Awards: LCH

LCH’s ForexClear launched in 2012, with the specific aim of creating a solution for clearing foreign exchange non-deliverable forwards (NDFs) and options, as the aftermath of the financial crisis created a regulatory driven push towards the central clearing of derivatives.

But, come 2018, market participants are still waiting for FX options clearing to become a reality. While the idea of moving derivatives to clearing houses seemed an obvious move to regulators, the practicalities of creating a framework for physically settled instruments is a huge mountain to climb.

“Developing and implementing a robust settlement model that works for CCPs, CLS and regulators that users are keen to use has been a lengthy process,” says Paddy Boyle, global head of ForexClear at LCH.

“One of the key challenges in creating a clearing solution for FX options lies in the fact there is an existing over-the-counter risk infrastructure that allows market participants the flexibility to trade any strike for any maturity. That didn’t exist in the cleared FX world,” he adds.

ForexClear, which has been voted the winner in the Best Clearing Services Provider category at the 2018 FX Week e-FX Awards, is now getting close to its aim as it prepares to launch a deliverable FX options-clearing service together with CLS.

Developing and implementing a robust settlement model that works for CCPs, CLS and regulators that users are keen to use has been a lengthy process

Paddy Boyle, LCH

Boyle notes it is engaged in projects with banks that collectively represent more than 50% of the FX options space, with the goal of going fully live this summer.

“Launching FX options clearing with CLS also offers us the possibility in the future to launch clearing for other physically deliverable products such as forwards and swaps,” he says.

Difficulties of migration

ForexClear has first-hand knowledge of the difficulties presented by migrating market participants from bilateral trading towards a centrally cleared world. Having launched emerging markets NDF clearing six years ago, LCH had a long wait for significant take-up.

“In NDFs, growth really picked up in 2016, and it’s taken two years to go from 2–3% of the interbank market being cleared to about 50%. We anticipate a similar trajectory for FX options. While it’s very difficult to forecast how volumes will develop over time, we expect to see meaningful volume before the end of the year,” Boyle says.

LCH has also launched clearing for G10 NDFs, with Boyle highlighting this effort is the first time a firm has achieved traction in these contracts. The main users are large banks, just like in emerging markets.

“We have built up to open interest approaching $10 billion, with most of that growth materialising in the last two or so months as banks use these contracts to better manage bilateral counterparty risk and margin,” Boyle says.

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