The US Commodity Futures Trading Commission’s (CFTC) sub-committee on foreign exchange markets has submitted a report to the global markets advisory committee (GMAC) with a number of recommendations regarding a clearing mandate for non-deliverable forwards (NDFs).
The sub-committee advises that, should the CFTC decide to go ahead with a clearing mandate for NDFs, such mandate “should contain a clear timeline and method of implementation to ensure that market participants have appropriate opportunity to address the issues outlined in this paper”.
The report also highlights the importance of harmonisation across jurisdictions in terms of timelines, counterparty categories and currencies in order to “limit any negative impact on global liquidity”. Specifically with regards to the timing of any mandate phase-in, the sub-committee urges alignment with European Securities and Markets Authority (ESMA) categories.
To this end, it suggests that the CFTC proposes clearing no later than 1 August 2015, with the CFTC mandate being finalised on 1 November. Compliance would be phased in over time, category 1 participants would be subject to the clearing mandate on 1 February 2016; category 2 participants on 1 May; and category 3 on 1 August.
The report also suggests that the agency should limit the products included in the first phase of mandatory clearing to those with maturities of one year or less; however, this is at odds with ESMA proposals which extend the mandate to products with maturities of two years or less.
Responding to concerns over the potential systemic risk impact of market participants not having adequate time to prepare for mandatory trading, which could occur if a Made Available to Trade (MAT) determination followed too closely after a mandatory clearing determination, the sub-committee advises that any definition of “adequate time” for market participants be balanced against the needs of the swap execution facilities to have clarity on when the MAT determinations will be available.
In addition, the report points out that issues regarding the handling of package transactions, amending prime brokerage flows and addressing outstanding no-action relief letters need to be resolved for a successful and stable implementation.
Commissioner Mark Wetjen, sponsor of the GMAC, says: “[The report] raises a number of essential issues about a potential clearing mandate for NDFs, particularly as it relates to the timing and cross-border harmonisation of implementing such a mandate. I know this report will be useful and instructive to the GMAC members, commissioners and CFTC staff.”
The sub-committee was established in October. It includes representatives from CLS Group, Deutsche Bank, EBS, FXall, JP Morgan, Kings Peak Asset Management, LCH.Clearnet and Traiana.