XTX Markets set to clear NDFs on ForexClear

Move makes XTX first non-bank liquidity provider to clear NDFs

XTX Markets is set to begin clearing its foreign exchange non-deliverable forwards (NDFs) trades with LCH, becoming one of the first non-bank liquidity providers to do so.

The UK-based market-maker will be going live with FX NDF clearing on LCH’s ForexClear “soon”, says a spokesperson for the firm, either as a client of clearing members or via prime brokers.

An LCH spokesperson declined to comment on the plans.

XTX’s expansion into cleared NDFs comes at a time when the market is increasingly electronified. The firm already provides direct electronic pricing for NDFs, enabling it to compete directly with other banks.

It did signal its intentions to clear NDFs with CME in 2017, alongside six other banks including Citi, NatWest Markets and Standard Chartered, but it is unclear whether these plans were followed through.

The move by XTX is a first for the non-bank market-maker segment, where most only trade FX spot, futures and to a lesser extent options. Jump Liquidity, the market-making business of Jump Trading, trades NDFs on BidFX’s central limit order book (Clob) but it does not clear them.

Client-cleared NDF volumes at LCH have grown dramatically in the run-up to the final phase of the initial margin rules for non-cleared derivatives. From September 1, buy-side firms with aggregate average notional amounts of non-cleared derivatives above €8 billion will have to start posting initial margin on their trades, including NDFs.

The number of firms caught in this phase was originally estimated to be around 145, but recent market volatility is expected to have resulted in at least another 50 firms being dragged into scope.

With initial margin on cleared trades designed to be smaller than non-cleared, the rollout of the rules has seen clearing volumes grow. In the second quarter of this year, LCH saw record client cleared FX volumes of nearly $140 billion, up 52% from the previous record set in Q1.

It also comes at a time when LCH is mulling the launch of a spot FX clearing service, which could help non-bank market-makers reduce their reliance on prime broker credit lines.

But despite being the first liquidity provider to set up an electronic pricing engine in Singapore’s SG1 data centre in 2018, the XTX spokesperson says the firm is not in the process of going live on Refinitiv’s new NDF central limit order book platform in Singapore.

Earlier this year, Refinitiv announced it would launch a new Clob for NDF matching in Singapore, which will include a straight-to-clearing link to ForexClear.

A clearing source though says there is interest from some non-bank market-makers in joining that venue and clearing direct to avoid having to be subject to credit line restrictions at their prime brokers.