>>>
would be comfortable with a CCP being able to guarantee full and final settlement of the principle amount, on the day. FX is very much a funding instrument and there can be knock-on liquidity implications if the cash is not delivered.
James Kemp
key risk is actually settlement risk, not counterparty mark-to-market risk. It suggests that, because of the well-developed infrastructure in the form of CLS, such products may be taken out of the mandatory requirements for clearing, similar to the approach taken in Hong Kong, Singapore and Australia.
Says Kemp: “Regulators are starting to identify, and perhaps accept, that FX forwards and swaps do not have the same type of risk and that subjecting them to mandatory clearing obligations may actually harm the market and introduce more risks.”
NDFs and FX options
NDF and FX options are likely to be subject to mandatory clearing and already a number of global offerings have launched for NDFs, but Kemp says the continuing challenge, identified by regulators, such as CPSS/IOSCO, is that FX options come with a requirement for physical settlement, in other words, the need to deliver the currency.
He adds: “Te question is how well CCPs are to able to deal with this risk, if at all, and what risk mitigation assurances would be required before the regulators
“Regulators are starting to identify, and perhaps accept, that FX forwards and swaps do not have the same type of risk and that subjecting them to
mandatory clearing obligations may actually harm the market and introduce more risks.”
“Tis could cause instability in the financial system and regulators are naturally concerned about breaks in the system, between clearing and settlement obligations. As we read it, a CCP would be required to guarantee the performance of the contract and the physical delivery of the principle. As it is a funding product, if there is a default and the cash is not delivered on the date, there could be liquidity crunch. Tis could mean the need for central banks to get involved – clearly, any such involvement should be a last resort and not a first resort.”
At the moment therefore, it is not certain how FX options could be cleared. In an effort to bring some clarity, GFMA’s Global FX Division has kicked off a project, working with interested parties, including regulators, central banks, CCPs and the Global FX Division’s 22 members, to analyse five years’ of FX
july 2012 e-FOREX | 23
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143 |
Page 144 |
Page 145 |
Page 146 |
Page 147 |
Page 148 |
Page 149 |
Page 150 |
Page 151 |
Page 152 |
Page 153 |
Page 154 |
Page 155 |
Page 156 |
Page 157 |
Page 158 |
Page 159 |
Page 160 |
Page 161 |
Page 162 |
Page 163 |
Page 164 |
Page 165 |
Page 166 |
Page 167 |
Page 168