International regulators set expectations on CCP liquidity issues
Two international regulatory bodies—the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions—issued a statement on Feb. 5 regarding liquidity issues related to the clearing of deliverable FX instruments.
The statement focused primarily on the issues arising from the settlement process. The two regulatory groups emphasized that clearinghouses are responsible for settlement, which in the case of a deliverable FX instrument involves the simultaneous settlement of obligations in more than one currency. Clearinghouses therefore must maintain "highly reliable liquidity resources" to cover the settlement of cleared transactions in all settled currencies in a default situation, the statement said. The statement also outlined several issues that the two groups expect clearinghouses to address in their liquidity arrangements.
Currently several clearinghouses offer clearing for non-deliverable currency forwards. These instruments are cash-settled and do not pose the types of settlement issues flagged by the regulatory groups. However, CLS Bank, the financial institution that handles settlement for a majority of transactions in the global foreign exchange market, announced last year that it would work with clearinghouses on providing settlement services for the clearing of deliverable foreign exchange products, starting with FX options. CLS made the announcement jointly with LCH.Clearnet, which is currently the leader in NDF clearing and is working to introduce clearing for FX options.
