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and their clients, to ensure the new NDF service fits with their needs. Wells says that ForexClear is built on a unique approach to default management which leverages
LCH.Clearnet’s extensive OTC clearing experience. Te service uses a value-at-risk approach to calculating margin, with filtered historical simulation, known internally as FxPAR.
As with any risk mitigating service, some users will focus on the quality of the risk management others will always focus on cost. Wells says that LCH. Clearnet has focused on its strengths, which are its risk methodology, default management process and the breath of collateral it accepts. Te regulatory clearing mandate will require market participants to post more collateral and
LCH.Clearnet is focussing on offering an efficient, centralised collateral management service. He also adds that robust risk management standards, meeting member and client requirements and cost expectations are all important. “If these factors were even, amongst all CCPs, then the final determinant would be the cost,” he adds.
At this stage of building the infrastructure for FX clearing, reducing cost is challenging as the services are all in their infancy. As they mature, and other related FX products are cleared, this will increasingly become a focus.
Enhancing capital efficiency
While most coming to NDF clearing will already be clearing other asset classes, FX clearing will introduce a daily net calculation of variation margin that was not there before; whilst many participants were collateralising FX daily under the Credit Support Annexe of the ISDA Master Agreement this was done bilaterally and was less efficient.
Says Wells: “With a clearing house, payments are netted multilaterally rather than managing multiple payments, so there is only one payment to the clearing house. With regards to initial margin, this is something that would not have been needed pre- clearing and the impending regulatory mandate, but in the future, will have to be posted for bilateral
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