LSEG’s post trade businesses Quantile and LCH ForexCLear have partnered to deliver what they claim is “the market’s first FX Smart Clearing service”. According to a press release from LCH, the solution was “developed in response to customer demand for solutions that simultaneously manage counterparty risk, initial margin and capital”. It will allow participants to selectively clear FX forwards via LCH ForexClear, reducing capital requirements and counterparty risk.
The service works by intelligently selecting and moving existing uncleared trades to LCH ForexClear. Simultaneously, it optimises portfolios with new rebalancing trades so that counterparty risk and the financial resources a participant must hold are reduced. This optimisation is customisable, which allows participants to control their risk and resource changes, preferred currency pairs, and trading partners. Portfolios can also be potentially compressed to reduce trade count and notional.
Standard requirements
LCH pointed out in a statement that the introduction of the standardised approach for counterparty credit risk (SA-CCR) has ”increased capital requirements for FX which creates a new incentive to clear, assuming the differences in cleared and uncleared initial margin (IM) are appropriately managed”.
By moving FX forwards to LCH ForexClear, participants can benefit from features that reduce capital requirements and counterparty risk, such as multilateral netting, lower counterparty risk weights and settled to market (STM) treatment. Through Quantile’s optimsation, users are assured that the risk reduction is achieved within IM and risk constraints.