The poster boy for ForexClear, Wells was in charge of building and leading LCH.Clearnet’s clearing services for foreign-exchange products, in anticipation of mandated clearing from regulators.
Choudhury was hired in 2011 as a director and head of product at ForexClear, according to his LinkedIn profile.
One industry participant says: “I met Gavin about two weeks ago and he was all bullish about FX options clearing. Then I discover he’s no longer there. Was there a change of strategy or execution?”
FX derivatives veteran Evgeni Mitkov, who is building an FX clearing service, Clearable – a budding competitor to ForexClear – described the departure as “shocking”.
“Without him, LCH is lost,” he says. “He has been the backbone of the operation. No one else at LCH knows FX the way Gavin does. He singlehandedly did the whole thing.”
Another market participant with knowledge of the situation described an atmosphere of friction, adding: “I know there was an issue between them and LSE [London Stock Exchange, owner of LCH.Clearnet]. LSE wanted returns faster and they were delaying.”
LSE Group, LCH.Clearnet and Choudhury declined to comment. Wells did not respond to attempts to contact him.
Regulators have pushed for derivatives to be channelled through clearing houses in the wake of the financial crisis, in a bid to reduce systemic risk in financial markets and prevent another crisis.
As a result, clearing houses entered a race to offer FX clearing services.
However, regulators have backpedalled on FX since they first announced mandated clearing of derivatives, says Brad Bailey, research director at consultancy firm Celent.
“This has been very muddled,” he adds. “Many people prepared for clearing to occur, [but] it has been perpetually pushed back.”
Intercontinental Exchange threw in the towel in 2013, despite earlier announcing plans to launch a clearing service. Most recently, rival clearing house Chicago Mercantile Exchange pulled out of offering clearing for FX options, citing low demand for over-the-counter (OTC) FX options clearing.
One market participant at a technology vendor says: “The bigger issue wasn’t whether ForexClear was the place to clear, but whether it made sense to clear full stop.”
Nevertheless, LCH.Clearnet partnered with settlement provider CLS last year to offer settlement of cleared FX products, such as OTC and exchange-traded FX options, futures and cross-currency swaps.
CLS was set up in 2002 by leading banks to mitigate settlement risk in currency trades, ie where a counterparty does not deliver its agreed currency and leaves its counterparty out of pocket. The service is due to be launched this year.
In September, ForexClear announced it had cleared more than $3 trillion in non-deliverable forwards, and had plans to enter the larger market of clearing FX options in 2016.
Wells said at the time that ForexClear had its best month ever in August in terms of clearing volume, despite no regulatory mandate for clearing FX.
Future of FX clearing
Despite the slow start to clearing FX derivatives, market participants insist it is the future for FX, in large part due to prohibitive uncleared margin rules for derivatives under banking regulations such as Basel III.
Regardless of any clearing mandate for FX, it has become expensive to trade uncleared derivatives. The missive from regulators is clear: trade as much as possible on exchange or exchange-like platforms and use clearing houses.
Clearable’s Mitkov says: “A lot of banks that haven’t even thought about clearing are now saying ‘take the forwards book off me’ even though [they are] exempt from clearing because that’s where they have the worst netting.
“Basel III is all about counterparty risk. They sell one forward to one corporate, buy from a different one [and] even though they have a somewhat balanced book, [they must put] 10% capital against each one of those risks in case the corporate would go bankrupt.”
The FX derivatives market has also come back to life, as rising volatility has triggered demand for protection against fast-moving currencies, amplifying the need for clearing services.
The industry is keen to see what will happen to ForexClear. Some have speculated whether it will be merged with LCH.Clearnet’s SwapClear, which clears interest-rate swaps, and managed as a single organization.
LCH.Clearnet’s press spokesperson declined to comment.
Wells’ future also remains unclear. A former captain in the British Army, he worked at Citi in FX trading from 1993 to 2008, according to his LinkedIn profile, and has also worked as a film extra.