LCH, in addition to the US-based IntercontinentalExchange, secured regulatory non-objection for OTC FX last week. Other exchanges have expressed either statements of intent or are regional services – such as the Singapore Exchange that began clearing NDFs in October. “ForexClear is the first live global service and we’re clearing trades now,” says Gavin Wells, managing director of FX clearing at LCH.Clearnet.
LCH cleared its first trades on Friday in USDRUB, USDCNY, USDKRW, USDCLP and USDINR, with further currencies to be added at a later date. The service is supported by 14 leading FX banks, with a number of additional participants scheduled to begin clearing in coming weeks, according to LCH.
“Given the number of members we’ve signed and the amount of enquiries we’ve had from non-members on how to connect, we are positive that the take up will be significant,” says Wells.
Though the interbank market has until the end of the year before OTC FX activities will have to comply with the Dodd-Frank regulation in the US, LCH attests that banks are keen to clear NDFs early to familiarize themselves with the process.
“We encourage the banks to connect to the CCPs now to acclimatize to what is, for foreign exchange, a new piece of infrastructure,” says Wells.
While the past few months have seen competition among clearing houses and exchanges to prepare for OTC FX clearing, when the regulatory mandate eventually comes to the market, the competition will be among the clearing members themselves to offer fully compatible services for their clients.
“At this stage it is important for the banks to fully define what they will offer their customers,” adds Wells.
As well as preparing for the new landscape in foreign exchange, banks also have the incentive to connect to clearing services ahead of schedule because of potential savings on regulatory capital.
The EU Banking Directive 2006/48 states that financial transactions cleared through a CCP require 0% regulatory capital, as opposed to as much as 8% for uncleared transactions. This figure might yet change under European Market Infrastructure Regulation.
In the US, specifying capital savings is harder to discern as it depends on which of the three bank regulators an institution is governed by.