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LCH.Clearnet Group Ltd., the world’s biggest swaps clearinghouse, began clearing over-the- counter foreign-exchange derivatives for currencies including Russia’s ruble, the Brazilian real and yuan.
LCH.Clearnet’s announcement comes as regulators and banks seek to cut risk in a market where $4.7 trillion trades daily. The London-based company will also start with foreign-exchange Non Deliverable Forwards based on Chile’s peso, India’s rupee, and the Korean won, the company said in an e-mailed statement.
Banks, hedge funds and asset managers active in the $708 trillion over-the-counter derivatives market are adapting to changes mandated by the Dodd-Frank Act passed by the U.S. Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. In Europe, European Union officials and lawmakers have brokered a deal on rules to force trading of some over-the-counter derivatives through clearinghouses to safeguard financial markets.
Six of the world’s largest banks, including Deutsche Bank AG (DBK) and Citigroup Inc. (C), will use ICAP Plc’s Traiana system that connects to clearinghouses that clear over-the-counter currency contracts, the lender said today. Intercontinental Exchange Inc. will start clearing some over-the-counter foreign exchange derivatives in the second quarter, the Atlanta-based company said last week.
LCH.Clearnet, whose SwapClear service began clearing interest-rate swaps traded between banks in 1999, and other clearinghouses owned by CME Group Inc. and Deutsche Boerse’s Eurex Clearing, operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default. The businesses have become more valuable as regulators globally seek more central clearing of derivatives.
The Dodd-Frank Act mandates that most swaps be processed by clearinghouses and that all trades are reported to data repositories.
As regulators urge more clearing for derivatives, exchanges such as Deutsche Boerse, NYSE Euronext (NYX), ICE (ICE) and CME, (CME) which own clearinghouses or have the so-called vertical model that locks in trading and post-trading, are offering more services. The banks that dominate the market are seeking to take stakes in clearinghouses or strike profit-sharing agreements.
Brokers including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Morgan Stanley and UBS AG (UBSN), are among lenders that will will use Traiana’s Harmony central counterparty to “manage the clearing process” required for over-the counter foreign exchange derivatives, ICAP said today.
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