LCH and StanChart tout rival routes to cheaper margin

Panellists at FX Week Asia conference say participants should start thinking about margin optimisation sooner rather than later

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Which way? A one-year delay has given participants more time to prepare

Clearing houses and prime brokers (PBs) are jockeying for position as the roll-out of margin rules for non-cleared derivatives continues, with both groups of firms arguing they are best placed to help currency market participants keep a lid on margin costs.

At an FX Week conference in Singapore on August 29, representatives of LCH and Standard Chartered trailed their arguments, with the former saying foreign exchange traders should consider clearing their trades to boost their netting abilities, while the latter claimed prime brokerage was a cheaper way to get a similar result.

“You get to do it, I would argue, with slightly lower costs because you only pay PB fees, not necessarily clearing fees or clearing house fees,” said Sumaiya Choudhury, global head of in-business risk, financial markets at Standard Chartered.

Netting matters because the new margin regime is designed to mitigate counterparty exposure. It reduces all portfolio exposures to one number and lowers the amount of initial margin to be held.

“If you continue to trade on a bilateral basis, you are effectively posting gross margin to each counterparty,” said Kate Birchall, head of Asia-Pacific at LCH.

LCH’s website states it charges clients $2 per million to clear emerging market non-deliverable forwards (NDFs) and $1 per million for G10 NDFs, in addition to fees charged by futures commission merchants.

On the other hand, clients typically pay a fee of $5 per million notional to trade NDFs with their prime brokers, according to a recent Citi whitepaper. To compensate FXPBs for their costs, Citi argued fees would have to increase 31 times, suggesting clients should be better off taking the clearing route. But Citi’s claims about costs have been criticised by some of its peers.

…firms breach the $50 million threshold much faster than they expected. And once those costs are incurred, it is detracting from your alpha
Kate Birchall, LCH

Birchall urged participants who could be affected over the next 12 to 18 months to start thinking about margin optimisation sooner rather than later.

“Every time, after September 1, [when] UMR goes live, we see a significant spike in the subsequent months in terms of the number of firms either onboarding or putting increased volume through the ForexClear CCP (central counterparty clearing house),” she said. “The reason for that is that firms breach the $50 million threshold much faster than they expected. And once those costs are incurred, it is detracting from your alpha.”

In July, regulators split the fifth phase of the initial margin rules for uncleared derivatives into two, creating a new $50 billion threshold for average aggregate notional amount and extending for one year the time for small buy-side firms to prepare. The move is expected to reduce the number of firms caught in the regime in September 2020.

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