AWARDS Best FX clearing house: LCH

Options clearing in foreign exchange has been on the currency trading industry’s agenda for years. As 2017 draws to a close, LCH is gearing up to launch a clearing service for over-the-counter FX options at the beginning of 2018, pending regulatory approval.

When the OTC FX options clearing service launches on the ForexClear platform, it will initially focus on European-style vanilla options, which will be physically settled through LCH’s partnership with FX settlement house CLS.

While NDF clearing took some time to gain momentum, Paddy Boyle, head of ForexClear at LCH, says more than a dozen global banks are already working towards participating in the new FX options clearing service. He anticipates more than half of participants in the FX market will join in from launch.

“When we launch this service, the incentive of the uncleared margin rules will already be in place,” says Boyle.

At the outset the emphasis will be on the eight most liquid, high-volume currency pairs with a two-year tenor – EUR/USD, GBP/USD, USD/CHF, USD/AUD, USD/JPY, EUR/GBP, EUR/JPY and EUR/CHF – and covering three-quarters of the market volume of deliverable FX options, with additional currencies and tenors to be added in the future, if appropriate.

“We believe there is more benefit for clearing options than non-deliverable forwards. We therefore anticipate a pretty rapid take-up from launch,” Boyle says.

While NDF clearing on the ForexClear platform has surged above the $1 trillion-per-month mark, much of that flow has largely been from the interdealer market.

We believe there is more benefit for clearing options than non-deliverable forwards. We therefore anticipate a pretty rapid take-up from launch

Paddy Boyle, LCH

LCH, which won Best FX Clearing House at the 2017 FX Week Best Banks Awards, is keen to develop the client side of the business as it increases the number of instruments available to clear to not only deliverable options, but also G10 NDFs and non-deliverable options.    

The firm has already seen a material increase in the number of non-member clients clearing through ForexClear, with an additional 3,000 client accounts being opened this year alone – a trend it is eager to maintain.

“As we move towards 2018, we’re going to see a material pick-up in client clearing,” says Boyle. “NDF clearing has become the default option for the interbank market. We expect a similar outcome on the client side in time.”

“As the uncleared margin rules percolate through to a larger proportion of the FX market, we expect to see more and more participants turn to clearing as a way to mitigate the majority of the increased cost that comes with being subject to bilateral initial margin,” concludes Boyle.