Despite hurdles, clearers map out forex ambitions

“In an auto-exercise world, you could have the trade repository and the CCP work on a positional basis, whereas with directed exercise the CCP has to work on a trade-by-trade basis: the CCP has to maintain who you did the option with, because that specific counterparty would be exercised when you exercise the option.

“Essentially, it means you have a large, additional amount of information that needs to be tracked and stored – and that’s a massive undertaking for the CCP,” Telmer says.

Voluntary work

While the early focus has been on foreign exchange products that will be forced into clearing by regulators, one clearing house in particular – CME Group – is not shying away from products that would need to be voluntarily cleared. On September 22, the clearing house notified the US Commodity Futures Trading Commission of its intent to start clearing a broad range of currency pairs in cash-settled and non-deliverable spot, forward and swap markets from early 2012.

“We made a decision at the beginning of this year to ensure we put CME Clearing in a position to offer a cleared solution for all over-the-counter forex products,” says Roger Rutherford, the clearing house’s global head of foreign currency products. “Spot, forwards and swaps are not covered by the Dodd-Frank Act, but we believe it’s important to offer up flexibility and choice for those that choose to clear. We also believe there is a desire and a demand to clear all OTC products in the market.”

He may be right. Although the US Treasury has proposed exempting forex swaps and forwards from mandatory clearing, some dealers argue it might make sense to clear those instruments anyway.

“I don’t think it will be just one CCP that offers voluntary clearing of forwards and swaps in the end. If you’re forced to clear options, you’re going to want to clear the hedge with it – so some CCPS are trying to get ahead of that and add the ability to do so,” says Colin Telmer, New York-based head of foreign exchange prime broking at Barclays Capital.

If voluntary forex clearing takes off, the main driver is expected to be the desire to create margin efficiency, through the netting benefits of clearing an entire forex portfolio. Leaving parts of a portfolio uncleared could also see those instruments exposed to higher capital charges – and, indeed, higher margin requirements, depending on the final shape of rules for the margining of uncleared trades.

While it’s unknown how much demand there will be, market participants are already weighing the pros and cons, says Jason Vitale, global head of foreign exchange prime brokerage and foreign exchange OTC clearing at Deutsche Bank, based in London. “I qualify it right now as interest. It’s early days in terms of what we think those charges will be and how and when they will be implemented, but increasingly, clients are reaching out to the forex clearers to get an idea of what will happen and when,” he says.

But none of the other CCPs with concrete plans in the forex market – LCH.Clearnet, Singapore Exchange and Ice – would be drawn on whether they will offer forwards and swaps. A few dealers, too, are more guarded. To them, it’s still unclear whether margin efficiency will necessarily result. “At least in the US, with the proposed exemption, forwards and spot are not classified as swaps, and will not therefore be subject to the margining rules for uncleared swaps, if that’s how it pans out,” says Andrés Choussy, New York-based global head of foreign exchange clearing at JP Morgan.