FX central clearing booms amid margin rule changes

Uncleared margin rules have caused significant increase in central clearing of FX.

Margin rules are being used to push more FX trades towards central clearing, an audience at Sibos Geneva was told on Tuesday.

In recent months, clearing house LCH said it has seen a significant uptick in FX clearing activity as an indirect result of uncleared margin rules being introduced.

Jeremy Bell, ForexClear product director at LCH, told Sibos: “We’ve seen FX activity increase from around 2-3% a couple of months ago to around 15% daily now and every day we’re seeing new records.

“Is this an intended consequence of uncleared margin regulations? Absolutely yes, regulators clearly want to encourage central clearing where it makes sense to do so.”

The trend is particularly interesting as central clearing of FX derivatives is not currently mandated anywhere, while rates and credit derivatives are. Yet despite this the tightening of uncleared margin rules is making it more economically viable to use central clearing.

As the discussion moved on, Allan Guild, global head of regulatory change and FX options business management at HSBC, urged regulators to act in a more harmonious manner to ensure FX regulation did not hamper the industry.

“FX is cross border by definition so it’s essential that we have consistency across jurisdictions, but right now it can be hard to get consistency even in a single jurisdiction,” Guild explained.

He highlighted cases in the US where four different agencies are responsible for FX regulation and, even if one decides to proceed with issuing a no action relief, if the rest do not follow then such moves are effectively pointless. Guild urged regulators to “work together for the sake of consistency.”

Swift’s head of securities and FX markets, Keith Tippell, said flow on the Swift network indicated that global FX volumes have grown approximately 20% over the past three years and asked panellists why this might be.

Steve French, head of regulatory strategy and product at Traiana, replied: “Asia is a big factor but we are also seeing more activity from asset managers looking at FX as a way to generate returns.. There tends to be a perception that asset managers don’t use prime brokers and don’t get that involved in FX compared to hedge funds but that’s not really true.”

The rest of the panel agreed growth in Asian FX trading, particularly between Asian countries, was a key driver of the industry, but the overall stability and investability of FX was also considered one of the main reasons for FX’s success.