“I think we’ll see a huge consolidation of business in traditional centres,” said Barney Reynolds, head of Shearman and Sterling’s financial institutions advisory and financial regulatory group. Reynolds was speaking at the FX Trading Strategies & Solutions 2011 conference in London.
He said incumbent financial centres and market participants would be the biggest beneficiaries of regulatory change.
London-based clearing houses will be best placed to benefit from mandated non-deliverable forwards and options clearing, Reynolds said. Under Dodd-Frank rules, all US clearing-house members must operate as futures commission merchants. London-based clearing houses, however, allow non-FCMs to clear products. Three firms – LCH.Clearnet, CME Clearing Europe and ICE Clear – are working on London-based FX clearing offerings.
In addition, client collateral for products cleared in the US must be held within that country. “This is going to split collateral pools between the US and the rest of the world,” Reynolds said. “They don’t trust anyone else’s insolvency regime.” He added that the move was unnecessary and added to clearing costs.
In Europe, according to the draft European Market Infrastructure Regulation (EMIR) directive, cash-settled non-deliverable forwards are likely to be subject to clearing. The European Securities and Markets Association will consider exemption proposals, however. In the US, Treasury Secretary Timothy Geithner has said currency forwards – which will not be treated as swaps – will be exempt from clearing requirements. They will still be subject to post-trade reporting requirements, however.
Reynolds also said mandatory clearing would be likely to favour prime brokers at tier-one banks, who are likely to have membership of all the major global clearing houses already, at the expense of smaller firms. Many leveraged funds and high-frequency trading firms are likely to clear FX instruments through their prime broker, rather than becoming full clearing-house members themselves.