Cleared NDFs Reach Record
The European Union will add physically settled FX forwards into the scope of the non-cleared margin rules next year as the new regulations have boosted clearing of non-deliverable forwards.
LCH, the London Stock Exchange Group’s clearing house, said in a statement that ForexClear processed a monthly record of more than $1 trillion in notional in August, including a daily record more than $65bn (€55bn) on 29 August. As a result, ForexClear had a record $1.3 trillion in outstanding notional at the end of last month.
Paddy Boyle, global head of ForexClear at LCH, said in a statement: “The uncleared margin rules continue to be a key driver of clearing activity at ForexClear and we are delighted to have passed this significant milestone in August. These record volumes demonstrate that the margin, capital, risk and operational efficiencies that clearing brings to the market are proving persuasive to ever more market participants.”
At the beginning of March 2017, new rules requiring the exchange of variation margin on uncleared derivatives came into effect. However, market participants said they needed more time to put documentation in place or they would have to stop trading. As a result the US Commodities Futures Trading Commission said it would not take any action against dealers that failed to comply with rules for six months and European regulators followed.
ISDA, the derivatives trading association, said in a blog on the margin rules last month that the industry had been facing the possibility of real disruption six moths ago. At the end of February, just one-third of required amendments to trading agreements had been made but this increased to 90% by the week ending August 11.
“The 60% increase represents tens of thousands of newly amended credit support agreements, each requiring hours and hours of complex bilateral negotiations with counterparties to agree the changes,” added ISDA. “That doesn’t mean the job is done, and it doesn’t mean the industry is getting complacent.”
Chris Barnes at derivatives analytics provider Clarus Financial Technology said in a blog that their data shows that an increasing number of NDF trades are being traded under compliant CSAs.
Last month J.P. Morgan cleared its first NDF trades with LCH ForexClear on behalf of non-member clients since the introduction of uncleared margin rules
“In light of the upcoming MIFID II clearing straight-through-processing requirements and the growth in cleared volumes since the new variation margin rules came into effect, which J.P. Morgan see as a catalyst for clearing, this launch aims to provide clients full transparency of the clearing status from point of execution through to settlement,” added the bank in a statement.
Barnes continued that fully collateralised NDF trades have also risen from 2.6% last year to 17% since March 2017. “This move to collateralisation for FX markets is an important trend to monitor. To my mind, it should only hasten the uptake of NDF clearing,” added Barnes. “The uncleared margin rules are therefore a success so far.”
ISDA said the rollout of the variation margin requirements does not mark the end of new regulations.
“The EU will bring physically settled FX forwards into scope of the non-cleared margin rules from January 3 – the only jurisdiction to do so – which will result in another wave of CSA negotiations,” said ISDA. “While a small number of so-called phase-two firms will post regulatory initial margin from September 1, a larger number of counterparties are set to follow suit in September 2018, 2019 and 2020.”
Barnes said the EU regulation is the first time that the physical FX forward market will be impacted by the G20 reforms.
“We’ve seen trade reporting (physical FX is exempt), we’ve seen clearing mandates (no one clears physical FX) and we’ve seen margin rules (excluding FX),” added Barnes. “Unfortunately, in the absence of any volume transparency or trade reporting for FX, we won’t be able to monitor any nascent trends in the market if they do appear. That doesn’t sound like a healthy footing for the largest market in the world…”
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