LCH.Clearnet plans to launch its widely anticipated foreign exchange clearing platform for non-deliverable forwards (NDFs) in mid-November.
The new clearing service, dubbed ForexClear, has been in development since late 2010. LCH.Clearnet declined to comment for this article, but it is understood the platform will launch with NDFs covering six currencies against the US dollar: Chinese Yuan, Brazilian Real, Indian Rupee, Russian Ruble, Korean won and Chilean peso.
While it had initially been expected to cover Forex options and NDFs, the clearing house is understood to have temporarily shelved options pending discussions that were initiated in June between the US Federal Reserve and the major banks about the management of settlement risk for options.
The Dodd Frank rulings have put all emphasis on NDF’s as the exact rulings on Options are not clear. New Swap Execution Facilities will be acting as clearers for OTC products.
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Current daily NDF volumes are insignificant compared to traditional FX products, accounting for some 3% of daily FX volumes. Although, global trade volumes have risen dramatically in recent years, it has been estimated (by NY Fed) that somewhere between 60-80% of NDF volume is based on speculative trades, rather than commercial hedging.
As the name implies, the NDF currencies are not physically delivered, instead the contract is cash ‘net settled’ by calculating the difference between the agreed upon (forward) exchange rate at the time the NDF was taken out, and the subsequent spot fixing rate, which for most NDFs will be 2 days before the forward value date. One party in the agreement will then make a payment to the other party on the basis of the profit or loss on the contract (in the deliverable ‘other currency’ against which the NDF was quoted).
NDFs are mostly, quoted and settled in US dollars, but can be quoted in other liquid currencies such EUR, GBP, JPY, CHF, CAD etc.
NDF’s are still traditionally traded products and the majority of transactions are processed via voice broking around 46% of current volumes. The market is moving closer to e-trading with platforms such as FXALL and many single dealer bank platforms.