CLS, a provider of settlement services for the FX market, and LCH.Clearnet, a multi-asset clearing house, today revealed that they are working jointly to develop a service to facilitate the settlement of cleared FX instruments via ForexClear.
The new service is said to be consistent with goals set out by the G20 to promote clearing of standardized derivatives. It will be open to all central counterparties (CCPs) and will cover a range of cleared FX products, including OTC and exchange-traded FX options, FX futures and cross-currency swaps.
Market reactions to the move are positive so far. "We are seeing growing demand for OTC FX options and we believe there is a need for more clearing and settlement solutions to provide transparency in an expanding marketplace," said Zoe Fiddes, Head of Sales at ORE Tech, a software company allowing traders to enter OTC options on web, mobile and MT4 platform.
OTC derivatives gross market value of outstanding contracts rose sharply in the second half of 2014 (from $17 trillion to $21 trillion between end-June 2014 and end-December 2014 according to BIS). "Trading was boosted by an announcement from China's State Administration of FX (SAFE) in June 2014 that banks can offer a greater variety of RMB FX options to corporate clients," she added.
The options settlement service is targeted to launch in 2016, subject to regulatory approval, with the intention of expanding to cover other FX products in line with demand. It will also provide a specialized payment-versus-payment (PvP) settlement in all CLS-eligible currencies and will operate separately from CLS's main PvP settlement service.
Settlement Risk
According to the firms, the new service will also deliver a number of risk benefits to participants. In the event of a clearing member failure, payment netting will substantially reduce the size of the participating CCP’s potential Liquidity shortfall, mitigating systemic liquidity disruption. The service is designed to work on an all-or-nothing settlement basis, which minimizes the risk arising from partial or incomplete settlement.
David Puth, CEO of CLS, commented: “This is an important milestone in the continued development and safeguarding of the global foreign exchange market." Following his statement from our recent interview that settlement risk is one of the most significant risks in FX, Puth added: "Our priority is to mitigate this risk, while increasing operational efficiency through our technology and connectivity."
Gavin Wells, Global Head of ForexClear at LCH.Clearnet, said: “We are delighted to be working with CLS on this initiative. We continue to see increased demand from the market for FX clearing, as firms are keen to benefit from the associated capital efficiencies and improved Risk Management associated with clearing. The new CLS settlement service is integral to our plans to broaden our service offering by adding products involving physical FX settlement.”
