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options’ data to understand the implications and the pay-out amounts around different currencies in the event of a number of default scenarios. Tis will provide the regulators, and the CCPs, with a much clearer view of the risk problem to be solved. Initial results are expected during Q3/Q4. Hopefully at that point, it will become clearer what solutions may exist.
Kemp says: “Once the size of the problem is worked out, the industry and the CCPs, along with the regulators and the central banks can examine what the clearing models might look like and determine whether they feel comfortable with the solution.”
Within the derivatives and equities markets, which are further ahead in central clearing, some commentators have already suggested that there are too many CCPs. For FX, in the case of the less liquid NDF market, it could very easily happen again especially if regulators insist upon having regional CCPs. Competitive forces may ultimately dictate how many are sustainable.
Te FX industry has approached the problem of risk reduction with the view that regulators are better placed to deal with the larger, core issue of settlement risk through promoting CLS and then monitoring the market in terms of how participants are trading via analysis of trade repository data.
Says Kemp: “Te Global FX Division operates on a truly global basis and we are keen to co-ordinate and promote international convergence in multiple jurisdictions across the globe. FX is a global asset class used by corporate and pensions funds for trade and investing and we want to ensure that we do not take what is a highly efficient global market and end up with a series of fragmented regulatory regimes to the detriment of everyone involved.”
Clearing gets going
LCH.Clearnet went live with ForexClear, initially clearing FX non-deliverable forwards (NDFs), in March and Gavin Wells, CEO of ForexClear at LCH. Clearnet, says that its global NDF clearing service is now operational with 14 members, with more preparing to join before year end.
Wells believes that ForexClear’s global reach will capture the main clearing-member participants and the bulk of the market share, and with the introduction of a client clearing service next month,
24 | july 2012 e-FOREX
Gavin Wells
“If Dodd-Frank or EMIR had not emerged, we would still be clearing FX, but perhaps 12 to 18 months
further down the road because the market would have been focused on rates and credit.”
further users will be able to benefit from the service. It currently covers six currencies: Brazil, Russia, India, China, Chile and Korea and at the same time the service is extended to clients, five new currencies will also be added. Tey will be Columbia, Indonesia, Malaysia, Philippines and Taiwan. He says: “Te reason we have chosen these eleven currencies is that they cover 95% of the NDF market.”
For clients, there will be two types of offerings and both will mature over the next six to twelve months. Te first will be for the Futures Commission Merchants (FCM) and will start with a gross omnibus account structure moving to an LSOC structure in time for the November deadline from the CFTC. In Europe, it is less clear. It looks likely there will be a segregated account structure for Europe but details are yet to be finalised by ESMA.
LCH.Clearnet will therefore start with a gross omnibus account structure and refine this as regulators require.
LCH.Clearnet designs all its services in collaboration with market participants and in the case of client clearing it has been working closely with members
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