Ice to compete with CME and LCH.Clearnet on FX clearing

Competition in forex clearing intensifies as LCH.Clearnet receives regulatory approval and Ice explains how its rival offering will differentiate itself

The IntercontinentalExchange (Ice) plans to launch a clearing service for over-the-counter foreign exchange instruments this year, putting it head to head with rivals CME Group and LCH.Clearnet.

The platform will initially cover non-deliverable forwards (NDFs), and is scheduled for launch in the second quarter, having been in development for about 18 months.

"We have spent about a year-and-half putting this service together, and we wanted to wait to announce until we knew we would have a differentiated offering that would be able to compete vigorously for OTC foreign exchange clearing. Ice is already a leader in clearing OTC derivatives in two major asset classes - credit and energy - and our hope is that foreign exchange will be the third," says Thomas Farley, president of Ice Futures US in New York.

The clearer has already signed up 10 clearing members, including Bank of America Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Morgan Stanley and UBS. Clients of clearing members will also be able to clear NDFs from launch - a differentiating factor from other platforms, Farley claims.

"The way we have differentiated this offering is, first and foremost, by having a wide array of clearing members supporting the initiative from the start, so customers will have a choice of clearing member. Another differentiator is that we will have client clearing and dealer clearing from day one," says Farley.

Ice has received a green light from the US Commodity Futures Trading Commission (CFTC), but approval from the UK Financial Services Authority (FSA) is still pending.

The Ice announcement came just days after the FSA granted so-called ‘non-objection' to LCH.Clearnet for its ForexClear venture on March 12. The service began operating today.  

Both LCH.Clearnet and rival CME Group have elected to begin NDF clearing with interbank trades only, with a view to extending to client clearing later in the year. Although Ice claims its ability to allow client clearing from launch is a major selling point, currency coverage stands to be another area of differentiation.

Ice announced it would cover seven currencies, including the Russian ruble, Chilean peso and Chinese renminbi, while the Singapore Exchange (SGX) launched NDF clearing for seven currencies in October 2011. LCH.Clearnet began clearing six this morning, while CME Group claims readiness to clear NDFs in 12 currency pairs.

"We are operationally ready to clear the suite of 12 NDF pairs and 26 cash-settled forwards pairs we submitted to the CFTC. We continue to work closely with clearing firms on multiple workstreams, such as operational and risk management, to ensure we collectively have an agreed model that will scale," says Roger Rutherford, global head of foreign exchange products at CME Group in London.

Some currencies will be offered by multiple clearers, while others will claim a monopoly on more niche pairs. SGX, for example, offers NDF clearing in Malaysian ringgit, Philippine peso and Taiwanese dollar - currencies that Ice and LCH.Clearnet are not expected to offer.

While it is too early to predict which of the four putative forex clearers stands to attract the most market share, both Ice and CME Group will compete for large US-based clients - and both have cited their pre-existing capabilities in listed products as a key element of their value proposition.

"The record amount of open interest we now have in our forex futures and options products differentiates us from the competition. We see the demand for OTC forex clearing starting to increase at the CME as customers look to mitigate credit risk in the most cost-effective manner. They are looking to us for the benefits of scale that come from including foreign exchange alongside their cleared credit default swap and interest rate swap business, and ultimately the cross-margin benefits with their existing futures and options businesses," says Rutherford.

"We already have significant experience in clearing forex futures - we clear 51 currency pairs today, as well as the US dollar index. So we are coming into this area with plenty of expertise, as well as the systems and technology," adds Ice's Farley.

Read more foreign exchange news at FX Week.