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So, on the bright side, European Vanilla options in the US represent nearly 1, trades per day. On the down side, only 1 or 2 of these appear to be cash settled. So the market is almost totally a deliverable market.

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This makes sense — the long-standing issue with clearing FX Options had been how to mitigate the settlement risk of the delivery. There is certainly a practice of firms closing out options positions before maturity, whether it is the client who wants to unwind, or even the dealer who wants to mitigate their pin risk. Speaking of pin risk — cash settling should be able to help everyone gain certainty.

LCH (clearing house)

Quick tutorial on PIN risk — assume you have sold a 1. At am and the market trading at 1. If you find out at that he took delivery and the market is now 1.

Point here is that cash settlement would presumably give immediate certainty to everyone with a position that their trades have either expired or exercised. So the market seems large enough, and cash settling could have its own benefits. Surely, we should also expect some benefits of margining.

It all depends on the starting point margined or not margined and how much portfolio offsets they are currently enjoying. I packaged up 3 different options, spread individually across 3 separate counterparties.

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The options are:. Worth pointing out that the differences in margin for each similar-sized option are presumably due to the different levels of volatility in each pair. Again this is SIMM margin, perhaps to illustrate what we might expect at the upper end at a clearing house :. So, we go from 6.

Will margin rules change the cleared FX market?

A quick look at the data shows that the market is certainly large enough. We might, however, question how many cash settled options are traded at the moment, as well as the appetite within the market to cash settle their options instead of taking delivery.

At the same time, we acknowledge some efficiencies could exist if cash settlement was more readily available. Wholesale banking. External what does this mean?

OTC FX trading – Viewpoints which Matter

This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author. Going forward, in order to meet customer needs in light of uncleared margin rules, CME will focus its over-the-counter OTC clearing services on interest rate swaps IRS and foreign exchange FX , as well as on developing further capital efficiencies for market participants. CME Group will work with CDS open interest holders and regulators to ensure an efficient and seamless transition for the credit market. During this transition, CME will continue to provide full clearing services so that participants can continue to manage their risk, including the roll to CDX Pending regulatory approval, the company will provide fee waivers on CDS clearing, as well as facilitate the bulk transfer of open positions.

The company also will accelerate additional OTC clearing innovations to provide further efficiencies to market participants, including: Launching OTC FX options clearing by the end of Comments: 0.