LEADER
options. Without agreement on this topic, I doubt we’ll see FX options cleared in the near-term.”
Timelines
“Whilst a general framework [for which products will be eligible for clearing] has been provided by the Dodd-Frank Act in the US and EMIR and Mifid II in Europe, there has been no decision on the final rules. Te challenge for industry participants is to make preparations that are as future-compliant as possible.” says Pestone, “Te industry knows that change is coming but is in need of clarity around what, exactly, these changes will be, and when and how they will be implemented. As such, it is important to prepare for every eventuality.”
Mark Croxon
“Te intention of the legislation is to reduce systemic risk by making OTC markets and counterparty risk management more transparent.”
FX options
While regulatory guidance on the requirements for NDF clearing have been relatively straightforward there is still missing detail as regards FX options. “While NDFs are relatively simple instruments to clear in theory, FX options pose some logistical issues that still need to be sorted,” says Chip Lowry of Currenex. “One issue is around auto-execution at expiry. In the listed world, auto-exercise is handled by the clearing house and is a standard process. Because OTCFX options are not standardised instruments, the question of who decides execution remains open. Tere is an ongoing dialogue between end users of these contracts and clearinghouses about this issue.”
“Te other issue to be tackled,” he adds, “is guaranteed settlement. Industry authorities such as Te Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have proposed that clearing houses guarantee the actual FX settlement of an exercised option. As the amounts involved can be quite large, clearing houses are not yet comfortable with this concept. Tis issue is fundamental to OTCFX
28 | january 2012 e-FOREX
For the time being it is expected that the rules under both EMIR and Dodd-Frank will be in place during 2012. Institutions required to comply still lack the clarity to build the required systems. Te timeline, which began with post-2008 crisis G20 talks looks like extending some distance yet and it seems likely that compliance will not become mandatory until 2013. Market participants are in general sanguine about
Wayne Pestone “Regulatory harmonisation will be key to enabling
participants to trade quickly and efficiently with their global counterparts, whilst avoiding the negative consequences of regulatory arbitrage.”
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