As foreign exchange finds itself under the same legislative spotlight as other asset classes, it looks as if only options and non-deliverable forwards (NDFs) will be have to be cleared through a central counterparty (CCP) in the US. But such legislation might prove very difficult to enforce.
Most banks are keeping quiet on the matter, given the sensitivities around the taxpayer support they have received. However, mandated clearing of a global product through for-profit entities such as CME Clearing, which are also not multinational, is starting to look increasingly unrealistic. Of course, the legislators and regulators cannot be ignored, but will the European Central Bank, the Bank of Japan or the Bank of England really allow their currencies to be cleared exclusively through a US-based clearing house?
The CME is growing its FX business at a faster pace than its rival over-the-counter platforms, so it should be questioned whether mandated clearing is really necessary. Derek Sammann, managing director financial products and services at CME, says the mitigation of counterparty risk achieved by the use of a CCP is a big reason why. The fact that the CME has seen a good increase in its exchange-for-physical (EFP) business – as has ICE – supports this claim.
But for the moment there are no plans to allow interoperability with other clearing houses. So a trade done in Europe, for instance, through one clearing house is not fungible with an offsetting trade done and cleared through Chicago. Sammann denies this is monopolistic and points out rightly that users will have a choice of which CCP to use. But it will curtail the choice end users have about where they trade.
