Thursday, October 16, 2014

ESMA Proposes Mandatory Clearing for FX Non-Deliverable Forwards

Author: David Schwartz J.D. CPA

The European Securities and Markets Authority is seeking input on its plans for mandatory central counterparty clearing of foreign exchange non-deliverable forwards (FXNDF).  FXNDFs are cash-settled foreign exchange forward contracts that cannot result in physical delivery of the designated currencies at maturity. FXNDFs allow hedging of currencies where government regulations restrict foreign access to local currency or the parties wish to compensate for risk without a physical exchange of funds.  

Under the rules proposed in the October 1, 2014, FXNDFs will be subject to mandatory clearing if they are contracts with maturities between three days and two years, and are settled in US Dollars in one of 11 currencies:

  1. Brazilian Real

  2. Chilean Peso

  3. Chinese Yuan

  4. Colombian Peso

  5. Indonesian Rupiah

  6. Indian Rupee

  7. Korean Won

  8. Malaysian Ringgit

  9. Philippine Peso

  10. Russian Ruble

  11. Taiwan Dollar

At the moment, only one CCP, LCH.Clearnet, is authorized to clear such contracts; however if the proposed rules are ultimately adopted, it is anticipated that a number of CCPs in the EU will be given authorization to do so. 

This paper follows the publication in July 2013 of a discussion paper on the clearing obligation under EMIR, the publication of the first consultation papers on the clearing obligation on interest rate classes and credit classes, and the publication of the Final Report on the clearing obligation on interest rate classes.  The consultation period closes on November 6, 2014.