FX clearing volumes on the up despite a lack of clearing mandates

A quarter of derivatives traders and portfolio managers on the buy-side want FX options to have increased clearing availability over the next two years, report finds.

The fact that regulators have yet to make clearing a requirement for FX has been a principal reason for its lack of adoption thus far, however volumes are on the rise despite this according to a report from Coalition Greenwich.

“FX clearing opportunities are expanding, interest rates have gone up, the market structure is evolving, and the cost of capital is rising—all tailwinds for FX clearing growth,” said Coalition Greenwich.

Past mandates such as Dodd-Frank and EMIR remain relevant, however regulators are yet to turn real attention to FX, a main driver for why FX clearing levels have lagged behind.

However, the tides are now appearing to shift as participants increasingly accept that “the benefits of clearing outweigh the negatives”. Overall, 81% of derivatives market participants surveyed in the report believe that clearing of FX derivatives is set to increase.

One of the benefits of growth in FX clearing includes developments in financial resource management tools, said Coalition Greenwich, further highlighting that increased clearing is set to affect how and with whom the buy-side trades.

Around 24% of derivatives traders and portfolio managers on the buy-side surveyed highlighted FX options as one of the products ‘most desired to have increased availability in clearing in the next two years’.

Speaking to the appetite from market participants, Coalition Greenwich stated: “The end goal is not clearing in and of itself, but more-efficient trading and investing.” 

According to the report, 28% of respondents supported a mandate and believe it would remove doubt and drive volumes, however overall, the desire for a clearing mandate remains mixed. A key concern is the potential for an overly proscriptive regulatory stance.

Elsewhere, 43% of respondents highlighted that the natural development of the market would eradicate the need for a mandate as “the way the market will organically evolve is in line with how the regulators would structure a mandate, making a mandate a non-factor”. 

The report highlights several areas where steps have already been taken which could apply to FX and would more easily enable the adoption of clearing, including improved FX clearing operational infrastructure, the ability to cross margin with other asset classes, CCP value-added services, workflow automation – for example, interdealer brokers increasingly affirming voice-brokered trades electronically – and execution efficiency.

Elsewhere, Coalition Greenwich highlighted the empirical considerations of cleared and bilateral trades existing in parallel, explaining that “this will have process and technology implications. Determining the best path requires tools, including pre-trade “what-if” scenarios to quantify the costs and benefits of clearing a trade or keeping it bilateral. 

“Once they make the decision, these firms need to ensure they have connectivity to the necessary middleware and other providers to seamlessly manage the associated workflows. And, of course, portfolio managers and traders need portfolio and order management systems that can handle cleared and uncleared transactions all in one place.”

The report includeed responses from 120 FX professionals, as well as 60 senior derivatives market participants across North America, Europe and Asia.