Frances Faulds
Frances Faulds

FX clearing: the last hurdle?

Two CCPs race to offer an FX options clearing solution first and as Frances Faulds reports, CLS may offer a settlement service to other CCPs.

Mandatory central clearing for OTC derivatives has dominated the headlines over the past two years as interest rate and credit derivatives have moved into CCPs. It is a very different story in the FX market. There is no mandatory requirement to centrally clear non-deliverable forwards (NDFs), or FX options, and while NDFs are being cleared centrally, on a voluntary basis, there is still no CCP solution for FX options available. Devising a clearing mechanism for physically-delivered FX options has dogged the industry for almost a decade. There has already been one failed attempt to centrally clear FX -- the OTC central clearing platform, FXMarketSpace (FXMS), jointly launched by CME Group and Thomson Reuters -- but in 2006 there was no regulatory pressure to centrally clear, and no economic incentive or interest in the market so the illiquid platform closed in 2008. The problem with clearing FX options is that unlike NDFs, which are cash-settled, they have physical settlement requiring counterparties...continued

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