Clearing for the foreign exchange (FX) market has been heavily debated issue over the years but the global market has been regarded as too big and too liquid to warrant the huge sums involved. Settlement risk in the world’s currency markets had always been considered the biggest risk and the introduction of Continuous Linked Settlement (CLS) in 2002 put clearing firmly on the back-burner until 2009, when the G-20 leaders met in Pittsburgh, US and ruled that central clearing must be put in place for all standardised over-the-counter (OTC) derivative contracts.
While central clearing for the financially settled non-deliverable forwards market began in 2013, through three central counterparties (CCPs) that are also poised to offer clearing for FX options, a solution is yet to be built. Clearing FX options would involve delivering both the currency sold and bought and so, as a result, there is a potential liquidity disruption, of an entirely different magnitude, should there be a problem in the settlement. As physically settled OTC FX contracts have never been centrally cleared, the size and scale of this risk was unknown, until now.
