Markit Expands In Foreign Exchange08.28.2015
Markit has made two moves in the foreign exchange space this month as the financial information services provider expects the use of electronic trading and central clearing to increase in the asset class.
On 24 August Markit said it was acquiring DealHub, which provides foreign exchange trade processing and trading services. Two weeks earlier Markit had announced the launch of its foreign exchange trade confirmation service.
Jeffrey Maron, managing director at Markit, told Markets Media that following the DealHub acquisition the firm will be able to offer pre-trade services in foreign exchange for the first time and cover the whole life cycle of an FX trade.
“There is a growing FX ecosystem but a huge amount of fragmentation which we want to address, as MarkitSERV has done in rates,” he added. “We want to act as a central point which clients can use to connect to many places.”
Paul Blank, director of eTrading solutions and partner program at Caplin Systems said in a blog on singledealerplatform.org: “As the industry continues to innovate, and in response to evolving FX regulations, there will naturally be increased demand for efficient, scalable and innovative centralised FX solutions, that provide the market connectivity to the various venues, credit-hubs, settlement systems, trade repositories, clearing houses with the associated regulatory reporting needed to enable participants to effectively manage their FX business.”
Maron emphasised that Markit’s model is to act as a hub and provide a single point of access – it is not an execution venue, a clearing house, an asset manager or a broker-dealer. Chanelling activity through one platform should also make it easier for clients to monitor whether they are achieving best execution.
“We are looking carefully and closely at transaction cost analysis in foreign exchange,” said Maron. “We need data for real-time TCA in non-spot markets and we are making a similar effort in fixed income.”
Maron added that reducing the number of platforms that firms have to use also reduces complexity and operational risk.
Markit’s new foreign exchange confirmation service reduces operational risk by replacing manual processes such as chat, email or the phone by automatically generating legally binding trade confirmations from matching option trade terms,
Claudia Jury, co-head of currencies and emerging markets at JP Morgan, said in a statement: “This type of initiative helps to increase efficiency and mitigate operational risks within OTC derivatives and creates mutual benefit for the banks and their clients.”
The industry estimates that just over half of the FX market, which turns over more than $5 trillion per day, is traded electronically and Maron expects that proportion to increase.
“There will be more electronic trading, although not necessarily on exchanges, and over time more volume will move into central clearing,” he added.
Although clearing of non-deliverable forwards is not currently mandated by regulators, some firms have started voluntarily 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 through ForexClear, a unit of the London Stock Exchange’s clearing business LCH.Clearnet.
The Commodity Futures Trading Commission, the US regulator, is expected to issue advice on clearing foreign exchange products later this year, which would boost clearing volumes when the rules come into effect.
This month ForexClear and CLS, the multi-currency cash settlement system, said they are jointly developing a service to enable physical settlement of cleared foreign exchange products in 2016.
Gavin Wells, global head of ForexClear, said in a statement: “This collaboration will provide a great opportunity for the FX marketplace to enhance its risk management and capital efficiencies, which is already driving increased demand for FX clearing. As a result, by providing access to compression and netting services in the $275bn a day FX options market this strategic initiative is playing a broader role in the industry-wide adoption of OTC clearing.”
Feature image by Rawpixel/Dollar Photo Club
The clearinghouses will be using a VaR methodology.
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Nearly all cleared activity is in non-deliverable forwards (NDFs).