CFTC Global Markets Advisory Subcommittee on Foreign Exchange Markets Submits Report
The CFTC Subcommittee on Foreign Exchange Markets (the "Subcommittee") submitted a report to the Global Markets Advisory Committee ("GMAC") regarding a prospective clearing mandate for foreign exchange non-deliverable forwards ("NDFs").
The Subcommittee was established after a GMAC advisory meeting that focused partly on issues related to clearing NDFs. The Subcommittee was charged with completing a report for the GMAC that would address the following questions:
- Is an NDF clearing mandate appropriate?
- What is the best way for the CFTC to implement a clearing mandate?
- Are there likely to be any execution issues in light of the made-available-to-trade rulings?
Click here for a summary of the report prepared by Delta Strategy Group.
See: FEM Subcommittee Report; CFTC Press Release.
Commentary
The Subcommittee report is ambivalent about whether NDFs should be subject to mandatory clearing ("a CFTC clearing mandate for FX NDFs would result in a systemwide reduction of counterparty credit risk, but may not reduce systemic risk in the financial system given the small size . . . and short-dated tenor . . . of the NDF market"). The report is unambiguously emphatic about the need for any NDF clearing mandate to be implemented with a "clear timeline and method of implementation" and the necessity of consultation with regulators across the globe. Overall, the report recognizes that while there might be a push by regulators to move more derivatives into central clearing, such movement could have an adverse impact on markets and market participants if not implemented with care.