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Foreign Exchange

New CCR rules will boost appeal of clearing FX

Basel’s latest effort to improve market resilience is expected to accelerate the development of clearing solutions – but it won’t leave everyone better off.

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Photo: iStock

The new standardized approach to counterparty credit risk (SA-CCR) comes into effect for European banks in June.

It is designed to improve the risk sensitivity of CCR by differentiating between margined and unmargined, as well as bilateral and cleared, trades.

Under Basel Committee on Banking Supervision standards, a trade through a central counterparty clearing house (CCP) attracts a minimum lower margin period of risk of five days for client cleared trades and 10 days for house trades, compared with up to 20 days under bilateral trading.

Potential capital savings derive from CCPs being subject to strict risk management and default management requirements, and having rulebooks that are intended to protect clearing members and financial markets, especially during periods of volatility.

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Kah Yang Chong, LCH

“The ability for clearing members to opt into daily trade settlement, as opposed to collateralization of trades, provides further potential for capital relief,” says Kah Yang Chong, EMEA lead for FX product management at LCH, a London-based clearing house.

Given the netting benefit of clearing, cleared trades should be materially cheaper than uncleared trades from a capital perspective – assuming the related cost of posting initial margin is managed appropriately.

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