LEADER
trades, whether cleared or not. On current CRD IV estimates, capital efficiency is significantly enhanced when products are cleared.”
As NDFs are financially settled, without exchanging notional amounts, the risk is smaller that in physically settling FX and
LCH.Clearnet can use its proprietary Protective Payments Service to settle NDFs, without the need to connect to CLS.
In terms of FX options the clearing house is looking at extending the NDF service to cover all FX products, and will connect to CLS for the settlement of options once an appropriately robust model is agreed with Regulators and Central banks, a topic on which many in the industry are working hard.
Wells believes that the clearing model that will evolve for FX will be further shaped by market demands from here on. He says: “If Dodd-Frank, or EMIRhad not emerged, we would still be clearing FX, but perhaps 12 to18 months further down the road because the market would have been focused on rates and credit. Because of the regulatory mandates, there is a quicker move into FX clearing but many end-users, especially on the buy-side wish to voluntarily clear more of their FX than just NDFs, so that they get best use of their collateral. Tis means that many in the market want to clear FX. Whether it is mandated or not, all instruments in foreign exchange, except spot, will be cleared in due course”
Mitigating counterparty credit risk
At the end of April, CME Group also went live with clearing for NDFs in 12 currencies, to include the Peruvian Sol. NDF clearing is an expansion of its multi-asset class OTC offering enabling customers to leverage the same risk, operational and legal infrastructure across interest rate swaps, credit default swaps and FX.
Derek Sammann, Senior Managing Director, interest rates and foreign currency products for CME Group, says that the exchange is positioned to clear dealer-to- dealer as well as dealer-to-client business but trades cleared to date in NDFs have been on the client side. CME Group has been working with executing dealers, clearing members, clients and affirmation platforms to ensure its offering meets the needs of all market participants. Initial clearing members working toward an end-to-end fully automated clearing solution later this quarter include Barclays, Citigroup, Credit Suisse, JP Morgan Chase and Morgan Stanley. He says: “We are looking to work with the dealer and the clients to ensure all the operational and risk management process are sound before volumes can increase and the service
28 | july 2012 e-FOREX
can truly scale in the coming months. Our approach has been to leverage as much of our existing FX infrastructure as possible to try and keep this as cost effective for our clearers and our clients as we can.”
Sammann says that CME Group has committed to building a solution that will clear all FX products, regardless of mandates, because of the belief that there is a desire, and a need, for the market to mitigate counterparty credit risk, and this is what the CCP model does. Tis is part of the reason the group began clearing NDFs before the mandate, he adds.
To this end CME Group is working with the industry, the other CCPs, and GFMA’s Global FX Division to overcome the challenges of clearing FX options and working out what a global CCP settlement model will look like, involving CLS. Te FX market is also looking at how Dodd-Frank is defined and the proposed exemptions from the US Treasury versus the EMEA position at the moment, where there are, currently, no exemptions.
Te CME Group has included clearing for spot in the solution it develops for FX clearing. Says Sammann: “Te driver behind including spot FX is really down to the spot element that can be sometimes included in
Keith Tippell
“We are taking the pain out of managing connectivity and the operational processes around managing new trade flows,”
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