Two banks sign up for ForexClear compression

New service brings greater capital and operational efficiency to FX market participants

compress dollars
Popularity boost: ForexClear expects uptake of compression services to accelerate significantly, says Tamaryn Nuttal

Citi and Standard Bank are among the first to take advantage of LCH ForexClear’s compression service, as market participants seek to reduce outstanding notional to improve their capital and operational efficiency.

Launched on the back of a significant uptick in FX clearing on the platform over the past two years, ForexClear members have so far compressed $4.5 billion of outstanding notional of FX non-deliverable forwards since the start of November.

The latest product roll-out by the clearing house comes on the back of the launch of FX options clearing in July, as FX market clearing has gained in popularity. ForexClear cleared $1.56 trillion in FX notional in October – nearly treble October 2016’s total of $529 billion.

“Growth in FX clearing volumes has led to demand for solutions that drive down notional outstanding, and contribute to greater capital and operational efficiency,” says Tamaryn Nuttall, head of ForexClear product.

“Compressing $4.5 billion in cleared NDF notional is a significant milestone for LCH. We expect uptake of compression services to accelerate significantly over the coming year, as clearing volumes continue to grow and we expand our compression offering,” she adds.

The surge in clearing activity over the past two years follows the introduction of bilateral margin rules for uncleared derivatives in September 2016, which increased the cost of capital and the appeal of FX clearing.

Compressing $4.5 billion in cleared NDF notional is a significant milestone for LCH
Tamaryn Nuttall, ForexClear

To alleviate the higher cost of trading in bilateral over-the-counter markets, several infrastructure providers have come up with a range of tools, such as compression and portfolio optimisation solutions, to allow market participants to reduce net notional and improve capital usage. Lowering regulatory leverage ratios and operational risk have also been a priority, along with reducing counterparty exposure and credit risk.

Trade compression popular

The introduction of capital requirements, such as the Basel III leverage ratio, have pushed market participants to seek ways to reduce their notional outstanding and led to the increasing popularity of trade compression in recent years.

In line with the compression services offered by LCH in other asset classes, ForexClear provides its clearing members and clients with standard and blended-rate solo compression, enabling them to eliminate offsetting trades and reduce the number of line items on their books.

Fewer line items lets market participants manage their portfolios and reconcile outstanding trades better.

“Having seen the benefits of compression in our rates business, we’re delighted to be an early adopter of compression at ForexClear,” says Matt Turner, director of balance sheet management at Standard Chartered Bank. “It’s an effective way to reduce our notional outstanding and improve operational efficiency.”

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