Quantile and LCH ForexClear, both London Stock Exchange Group (LSEG) Post Trade businesses, announced the FX Smart Clearing service, which enables participants to selectively clear FX Forwards via LCH ForexClear to significantly reduce capital requirements and counterparty risk.
It works by intelligently selecting existing uncleared trades to move to LCH ForexClear, and optimizing portfolios with new rebalancing trades to reduce counterparty risk and the financial resources a participant must hold. The optimization can be fully customized, 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.
FX 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 optimization then ensures the risk reduction is achieved within the relevant IM and risk constraints.
Prior to the recent go-live, Quantile and LCH ForexClear have delivered several Proof of Concept (PoC) runs which have demonstrated the significant potential of the service. 19 participating banks achieved an average reduction in capital requirements of 51%, without increasing IM significantly. Quantile and LCH ForexClear believe there is scope to increase capital reductions to 70%+ as the clearing network and eligible products grow.
Esben Urbak, head of Product at Quantile, said in a statement: “By using Quantile’s optimization 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 at LCH ForexClear, said in a statement: “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.”
Quantile and LCH ForexClear will be offering regular FX Smart Clearing runs from early 2024 for FX Forwards, with other cleared products to follow.