Rivals gear up for FX clearing
LCH.Clearnet said it discussed its proposals for a CCP model for FX spot, forwards and options with central bank sources last week – while the CME said it plans to link up five clearers to its recently launched CME FX on Reuters service by Q4.
"A number of banks have said to us that they can see significant scope for operational advantages if we could net settlements multilaterally and then pass the resulting net amount to CLS [continuous linked settlement] for settlement," said Rory Cunningham, director of strategy and development at LCH.Clearnet in London.
Currently, all individual forex transactions are reported to CLS and settled individually, whereas in the securities market, equities and bonds are netted down and the settlement system handles the net amount each day. This forms LCH.Clearnet’s core business.
But although LCH.Clearnet’s proposal for a central clearing system would affect the way the ‘whole value chain’ would work, it would not replace CLS, said Cunningham. "We would still see the need for a payment versus payment (PvP) system but possibly by currency pair per day rather than for each individual transaction." It would not be an exchange model with its associated regulatory framework, he said.
The CME/Reuters deal, however, has triggered an industry-wide debate over the blurring of distinctions between exchange and interbank business.
For some, the CME already has the structure to provide CCP clearing on a netted basis for FX. "The CME is already working with CLS for quarterly deliveries – it has structured all its delivery settlements around CLS – and to settle FX futures you must be a third-party CLS member anyway," said Julian Knight, FX head at Fimat in London. "It’s an obvious benefit that the CME is already embracing CLS – it is putting forward its own clearing model but using the best bits of CLS to facilitate currency deliveries."
The CME settles FX deals through CLS just as in the traditional spot market, but it sends one netted event per quarter, per currency pair. It also remains the central counterparty, "so you always have one netted currency position with one counterparty. Since that doesn’t mature until the contract expires, there is only one position between the bank and the CME", said Rick Sears, CME’s FX managing director.
This could prove to be a key revenue issue, particularly for the large FX banks, as a bank might pay a $2.50 charge per spot deal in the traditional market, but in the futures model it would pay only one per quarter.
For LCH.Clearnet the realisation is still "some way away", said Cunningham, as it will need the cooperation of organisations providing the trading systems as well as central bank, regulatory and supervisory bodies.
"We would need to get sent the business from the market in the same way as we do from the stock exchange, and we can’t move unless the market decides to take this step." LCH.Clearnet has the benefit that the main investment and commercial banks are already its clients – but the problem would be to persuade those clients to agree. "[A new clearing system] would affect a bank’s back office, risk profile, prime brokerage, clearing, as well as front-office desks, so the bigger the banks are, the more complex it would be for them," said Cunningham. At a meeting held by LCH.Clearnet in December, out of about 12 banks, eight were keen to look at the concept, he said.
Meanwhile, Fimat already plans to be one of the first five ‘beta-test clearers’ on CME FX on Reuters. "The CME/Reuters agreement provides a very liquid market and from Fimat’s point of view it’s a market we have expertise in clearing," said Fimat’s Knight. "Distribution is going to be huge – it is going to draw the FX futures product to the mainstream FX market."
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact customer services - www.fx-markets.com/static/contact-us, or view our subscription options here: https://subscriptions.fx-markets.com/subscribe
You are currently unable to print this content. Please contact customer services - www.fx-markets.com/static/contact-us to find out more.
You are currently unable to copy this content. Please contact info@fx-markets.com to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@fx-markets.com
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@fx-markets.com
More on Settlement Risk
Tackling rising FX settlement risk with DLT
Distributed ledger technology provides a remarkable opportunity to mitigate the rising settlement risk within the FX industry, explains Alex Knight, head of Europe, the Middle East and Africa at Baton Systems.
Goldman Sachs and JP Morgan go live with CLSNow
Unlike CLS’s main settlement tool, CLSNow lets banks settle FX positions on the same day
State Street provides CLSSettlement to Japanese pension fund
Unnamed Japan-based pension fund is part of pilot to mitigate pension funds’ FX trading risks
Nomura’s asset manager extends CLSSettlement to Japanese funds
First local asset manager to provide access in sign of success for buy-side adoption push
CLS: mitigating settlement risk is crucial as volatility rises in 2019
Geopolitical factors expected to drive markets this year
CLS settlement will migrate to new platform in 2020
The infrastructure provider will launch the new venue based on its own technology next year, with service migration planned for May 2020
CLS onboards Japanese funds
Japan-domiciled funds gain access to settlement through CLS as third-party participants for first time
Banco Monex becomes first Mexican member of CLS
The bank is the only CLS settlement member in one of Latin America’s largest FX trading centres