Goldman Sachs (GS.N) will offer clearing facilities for some currency derivative products on the London-based clearing house LCH’s ForexClear service, the bank said on Thursday.
Clearing or settling trades via exchanges or clearing houses is well established in equities and other asset classes. But lots of trades in financial products – particularly in the forex market – are still done “over-the-counter”, where there is no central clearing house backing up the deals.
Clearing ensures financial market trades are completed even if one side of the transaction goes wrong.
Centralised clearing is starting to increase in the $6.6 trillion a day foreign exchange market, but this is largely limited to currency futures which make up only a tiny fraction of the total market.
New regulations are gradually making it more expensive for investment banks to trade derivatives and this is encouraging them to send some trades for clearing to exchanges like the CME Group (CME.O) and the London Stock Exchange (LSE.L) and its clearing division LCH.
LCH’s ForexClear provides clearing services for currency non-deliverable forwards as well as for the currency options spot and forwards market.
Non-deliverable currency forwards are products where participants take a bet on a currency but settle in a different currency, mostly the U.S. dollar. This has gradually shifted from a bilateral trading model to a more centralised trading structure.
NDFs are the only type of FX derivative which are showing the biggest growth rate in clearing, which has led to a greater concentration of trading in these instruments in the main currency hubs globally, including New York, London, Singapore and Hong Kong.
London dominates market share in NDF trading, with Britain more than doubling its share to 46% in 2019 from 20% in 2016, data from the Bank of International Settlements showed.