Are Europe and US moving closer to NDF clearing mandates?

Could clearing mandate for NDFs be closer that we think?

Europe has tended to lag the US by about 18 months in implementing regulatory reforms in general, and trading and clearing mandates in particular.

So, the timing this week of a new consultation paper by The European Securities and Markets Authority (ESMA) on mandatory clearing of swaps and Non-Deliverable Forwards (NDFs) is potentially significant, as it could suggest a more rapid convergence between Europe and US on NDF clearing mandates.

The reason for this is that the paper has been published barely a week before the Global Markets Advisory Committee (GMAC) of the CFTC, hold a public meeting to discuss whether a clearing mandate is appropriate for NDF’s, with a particular focus on how such a mandate would impact foreign exchange contracts.

NDFs volumes are still very small, at just $127bn/day, which is about 2.7% of the $5.3tn total global FX volumes based on BIS 2013 Triennial FX Survey data, with London accounting for some $43bn/day which is about 34% of NDF trading based on the table below.

NDF volumesBIS data showing NDF volumes

Although NDF clearing is currently available, volumes for voluntary clearing are very low, and are not expected to change until mandatory clearing mandates are introduced. Also, the CFTC needs to determine on a currency pair by pair basis, which NDFs will be ‘Made Available to Trade’ (MAT) . The combination of the MAT determination and mandatory clearing, will then trigger the migration of NDF flows onto SEFs and off the phones.

The FIA produces a useful SEF tracker which shows NDF volumes on SEFs, see here pages 22-27.

SEF volumes for NDF+Option

FX Volumes on SEFs (NDFs and FX Options)

SEF volumes for NDF by currency

NDF volume by currency on SEFs

However, given the volatile nature of NDF emerging market currencies, the costs of NDF clearing will be relatively high. And whilst most corporate end users of NDFs will be exempt from the clearing mandate, asset managers and funds who are large users of NDFs will be required to clear, and the introduction of mandatory clearing and trading may impact the levels of liquidity in the market if they feel that they are no longer cost-effective products to trade.

ESMA Consultation paper is available here

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