By Shanny Basar

NDF Open Interest Passes $500bn

New margin rules led to a shift to central clearing from a bilateral only market.

Open interest of foreign exchange non-deliverable forwards has reached more than $500bn (€470bn) for the first time as the introduction of new margin rules led to a shift to central clearing from a bilateral only market.

Chris Barnes at analytics and research firm Clarus Financial Technology said in a blog on NDFs: “Open interest has now surpassed $500bn and looks set to continue to grow.”

In September last year the first phase of the new regime for margin requirements for non-cleared derivatives came into effect for the largest market participants.

“We saw a big shift towards clearing from a previously bilateral only market,” added Clarus. “Clearing rates went up from around 3% to 35% for some of the dealer-to-dealer NDF markets.”

Last September, LCH, the London Stock Exchange Group’s clearing house, said that 10 entities had started using its ForexClear service in the previous six months in order to clear NDFs.

Daniel Maguire, global head of rates and FX derivatives, LCH said at the time: “The uncleared margin rules that are coming into force across the world have been a catalyst for driving eligible and appropriate derivatives trades towards central clearing.

LSE Group said this month in its preliminary 2016 results that ForexClear cleared $3.2 trillion in notional last year, up from $1.1 trillion in 2015.

At the beginning of this month, new rules requiring the exchange of variation margin on uncleared derivatives came into effect.

However, market participants said they needed more time to put documentation in place or otherwise they would have to stop trading. As a  result the US  Commodities Futures Trading Commission said it would not take any action against dealers that fail to comply with rules for six months and European regulators followed suit. Clarus added there was not yet any evidence of a fall in trading volumes following the new rules this month.

Clarus said: “Whilst there (probably) remains re-papering work to be done, our understanding is that the combination of No Action Letters (US) and an acknowledgement that counterparties will not be held to the letter of the law (Europe) has kept markets trading.”

The analytics firm estimated that the current clearing rate in the NDF market is 15%.

Euroclear said in a blog that the launch of the the new regime for margin requirements for non-cleared derivatives showed that the onboarding process takes more time and is more cumbersome than many anticipated. Peter Battley, associate director, post trade change/regulation at Fidelity International said on the Euroclear blog that the fund manager spent 18 months preparing for the new rules.

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