ForexClear, a subsidiary of London-based clearing house LCH, has cleared more than $220 billion in non-deliverable forwards in September 2016 to date, as it plans to enter the larger market of clearing foreign exchange options next year.
Forwards in non-deliverable currencies involve a foreign exchange trade where one currency is from a country that has imposed capital controls.
LCH.Clearnet also announced that ForexClear has extended its client base and activity with 10 entities turned to actively clearing FX non-deliverable forwards in the past six months. As a result, a greater number of firms will now be able to access the features of NDF clearing, including enhanced risk management and improved capital efficiency.
In addition, ForexClear had its best ever week in September, in terms of cleared volumes, despite there being no regulatory mandate for clearing FX. The service recently hit the milestone of clearing $100 billion in notional of FX NDFs, the highest since launching in March 2012.
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ForexClear covers 12 currencies enabling more than 95% of the NDF market to be cleared. Although regulators have not mandated NDF clearing, many sell-side firms have started clearing voluntarily due to the capital and operational efficiency.
Non-deliverable forwards (NDFs) have experienced impressive growth in recent years. According to the latest Bank for International Settlements (BIS) triennial survey, total NDF daily turnover was $127 billion, as of 2014, around 19% of all forward trading globally and 2.4% of all currency turnover. However, unlike the remaining 97% of the foreign exchange market, NDFs are not physically settled through an exchange of principal. Instead one counterparty pays the profit to the other, based on the difference between the exchange rate at the time of the trade and at maturity.
Daniel Maguire, Global Head of Rates and FX Derivatives, LCH, said: “The uncleared margin rules that are coming into force across the world have been a catalyst for driving eligible and appropriate derivatives trades towards central clearing. LCH is committed to working with the market and helping our customers to navigate the constantly changing regulatory landscape while safely managing their risk and also achieving capital, collateral and margin efficiencies through central clearing.”
Paddy Boyle, Global Head of FX Product, LCH, added: “These factors have contributed to the notable uptick in the number of members actively clearing NDFs at ForexClear and the subsequent rise in volumes going through the service.”
Markus Schmidt and Geoff Kit, Co-Heads FX Cash, Standard Chartered, said: “Our keen interest in NDF clearing, particularly for Asian currencies, stems from our strong presence in the region. ForexClear covers all our major currency pairs, offers a 24 hour service and is able to clear trades in a matter of seconds. This is vital for our FX business, which spans multiple regions and timezones.”