview with EuromoneyFXNews that LCH.Clearnet is "leading the market" in the cleared OTC FX NDF space.

Wells says ForexClear has 14 clearing members for FX OTC contracts and is expecting to add up to four more before the end of this year.

Most clients using the ForexClear FX OTC clearing service are testing the company’s facility ahead of incoming US regulatory demands under the Dodd-Frank Act that trades in the products are to be cleared by a CCP.

"Clients are actively testing – whether they complete this and then wait for regulatory mandates before they benefit from centralized clearing is uncertain," says Wells. "The clients haven’t stated their intent yet, but they do want to ensure they are ready to clear both in the US and in Europe."

In Europe, ForexClear clients are testing LCH.Clearnet’s systems for OTC FX clearing for contracts traded within the region. However, many of them see the clearing mandate for NDFs under the EU’s European Markets Infrastructure Regulation plan as being further down the road, as drafting of the statute’s final language remains unfinished.

Meanwhile, clearing for OTC FX options remains a long-term challenge, says Wells.

CME clears exchange-traded FX options, which trade in a market worth around $5 billion.

"No one clears OTC FX options and no one is likely to until 2014," says Wells.

"FX products are defined under the regulations, and we anticipate that the process to allow clearing of physically settled products will not be ready until 2014."