ForexClear Eyes Expanding Opportunity

Terry Flanagan

Gavin Wells, global head of ForexClear, expects nearly all non-deliverable forwards to be cleared by the end of next year after margin requirements for non-centrally cleared derivatives are introduced.

Forwards in non-deliverable currencies, where governments have capital controls, are not currently required to be cleared by regulators. However, from September 2016, new regulations will require margin payments for over-the-counter derivatives positions.

Wells told Markets Media: “”We currently clear between $5bn and $7bn a day in NDFs. By the end of next year we expect that around 90% of the $120bn NDF market will be cleared.”

A blog by Clarus Financial Technology at the end of last year said ForexClear is the principal venue for clearing NDFs.

ForexClear, a unit of the London Stock Exchange’s clearing business LCH.Clearnet, was launched in March 2012. Last September it began clearing NDFs in Peruvian Nuevo Sol taking the total number of currencies covered to 12, enabling more than 95% of the NDF market to be cleared.

“The regulators have given strong incentives for OTC derivatives to move into clearing,” added Wells. “We expect to see there will be a big increase in cleared volumes from next September, once the introduction of new margin requirements for non-centrally cleared derivatives payments begin, and a general migration towards more FX flows being cleared.”

Although clearing of NDFs is not currently mandated, some firms have voluntarily started clearing in order to benefit from capital and operational efficiencies. In May, Societe Generale Prime Services said its futures commission merchant conducted its first customer NDF cleared trade which was through ForexClear.

Nicholas Gionfriddo, Americas head of OTC clearing sales for Societe Generale Prime Services, said in a statement: “This illustrates our commitment to OTC Clearing as well as our ability to leverage expertise and infrastructure to provide clients with solutions during a time of rapid industry change.”

The bank’s customers benefit from margin efficiencies by being able to include NDFs in Societe Generale’s proprietary cross-asset margining platform. The bank said that by using a a standardized valuation model and daily reporting, clients will know their centrally cleared NDFs are being accurately valued in a timely fashion.

In May, ForexClear also extended its client clearing offering in Europe so that end-users, such as asset managers, can connect to four clearing brokers including HSBC, Société Générale and Standard Chartered Bank. End users can choose a broker and their preferred level of asset protection. ForexClear’s US client clearing model was launched in 2013.

Andrew Sterry, co-head of Standard Chartered ECLiPSe, said in a statement: “We are seeing increasing number of clients interested in clearing these products due to their evolving business models as a result of the ongoing capital and margin regulatory developments.”

Non-deliverable forwards, unlike the remaining 97% of the foreign exchange market, are not physically settled through an exchange of principal. Instead one counterparty pays the profit to the other, based on the difference between the exchange rate at the time of the trade and at maturity. ForexClear will enter the much larger physically settled market when it starts clearing FX options.

“We have a project to begin clearing FX options next year and then will be able to judge the appetite for swaps and forwards. Both buy-side and sellside firms are telling have told us they want to clear options with some indicating that, if it was available and if they could do it now, they would backload their books.” added Wells.

The 2013 BIS Triennial Central Bank Survey of turnover in foreign exchange markets found that trading of FX options had the largest increase, by more than 60%, in the previous three years. The survey said trading volumes of outright forwards grew 43% to $680bn in 2013. The BIS said: “Taken together, the rise in turnover of FX forwards and options accounted for almost a quarter of global FX turnover growth between 2010 and 2013.”

Spot market trading grew by 38% to $2 trillion per day in April 2013, contributing about 40% to the rise in global FX market activity between 2010 and 2013. FX swaps remained the most actively traded FX instrument in 2013 with a daily volume of $2.2 trillion, 42% of all FX-related transactions, according to the survey.

“Given the size of the global FX market, it is feasible that, in the next two to three years, ForexClear could eventually be clearing the same daily volumes as SwapClear,” added Wells. “This will occur but will take two to three years to get there as the capital rules are phased in affecting different market users at different times”

In a presentation to investors and analysts on May 20 Wells said clearing NDFs and options represented a revenue opportunity of between €25m ($27.4m) and €40m. Total clearing revenue for the calendar year of 2014 for the London Stock Exchange was £109.6m ($166m) according to the group’s last annual report.

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