The BIS published in December a research paper on costs and benefits of switching to central clearing, depicting the imbalances on the rate of voluntary clearing among those derivatives not subject to mandatory clearing. In particular, the authors focus on the volumes of non-deliverable forwards (NDFs) versus credit default swaps (CDS).
According to the analysis, the divergence in volumes can be explained by structural differences across the two products, citing lower capital, margin requirements, ease of trade or trading liquidity as key reasons that might prevent certain derivatives from central clearing.
This research paper is aligned with November’s FX Week interview to Kahyang Chong, head of ForexClear product EMEA at LCH. With the upcoming Phases 5 & 6 of Uncleared Margin Rules (UMR) for IM affecting an estimated 1000+ firms by September 2021, the interview discusses the evolution of central clearing and the strong incentives for firms to consider clehankaring in the near future, with additional costs of bilateral trading up to 70% in some cases.
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