New OTC swaps clearing rules to make cleared FX deals more efficient

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The market for over-the-counter (OTC) FX futures and options transactions funnelled through a clearing house will become more efficient with the roll out of new rules designed to better insure OTC swaps transactions, says International Swaps and Derivatives Association (ISDA) CEO Robert Pickel.

Currency trades processed through a central counterparty (CCP) clearing house, despite only making up a small percentage of FX trading, are not exempt from new, incoming regulations in the US governing the OTC swaps market, says Pickel. “To the extent that, in the US, you are required to clear FX trading, this document would cover that,” says Pickel. “If you’re doing a cleared FX trade in the US, you would probably do it through a clearing agreement that would include these new rules, which also cover interest-rate swaps because that is the area in the OTC space where a significant amount of clearing is being done.” The new rules – designed by ISDA and the Futures Industry Association (FIA) – are contained in a standardized, template document that brokers can use in dealings with trader counterparties to ensure that positions in OTC swaps transactions are tracked accurately. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the clearing of OTC swaps so they can be traded on swap execution facilities. The new ISDA-FIA rules are part of the derivatives industry’s efforts to prepare for new, incoming markets regulations in the EU and the US in the form of Dodd-Frank and other statutes, such as European Market Infrastructure Regulation. The rules – developed in cooperation with 30 institutions active in derivatives markets – create a methodology for the close-out of a trading position for cleared OTC swaps. They also set triggers for the liquidation of a trading position and create provisions for valuing terminated trades, say ISDA and FIA. Pickel says the new rules enter into force when “the decision to clear the trade has been made”. “It’s only a question then of what legal terms will apply to that trade once it’s in a clearing house, and that’s what the focus of the addendum is,” he adds. “It does provide some very important protections, particularly if there should be a default by the futures commission merchant, the clearing house or the customer, so parties can have certainty they will be able to unwind and value their positions in a quick and efficient manner so they can close out their positions.” The creation of standardized documentation governing OTC swaps transactions is important if risk in the derivatives industry is going to successfully move towards a more regulated environment in which the majority of trades are managed through clearing houses, adds FIA president and CEO Walt Lukken. However, ISDA and the FIA say brokers using the template document for clearing OTC swaps transactions might want to carry out “some customization” of the new rules beyond their standardized form as new markets regulations in the US are finalized.