Could the Shift to Clearing Alter FX Market Structure?

Although there are clear drivers pushing more FX products into central clearing, this is unlikely to have a significant impact on market structure, says Paddy Boyle, the head of ForexClear, LCH.

“The pressure to clear for banks that are subject to bilateral initial margin rules is very, very high and we have banks who tell us they’ve been cut off by other banks because they weren’t clearing,” he says.

That, explains Boyle, is one of the negative drivers towards central clearing, while on the positive side there are lower capital costs, lower initial margin requirements and fewer credit line restrictions for firms that choose to use clearing services. As a result, Boyle predicts that cleared FX volumes will increase “pretty significantly” going forward.

Specifically, he sees this being driven by NDFs, which Boyle points out are growing in terms of trading volumes at a higher rate than other product types.

FX moving into central clearing could potentially enable firms using this service to trade with a broader range of market participants and thereby, in theory, significantly alter the structure of the FX market.

However, in practice, Boyle says that although in some markets central clearing has facilitated such as change, “in FX, 90% of the answer is that FXPB has already done it”.

Elsewhere in the interview, Boyle discusses how central clearing has developed in FX very differently compared to other asset classes and gives his view on what FX products ultimately will – and won’t – become cleared.

The full video can be accessed here:

Although there are clear drivers pushing more FX products into central clearing, this is unlikely to have a significant impact on market structure, says Paddy Boyle, the head of ForexClear, LCH. “The pressure to clear for banks that are subject to bilateral initial margin rules is very, very high and we have banks who tell us they’ve been cut off by other banks because they weren’t clearing,” he says. That, explains Boyle, is one of the negative drivers towards central clearing, while on the positive side there are lower capital costs, lower initial margin requirements and fewer credit line restrictions for firms that choose to use clearing services. As a result, Boyle predicts that cleared FX volumes will increase “pretty significantly” going forward.

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Galen Stops

Galen Stops