Nex Optimisation is now providing central clearing connectivity for its FX risk mitigation service in non-deliverable forwards (NDFs).
The clearing connectivity capability enables dealers to flag trades that are part of a risk mitigation cycle for automatic submission to a central counterparty clearing house (CCP).
This means that clients of Nex’s Reset FX risk mitigation service can now have their trades be submitted directly for clearing rather than having to be re-submitted for secondary matching prior to communication to a CCP.
“The majority of the existing dealer-to-dealer flow that is being cleared for NDFs at the clearing houses is actually part of a two stage clearing process right now. So what the dealers have to do is execute on the venue, then they get a post-trade message from the venue and they have to then re-submit that trade to a matching platform,” Steve French, head of connectivity and messaging at Nex Optimisation, tells Profit & Loss.
This process becomes more complex in FX due to the fragmentated nature of the liquidity pools in the market. If a firm executes an NDF that they want cleared they then have to see if their counterparty has a clearing account at the specific clearing house where that firm thinks it would be most beneficial to clear, they have to see if the counterparty agrees that the trade should clear and they have to do all of this post-execution.
By contrast, French points to the model developed around Swap Execution Facilities (SEFs) in the US as a more efficient way of clearing products. In this model the SEFs themselves have the relationships with the clearing houses and they submit trades directly to them.
“If you look at interest rate swaps on the SEFs there is a much cleaner workflow because you execute on a SEF and the trade is submitted directly to clearing. The problem with FX is that there’s no trading or clearing mandate and so none of the venues are offering a cleared liquidity pool with differential pricing for NDFs,” says French.
He adds: “This is why we’ve hooked up our clearing connectivity service, which was previously called CCP Connect, and the Reset NDF risk mitigation service so that now clients can choose if they want that trade to clear, and if they decide to clear that trade then it will be sent to the clearing house automatically. It eliminates the need for the current two-step process.”
Ultimately, notes Ken Pigaga, CEO of Nex Optimisation, offering central clearing connectivity to Reset clients will enable them to streamline their FX cleared trade workflow and make trade processing far more efficient.”