Despite hurdles, clearers map out forex ambitions

With a range of foreign exchange products expected to move towards clearing, several central counterparties are jockeying for a slice of the business. But technical obstacles and lacklustre demand are getting in their way

Foreign exchange dealers breathed a sigh of relief in April, when the US Treasury proposed to exempt foreign exchange swaps and forwards from the mandatory clearing requirement of the Dodd-Frank Act. Clearing houses might not have been quite as happy – according to the most recent Bank for International Settlements survey, the exempted instruments rack up average daily turnover of $2.3 billion, making them a potential money-spinner.

A similar exemption may follow in the European Union (EU), where a final version of the European Market Infrastructure Regulation is being hammered out by EU authorities. If they all agree, the final word will be left to the European Securities and Markets Authority (Esma).

“We’re hopeful Esma’s power to exempt forex forwards and swaps will be exercised along similar lines to the US Treasury’s proposed determination, so that forex is treated consistently by all parties,” says James Kemp, London-based managing director of the Global Financial Markets Association’s (GFMA) global forex division.

That doesn’t mean clearing for these products is off the table for good – some central counterparties (CCPs) and market participants argue demand could emerge even without a regulatory mandate (see below: Voluntary work) – but most clearing houses are focusing their initial energies elsewhere. Forex options and non-deliverable forwards (NDFs) have generated most heat, but both products are also encountering a variety of challenges, including technical obstacles and, in one instance, lacklustre demand.

First-mover disadvantage?

Chicago-based CME Group was first to market, launching an NDF service for US dollar/Chilean peso trades in April. But the service – which, according to one dealer, was pushed out in response to demand from a small number of clients – has yet to clear a trade, admits Roger Rutherford, the CME’s global head of foreign currency products.

Privately, some say the CME was too hasty: “They rolled out that particular platform very fast, and without necessarily having gone through the same level of testing and engagement with all the dealers as we’ve had in all other asset classes when launching a particular product. To a large extent, launching a product and being gung-ho without having first completed all the required risk management and due diligence is not conducive to any real volumes,” a second dealer says.

CME declined to address that criticism, saying only that it continues “to see strong demand in the US and in Chile”. The clearer has since announced plans to add 11 new currency pairs in January.

NDFs are on the menu elsewhere, too. Singapore Exchange (SGX) launched its NDF clearing service for transactions referencing seven currencies against the US dollar on October 24, with Singapore-based DBS Bank and OCBC Bank, and Deutsche Bank the first three firms to clear the products. Christina Ang, Singapore-based head of OTC clearing at SGX, says the exchange is eager to extend its service to cover non-deliverable swaps next year. “We believe that by being the first to move, we would have an advantage,” she remarks.

But fragmentation is a key concern for SGX – Hong Kong is considering whether to require use of a local CCP for certain products and markets, while authorities in other important regional markets, such as Australia, have already come out in favour. That would be a challenge for SGX, which has ambitions to act as a regional clearing hub.

“If the other Asian markets were to mandate a local CCP, banks would have no choice, as they have to operate there, so for a start, you could see some fragmentation. Over time, with inter-regulatory co-operation, there could be some migration to dominant CCPs, but it really depends on whether you have to clear with a domestic CCP – it’s not evident at this point,” she says.

This month, London-based LCH.Clearnet also plans to begin clearing NDFs, offering six currency pairs against the US dollar via a new service, ForexClear. It covers the Chinese yuan, Brazilian real, Indian rupee, Russian rouble, Korean won and Chilean peso. LCH.Clearnet has not given a firm launch date, but dealers say the service will go live by November 18.

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Despite hurdles, clearers map out forex ambitions

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