LSEG post-trade businesses Quantile and LCH ForexClear have delivered a new FX Smart Clearing service allowing participants to selectively clear FX forwards via LCH ForexClear, reducing capital requirements and counterparty risk.
The service, which went live on 15 November, selects existing uncleared trades to move to LCH ForexClear alongside optimising portfolios with new rebalancing trades to reduce counterparty risk and the financial resources a participant must hold.
The optimisation is fully customisable, allowing participants to control their risk and resource changes, as well as preferred currency pairs and trading partners. In addition, portfolios can also be potentially compressed to significantly reduce trade count and notional.
Moving FX Forwards into LCH ForexClear will also allow participants to benefit from multilateral netting, lower counterparty risk weights and settled to market (STM) treatment, which in turn helps reduce capital requirements and counterparty risk.
Quantile’s optimisation then ensures the risk reduction is achieved within the relevant initial margin (IM) and risk constraints.
“We are pleased to have pioneered FX Smart Clearing with LCH ForexClear, and would like to thank our clients for their participation and support in the first live run,” said Esben Urbak, head of product at Quantile.
“By using Quantile’s optimisation to intelligently clear risk, we can now drive new levels of capital reduction and enable participants to access the benefits of clearing in an extremely operationally efficient way.”
FX Smart Clearing was developed to meet customer demand for solutions which simultaneously manage counterparty risk, IM and capital.
The introduction of SA-CCR has increased capital requirements for FX which creates a new incentive to clear, assuming the differences in cleared and uncleared IM are appropriately managed, according to the firms.
“LCH ForexClear is a very efficient place to hold risk, and by leveraging Quantile’s optimisation service, we can now significantly reduce capital and funding requirements under SA-CCR for our members,” said Andrew Batchelor, chief operating officer and head of product at LCH ForexClear.
“We look forward to welcoming more participants to the live service so they can benefit from the strong network, improved capital efficiency and further optimisation benefits from facing a CCP.”
Quantile and LCH ForexClear will be offering regular FX Smart Clearing runs early next year for FX Forwards, with other cleared products expected to be added.