FX Clearing – What Happens in March stays in March?!

May 22, 2024 by No comments
  • Cleared FX now accounts for over $4Trn notional in a busy month across both OTC and Futures.
  • The past two years have seen particular growth in OTC FX clearing.
  • OTC volumes are no longer only in NDFs, with FX Options clearing almost $200bn in April 2024.
  • There have been consecutive OTC FX volume records in each of the previous five months of March.
  • We posit that March is such a busy month due to the calibration of AANA from March-May each year.

FX Cleared Volumes

Using CCPView, we see that cleared OTC FX has grown again since I last wrote about it in 2022:

Cleared OTC FX in millions of USD equivalents. Source: CCPView

Showing;

  • Cleared OTC FX volumes have recently surpassed $1.5Trn per month.
  • Peak volumes are almost 50% higher in the past two years – impressive.
  • The months of March in 2020, 2021, 2022, 2023 and 2024 have all recorded successive all time highs in volumes.
  • That is really weird.
  • I can only find the UK Government with a financial year end on 31st March (which was a new one on me!).
  • I belive it must be down to the AANA (Average Aggregate Notional Amount) calibration period used to decide whether you are captured by Uncleared Margun Rules. Europe, US and Japan all have March-May as the calibration period according to these Acadia materials.
  • The main beneficiary of this behaviour is LCH ForexClear, which continues to have a 98%+ market share in FX OTC clearing.

Are These Still All NDFs?

Not anymore! FX Options have seen record volumes in April 2024:

Cleared OTC FX volumes in $m equivalents. Source: CCPView

85% of cleared FX is now in NDFs, substantially lower than the 96% back in 2022. We noted last time that there has been some volume growth in other FX products, and this growth has accelerated significantly:

Cleared OTC FX Volumes excluding NDFs. $m equivlaents. Source: CCPView

Showing;

  • Cleared FX, excluding NDFs, reached nearly $220bn in April 2024 – a new monthly record.
  • Most (88%) of this volume is in FX Options.
  • The normal currency pairs are the drivers of volume here. EURUSD sees about 50% of volume, AUD and JPY at 15% each, GBP at 10% and CHF at 5%.
  • Volumes in options have basically doubled since August last year – a significant growth rate.
  • To put this in context, I first started writing about NDF clearing in 2016, when total monthly cleared volumes were just $75bn (and less than $50bn at LCH ForexClear).
  • It took until March 2017, and the implementaton of the Uncleared Initial Margin Rules, for NDF volumes to break $500bn in a single month.
  • Could FX Option volumes more than double from here? It is worth keeping an eye on – see below for more on the relative size of the FX Option Cleared market.

Which NDF Currency Pairs are the largest?

Back to NDFs, the currency split by volume is much the same as back in 2022:

Currency split by percentage of cleared OTC FX. Source: CCPView
  • 22% of volume is in INR, taking the top spot from…
  • TWD, making up 20% of volumes.
  • 19% in KRW
  • 13% in BRL
  • 6% each in PHP and IDR
  • 4% each in CNY and CLP
  • 91% of total volumes are in these 8 currency pairs, a bit more concentrated than back in 2022.

To put non-NDF FX clearing into perspective, FX Options clearing accounted for close to the same amount of volume as USDKRW NDF clearing in April 2024. It’s like adding another top 3 currency to volumes, which is great news for the strength of FX clearing franchises.

And What About FX Futures?

With OTC FX Cleared volumes over $1.5Trn now, is there still room for FX Futures? CCPView shows that exchange traded FX derivatives remain a significant market. However, there has not been the same growth in the past two years as seen in OTC:

FX Futures notional equivalents in $m. Source: CCPView

These products are mainly FX Futures traded at CME, and the BRL FX Future traded at B3 (which I think CME also owns a stake in?). Eye-balling the chart suggests:

  • BRL Futures volumes were down by about 25% between Q2 2022 and Q1 2024, before picking up again in April 2024.
  • Volumes in vitually all other currency pairs have been remarkably stable, although MXN volumes grew by about 40% (versus a low base).

Comparing the relative size of Open Interest across the two, we see that cleared NDFs are the largest market:

Open Interest in Cleared FX Derivatives in $m equivalents. Source: CCPView

Showing;

  • 73% of the Open Interest in Cleared FX products is in NDFs, down from over 80% in 2022.
  • The Cleared FX landscape is therefore becoming (slightly) more mature and hence more diverse.
  • There is some type of window dressing happening in December each year. Both Dec 2022 and 23 saw big drops in OI at the end of the year.
  • There are clear signs of growth in FX Options here as well – with OI up to 14% of the total, from 4% last time we checked.
  • The chart generates a nice headline – “FX Options Open Interest is now larger than FX Futures“. But maybe this just speaks to the lack of netting/compression in FX Options compared to Futures?

In Summary

  • Clearing of FX products accounts for significant volumes each month – over $4Trn.
  • OTC volumes can now reach $1.5Trn, with busy months seeing 50% higher volumes than two years ago.
  • In contrast, FX Futures volumes have been pretty stable over the past two years.
  • FX Options are seeing particularly impressive growth, reaching nearly $200bn in April 2024.
  • Open Interest in cleared FX products has again increased by about 45% in the past two years.

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Posted in FX