August 8, 2023 | Stamford, CT — FX derivatives clearing is slowly on its way to becoming an important and influential component of the FX market structure. 

While Dodd-Frank and a host of other rules have led to major increases in the clearing of OTC derivatives, the take-up in FX has been much slower. The reasons are understandable: FX instrument clearing is not mandated, FX transactions generally limit counterparty risk, and certain FX transactions are excluded from the initial margin calculation. These, in addition to the perceived additional costs, have historically reduced the incentive to clear.

However, clearing volumes for FX derivatives have started to climb as capital costs rise and clearinghouses and other providers invest in the infrastructure necessary to clear FX derivatives. 

“The increase in clearing of FX instruments is being driven not by proscriptive mandates from regulators, but by prudent financial resource management,” says Stephen Bruel, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of The Future of FX Derivatives Clearing: Has the Path Been Cleared?

Trade volume for cleared OTC FX has been increasing . Multiple clearinghouses support this market, and more innovation from trading venues and middleware will help support the transition.

Of course, “FX” is not one market, but instead, dozens of markets made up of dozens of product and currency combinations, all with varying clearing trajectories. The pace for NDFs, FX swaps and FX options, for example, will all be different. Currency pairs also come into the equation. NDF clearing is more common for pairs such as USD/BRL and USD/KRW, for example, than for less utilized pairs, such as USD/MYR.

Despite the heterogeneous nature of this market, approximately 80% of the derivatives market participants in a recent Coalition Greenwich global study expect clearing of FX derivatives overall to increase further in coming months. This momentum is fueled by a renewed focus on the efficient use of capital, balance sheet, credit, margin, and collateral. 

“Costs of capital are rising, the market structure is evolving and FX clearing opportunities are expanding,” says Stephen Bruel. “These are all tailwinds for FX clearing growth.”
 

The Future of FX Derivatives Clearing: Has the Path Been Cleared? examines the drivers and headwinds influencing the growth of FX derivatives clearing and analyzes the primary reasons market participants use FX clearing, industry views on regulatory mandates to clear FX instruments, the instruments seen as most conducive to FX clearing, and the potential benefits and knock-on effects of widespread adoption.