Nasdaq is pressing forward with its long-touted intentions to clear some of the foreign exchange instruments in Europe as local regulators are now being finalised with regards to mandatory rules for trading off-exchange derivatives.
The United States-Nordic Group has lodge an application in the past weeks with the European regulators for approval to clear the range of non-deliverable forwards (NDFs) along with options based on people who are familiar with the said application.
The move illustrates how the foreign exchange market is increasingly changing following the aftermath of G20 reforms to the global financial markets that were intended to monitor the risks and boost against systemic inconsistencies.
It is also seen as a form of test as it would be the first time a clearing house will be authorised to clear under the new rules has since sought to extend the said license. European authorities are presently examining all the clearing done and have given the go signal with regards to 13 venues so far.
Nasdaq was the first but was compelled only to clear equity, interest rate and commodity derivatives. With policy makers having sought to have more diverse range of derivatives supported by collateral and traded through clearing houses. From a historical perspective, forex market has been conducting privately with banks with little assurance posted between the parties in securing their trades.
Nasdaq had been openly settling for a move for more than a year with several financial institutions as its primary clients. Still, market participants have been more focused on their preparations to clear interest rates and credit default swaps before the European market is mandated to do the same next year.
Although politicians have been exempted from specific types of FX trading from the clearing mandate, U.S. regulators included other kinds of trades, notably non-deliverable options and forwards.
Global regulators have been lacklustre with issues to clear foreign exchange derivatives albeit concerns over how it would affect the world’s biggest and most liquidated market. Non-deliverable forwards trading accounts for nearly $127 billion of the $5.3 trillion traded in a regular basis on global currency markets last year alone despite volumes having rapidly expanded in recent year.
Finally, the European Securities and Markets authority, the pan-European regulator issued its market consultation to talk about draft technical standards for clearing forex NDFs after the other off-exchange asset classes commence. The discussion period closes this week, and if its application is successful, Nasdaq would be entering a clearing market which is ruled by LCH.Clearnet along with its competition from CME Group’s European operation.