Best portfolio optimisation solution: LCH ForexClear

Asia Risk Awards 2023

Rohit Verma, LCH
Rohit Verma, LCH

A growing number of firms in the Asia-Pacific (Apac) region have been opting for LCH’s clearing services over the past 12 months. This trend is set against a backdrop of more institutions being caught by uncleared margin rules (UMR) and the implementation of the new standard approach for counterparty risk (SA-CCR).

Over the past 12 months, the clearing house has onboarded 18 new clients, including Japanese and Indian institutions. Clearing volumes at LCH have also been on the rise during this period. In 2022, LCH ForexClear, the firm’s over-the-counter foreign exchange clearing service, cleared $24.8 trillion globally in notion, up 14% from the previous year. The clearing giant also saw an 83% increase in client clearing volumes in the first quarter of this year versus the same period last year.

“A growing number of firms in Apac are choosing to clear their OTC FX at LCH ForexClear, and are benefiting from the margin, capital and operational efficiencies that the service delivers,” says Rohit Verma, head of Asia-Pacific, LCH, LSEG Post Trade.

“We continue to work in collaboration with our market partners in the region to deliver innovative solutions and expand the diverse set of products available to our members and clients, enabling them to unlock additional cleared FX liquidity.”

Clearing at LCH ForexClear offers lower margin requirements than bilateral transactions, and provides capital optimisation opportunities through multilateral netting, a materially lower counterparty risk weight, as well as settled-to-market benefits and opportunities for portfolio margining across products.

LCH has seen growing interest in clearing non-deliverable forward (NDF) portfolios, especially from participants in Singapore, India and South Korea. LCH ForexClear dominates that area, clearing almost 20% of the global NDF market.

Smart clearing

Over the past 12 months, LCH made several improvements to its clearing services, including launching an enhanced online margin calculator and introducing portfolio margining.

The margin calculator provides access to margin information, enabling participants to proactively manage their clearing and simulated portfolios, and identify potential optimisation opportunities. Portfolio margining, which hit the market in the first quarter, allows margin offsets between LCH ForexClear’s deliverable and non-deliverable services and more efficient capital and collateral allocation.

The clearing house has also added new routes into LCH ForexClear, including FX Connect TradeNeXus and FXall Settlement Center, enabling simplified and streamlined trade workflows.

In addition, market participants praise LCH’s FX Smart Clearing initiative, which, through a selective clearing of FX forwards and swaps, helps them optimise their capital usage, reduce counterparty risk and improve operational efficiency.

FX Smart Clearing allows members to connect to a third-party optimisation provider to share trade and other financial information, while the optimisation provider connects to LCH ForexClear to consume the existing cleared portfolio.

The optimisation provider, or approved trade selection provider, assesses the desired financial resource-optimisation target for members, using selective clearing for each, solves complex optimisation problems to minimise financial resource requirements, and finally submits the resulting trade packages to LCH ForexClear to clear on behalf of its members.

An initial proof of concept (PoC) LCH ForexClear conducted in July 2021 with 17 banking groups. The latest phase of the programme, which was completed with multilateral optimisation provider Quantile, found that 13 ForexClear members experienced an average of 51% potential capital reduction in February. That number was improved from 40% tested in the fourth quarter of 2022 across 10 eligible members.

LCH FX Smart Clearing has the scope to increase potential capital reduction to over 70% as the clearing network and eligible products grow. A notional of $2.7 trillion was identified for backloading, of which 71% could be further compressed. Those members with larger cleared NDF and FX option portfolios registered larger potential savings than the average.

LCH ForexClear’s FX Smart Clearing solution is a testament to their commitment to materially improve capital efficiency in FX markets, and we’ve been impressed with how they’ve responded to meet the changing needs of FX participants under SA-CCR,” says Quantile’s head of product, Esben Urbak.

“There is [a] strong demand from our optimisation network to sweep risk into LCH ForexClear, and we look forward to being part of the Smart Clearing revolution going forward.”

Another update with LCH ForexClear is the launch of NDF Matching in the fourth quarter, in partnership with the London Stock Exchange’s capital markets division. NDF Matching will bring NDF clearing to the pre-execution part of the trade lifecycle for the first time, creating further opportunities and attracting new clearing participants and liquidity.

The service will offer a unique and streamlined workflow, combining the benefits of anonymous execution and all-to-all liquidity, as well as the multilateral counterparty risk netting benefits of facing a central counterparty on a cleared-only central limit order book, an exchange-style execution venue that matches all bids and offers according to price and time priority.

NDF Matching is scheduled to be launched in Singapore this year, with full support from the Monetary Authority of Singapore.

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