Quantile and ForexClear Launch FX Smart Clearing
Posted by Colin Lambert. Last updated: November 28, 2023
After several proof of concept runs, Quantile and LCH ForexClear last week formally launched FX Smart Clearing, a service that allows FX market participants to selectively clear FX forwards – the firm expect to offer regular Smart Clearing runs from early 2024.
The service, which the two LSEG-owned firms say significantly reduces capital requirements and counterparty risk, works by intelligently selecting existing uncleared trades to move to LCH ForexClear, and optimising portfolios with new rebalancing trades to reduce counterparty risk and the financial resources a participant must hold.
The optimisation can be fully customised, enabling participants to control their risk and resource changes, as well as their preferred currency pairs and trading partners. Portfolios can also be potentially compressed to significantly reduce trade count and notional.
The two add that Smart Clearing was developed in response to customer demand for solutions which simultaneously manage counterparty risk, initial margin (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.
By moving FX forwards into LCH ForexClear, participants benefit from multilateral netting, lower counterparty risk weights and settled to market (STM) treatment – all of which reduce capital requirements and counterparty risk. Quantile’s optimisation then ensures the risk reduction is achieved within the relevant IM and risk constraints.
During the proof of concept runs, 19 participating banks achieved an average reduction in capital requirements of 51%, without increasing IM significantly. Quantile and LCH ForexClear say they believe there is scope to increase capital reductions to more than 70% as the clearing network and eligible products grow.
“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,” says Esben Urbak, head of product, 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. The launch cements Quantile’s commitment to help make FX portfolios easier, and cheaper, to maintain.”
Andrew Batchelor, COO and head of product, LCH ForexClear, adds, “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. 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.”
For more on this, see the recent interview between The Full FX and Quantile’s Esben Urbak, which can be found here. The firms say they expect to extend the service to other cleared products in due course. Earlier this year, Capitolis also connected to FX Smart Clearing.
