(CORRECTS 2nd graf about sequence of proposal)
By Mike Kentz
BOCA RATON, Florida, March 13 (IFR) - The first CFTC
guidelines for the mandatory clearing of foreign exchange
derivative contracts are in the final drafting stages and could
come as early as the next six weeks, according to market
participants and one of the agency's commissioners.
The proposal, which would then be open for comment and
subsequently phased in over several months and three stages,
will set in motion a shift of the third set of derivative
instruments to be mandated for central clearing via Dodd-Frank
The first two sets of contracts were interest rate swaps and
credit default swaps. The FX mandate will comprise
non-deliverable forwards and OTC FX options.
"I don't have an exact date but the proposal seems
imminent," CFTC Commissioner Scott O'Malia told IFR on the
sidelines of an industry conference in Boca Raton, Florida.
"Judging by some conversations with staff, I would say it
will be out in the second quarter."
The movement of FX contracts into clearing will represent a
major shift for the NDF and options market, where trades are
currently conducted on a bilateral basis.
Previous shifts to mandatory clearing for IRS and CDS
contracts were marked by widespread industry disagreements over
the form, structure, and cost of clearing.
"There are a lot more players in this market [than IRS and
CDS], so it can be really messy," said O'Malia.
"We've really got to drill down and figure out some things
around how the infrastructure works."
Some market participants believe the industry has learned
its lessons from prior experience, and that the shift will be
smoother than last year.
Exchanges point to the fact that traders are already
increasingly utilizing cleared products such as futures and
exchange-traded options because the products provide reduced
counterparty risk and capital efficiencies.
The voluntary shift provides proof for some that the
industry is ready for a mandate and will collaborate in setting
up market infrastructure.
"We've seen a huge increase in clients looking to trade FX
through exchanges and on electronic platforms," said Derek
Sammann, head of FX, metals, and options solutions at the CME
"A host of regulations are pushing people to utilize the
capital and operational efficiency associated with on-exchange
Exchange-traded FX options are the firm's fastest-growing FX
product, with 2013 average daily volume growing 49%
The mandate for central clearing will also start the clock
ticking for the movement of NDFs and options onto swap execution
facilities - electronic platforms where OTC swaps will be forced
to trade as a result of Dodd-Frank.
"All the FX SEFs have been waiting with bated breath for the
FX clearing mandate - now we can exhale," said Vikas Srivastava,
the CEO of Integral SEF, an FX trading platform.
"This will finally provide the onus to trade NDFs and
options on SEFs."
Market participants are highly interested to see how the
CFTC structures the clearing of OTC FX options, specifically,
though the structure for NDFs is relatively understood.
The expiry of an option brings the settlement of a
transaction where two cash flows are exchanged, a process
traditionally handled by the dealer-run CLS Bank.
The inclusion of clearinghouses in the mix means CCPs and
CLS will have to strike an agreement regarding how the risk is
managed around that settlement process.
(Reporting by Mike Kentz)