From banks to the buy-side - FX Clearing brings risk mitigation to the wider market >>>
FX options portfolios, where a delta hedge is used. As this hedge may include spot or a forward transaction and it makes sense, from a capital efficiency perspective, to keep all of those instruments cleared at the same place.”
Investment returns
Providing risk mitigation across the FX market is a central prong of the CME Group’s strategy and the solution is open to all who meet the robust requirements of the clearing house. “Mitigating credit risk on a broader scale is a positive move, rather than focusing on a particular sector or instrument. We have put ourselves in a position where we are open to the dealer community and the buy-side community, across all the products in the FX suite. It is about providing open access, with a broad suite, to mitigate credit risk and creates capital efficiencies for a wider market,”, says Sammann.
As the FX industry considers the impact of clearing, participants will now have to look at how they will get the best returns on their investment on capital they outlay in respect to initial and variation margins and Sammann believes the liquid exchange-traded futures and options business will be leveraged to offset against the margin requirements in OTC FX instruments. He says: “Te market will be looking for a good return on its investment because as these changes come in it is going to get costly. We know what the capital requirements are going to be under Basel III and it is going to become very expensive for certain market participants and they will go for a clearing solution that will give them the best return on their capital outlay and this will be driven by margin offsets against core futures products and OTC.”
“We will scale our FX clearing solution in line with market demand because there is counterparty risk out there in the marketplace with these products that they want to mitigate. Either they are required to clear FX instruments or there is a desire to do this and this will obviously grow volumes cleared over time.”
Connecting it all up
In readiness for clearing, MarkitSERV, provider of OTC trade processing middleware solutions, has partnered with SWIFT to enable 10,000 financial institutions and corporations worldwide to deliver new FX trade messages, initially NDFs, to multiple CCPs via its innovative FX clearing and reporting gateway.
NDF trade messages sent over SWIFT can be routed automatically onwards to the designated FX CCP for clearing. MarkitSERV will automatically receive
Derek Sammann
“Te driver behind including spot FX is really down to the spot element that can be sometimes included in FX options portfolios, where a delta hedge is used.”
transaction data from SWIFT, match the trade, send it, as required, to the nominated clearing broker for acceptance, and then deliver accepted trades to the designated CCP. Once the trade is cleared, MarkitSERV will send a cleared state notification via the SWIFT network to the originating party.
Keith Tippell, co-head of FX at MarkitSERV, says that its ability to enable all market participants to deliver (or receive) FX trades via a single point of access to its processing platform for matching, validation and onward routing to multiple CCPs makes MarkitSERV the first middleware vendor already clearing FX trades for tier one banks. “Today, all of the trades that have been cleared globally to date have been processed through the MarkitSERV platform. In addition to MarkitSERV’s proven matching and clearing services for OTC transactions, the real added value we bring is solving the connectivity conundrum; one connection to MarkitSERV provides efficient access to every clearing and reporting destination, now and in the future,” he adds.
It is highly likely that market participants will have to connect to more than one CCP, reflecting regional, and global, preferences and mandates as well as counterparty choice. MarkitSERV provides everything needed to connect, clear and report OTC
july 2012 e-FOREX | 29
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