OTC FX Clearing Over $1 Trillion Per Month

Clearing of over-the-counter foreign exchange has reached more than $1 trillion in a single month, with nearly all cleared activity in non-deliverable forwards, according to analytics provider Clarus Financial Technology.

Chris Barnes at Clarus said in a blog that monthly volumes in cleared OTC FX products now surpass $1 trillion, and 96% of these volumes are in cleared NDFs.

Non-deliverable forwards are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement, for example, the Chinese renminbi.

Barnes said: “CFTC data suggests 28% of NDF volumes have been cleared in 2022.”

In addition, eight currency pairs make up almost 90% of all cleared volumes and open interest in cleared FX products has increased by 45% in the past two years.

Gary Saunders, global head of prime derivatives services at Barclays Bank, said at the IDX conference hosted by FIA, the trade organization for futures, options and centrally cleared derivatives in London on 7 June that clearing had increased in foreign exchange.

“We have seen NDFs move into clearing, especially after the uncleared margin rules,” Saunders added.

Regulators have been phasing in uncleared margin rules (UMR) since 2008 to reform the over-the-counter derivatives market following the global financial crisis.

ForexClear

ForexClear, the foreign exchange arm of London Stock Exchange Group’s clearing  business LCH, continues to have more than 98% market share in FX OTC clearing according to Clarus.

LCH said that in April total notional cleared in the year-to-date was up 18% from the first four months of 2021. ForexClear provides clearing for NDFs, FX options, spot, swaps and forward outrights. In the first quarter of 2022 ForexClear cleared an average of $100bn of NDFs daily.

The growth in NDF clearing was also highlighted by LSEG announcing the development of NDF Matching, a fully cleared venue in Singapore, supported by the Monetary Authority of Singapore. The venue will be open for integration testing later this year, with a full production launch in mid-2023.

The exchange said this represents the first phase of LSEG’s plans to implement NDF and Spot Matching as well as streaming relationship venues in Asia to meet both the growing demand in the region and increasing electronification of FX trading globally.

James Pearson, head of ForexClear at LCH, said in a statement: “Margin savings (driven by UMR), operational efficiencies, and credit intermediation advantages will be a fundamental feature of this industry-first platform, all of which have underpinned the recent rapid growth of ForexClear and NDF clearing.”

In addition in May Citadel executed its first cleared FX non-deliverable forward at LCH ForexClear. Citi is facilitating the trades as the firm’s clearing broker.

John Niccolai, chief operating officer for global fixed income at Citadel, said in a statement: “We are pleased to be using the service and look forward to engaging with LCH and other market participants to drive broad adoption of clearing across all currency pairs and FX products.” 

Pearson continued that the addition of Citadel is a significant milestone for the industry and shows that FX clearing offers critical operational efficiencies and a credit intermediation advantage that make it compelling.

“This builds on the strong growth at the service, which has historically been driven by a focus on margin efficiencies that will only increase with Phase 6 of the uncleared margin rules in September 2022,” said Pearson. “There has now been a realisation that FX clearing can also bring significant capital savings, providing further benefits and helping the industry to respond to SA-CCR.”

SA-CCR is the Basel Committee on Banking Supervision’s standardized approach for measuring counterparty credit risk.