ForexClear To Expand in FX Options
LCH, the London Stock Exchange Group’s clearinghouse, will introduce more currencies for foreign exchange options clearing next year and said up to 50% of the market could eventually be cleared.
Tamaryn Nuttall, chief operating officer at ForexClear, LCH told Markets Media that the CCP was the first to have launched clearing of deliverable FX options.
#ForexClear set new records for deliverable FX and client clearing in Q1. $4.3tn cleared overall. $48bn in deliverable FX derivatives, 47%+ than 18H2 for FX Options clearing. Client cleared volumes of $7.48bn – a new record @LCH_Clearing
— LCH (@LCH_Clearing) April 4, 2019
In the first quarter of this year ForexClear cleared $48bn (€42bn) in notional in deliverable FX derivatives, 47% more than the total cleared in the second half of last year.
Nuttall continued that FX options launched last June with clearing available in eight currency pairs in collaboration with CLS, the FX settlement service, and the two will look to launch more currencies next year.
“We have 10 members live clearing FX Options and expect that number to grow over the next two years,” she added. “Only a small proportion of the FX options market is currently cleared but once clearing is introduced across all currency pairs, as much as 50% of the market could be cleared.”
Jon Skinner said on the Clarus Financial Technology blog that the derivatives analytics provider had noted a marked jump in the clearing of FX options in the first quarter of this year. He said cleared notional outstanding quadrupled from the end of last year.
— Clarus (@clarusft) April 3, 2019
“The next few months will show whether this is sustained and expanded upon or whether it was mainly a quarter end risk-weighted asset optimization phenomenon,” wrote Skinner.
He continued that dealers may still be on the fence and considering how to make the exchange of margin for FX options more capital efficient without going headlong into clearing.
Nuttall said members currently clear deliverable FX options with their spot and forward hedges.
“From June, we anticipate they will be able to clear unconstrained trades which will bring further capital benefits,” she added.
Automating option expiry
ForexClear has also automated the option expiry process as the clearer wanted a low latency process, similar to over-the -counter trading, through working with genesis. The fintech was launched to provide financial institutions with a microservices framework for developing capital markets software.
“Option holders can submit their intent directly to the clearing house and a rapid response is crucial,” said Nuttall.
— genesis (@GenesisFinTech) April 10, 2019
James Harrison, chief operating officer of genesis, told Markets Media: “genesis products and solutions vastly improve the automation of business workflow, built to integrate seamlessly with client systems and external services, operating across all asset classes. Typically capital markets vendors focus on single asset classes such as FX, equities or fixed income, but rarely tackle all.”
Simon McDowell, CCO at genesis, told Markets Media that the fintech won a competitive tender from ForexClear to automate the FX option expiry workflow as the genesis framework can deliver solutions more quickly.
“We promised to deliver in weeks and months rather than months and years,”added McDowell. “LCH began testing in six weeks and our delivery capability allowed us to win tenders from SwapClear and CDSClear.”
Clearing volumes of non-deliverable forwards at LCH in the first quarter of this year were 50% greater than in the fourth quarter of last year. NDFs are derivatives that are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement, for example, the Chinese renminbi.
Nuttall said: “We have more than 34 client members live clearing NDFs in emerging market and G10 currencies.”
She continued that the introduction of the uncleared margin rules in 2016 boosted NDF clearing volumes and LCH now clears 60% of inter-bank NDFs.
“We will launch clearing of NDF options in four additional emerging market currency pairs in the fourth quarter of this year or in the first quarter of 2020, subject to regulatory approval,” Nuttall added.
ForexClear is focussed on growing client clearing and onboarding regional banks as direct members as they become covered by the next phases of the uncleared margin rules.
“We expect volumes to grow through to 2020 as more banks and asset managers pass the regulatory thresholds,” said Nuttall.
Swap and CDS clearing
Volumes of cleared interest rate swaps at LCH increased in the first quarter of this year.
#SwapClear cleared $323tn in notional in Q1 2019, with $205.9tn compressed – an increase of 11% and 16% respectively. It was record quarter for end-user client clearing, with clients clearing $72.2tn in notional. @LCH_Clearing
— LCH (@LCH_Clearing) April 4, 2019
In addition credit default swap clearing had a record quarter in the first three months of this year with €351bn in notional cleared across European and US product. This month Deutsche Bank became the first German bank to offer client clearing through CDSClear.
.@DeutscheBank is the first German bank to offer client clearing through LCH’s #CDSClear service. MEAG and @unioninvestment are the first clients to connect to CDSClear via Deutsche Bank. https://t.co/eXwtHbIYt1 pic.twitter.com/WLCBMpma5q
— LCH (@LCH_Clearing) April 8, 2019
Frank Soussan, global head of CDSClear, said in a statement: “The German market is a major hub for credit derivatives, and we are pleased to welcome additional clients from Germany as our customer base continues to expand.”
Christoph Hock, head of multi-asset trading at Union Investment, said in a statement: “Transparency is an important element of risk management, and accessing LCH CDSClear allows us to trade and clear our credit derivatives in a standardized manner. Within the European CCP landscape LCH has a wide range of credit derivatives available.”
CPMI-IOSCO issued a discussion paper on CCP default management auctions.
The final phase of the uncleared margin rules has been delayed until 2021 .
Buy-side firms are signing on to ISA Direct.
CCPs are moving from traditional in-house delivery methods.
Euro cleared inflation swaps were compressed through triReduce.