2nd UPDATE: CME Launches NDF Clearing For Dollar Vs Chilean Peso
May 16 2011 - 4:56PM
Dow Jones News
CME Group Inc. (CME) launched a postexecution clearing service
for nondeliverable forwards on the U.S. dollar versus the Chilean
peso, marking the first step in its plan to offer clearing services
for over-the-counter foreign-exchange transactions.
The move reflects growing demand for clearing services among
local Chilean market participants, said the company's FX products
director, Craig LeVeille.
"There is demand locally for a product like this; it will
facilitate business being done between Chilean counterparties and
international liquidity providers," he added.
CME and other exchanges have been expanding efforts to handle
more of a $4 trillion-a-day foreign exchange trading business
dominated by over-the-counter products. Hedge funds and other
proprietary traders have become more active in the forex market,
increasing the appeal of centralized clearing services provided by
the exchanges.
The new offering is "the first step in our broader initiative to
provide clearing services for a wide range of FX products later
this year," LeVeille said.
CME already offers foreign-exchange futures contracts for more
than 50 currency pairs, said CME Group spokesman Michael Shore.
The company said Monday its offering will mitigate counterparty
risk, expand liquidity and improve operational efficiency for
trades of the nondeliverable forwards.
The Chilean peso was chosen as the service's first currency
offering in this initiative largely in response to client demand,
Shore said.
"There's a lot of liquidity in the Chilean peso, and there was a
market need to clear this style of transaction," he added.
Estimates for average daily volume for the Chilean peso NDF
over-the-counter market range from $5 billion to $10 billion, FX
products director LeVeille said.
"Chile has a strong economy generating large investment
exposures to foreign assets," he added. "Local institutions can use
our clearing service to mitigate the growing credit constraints
they face when hedging currency risks, and this should lead to a
boost in liquidity and an expansion in cross-border activity."
Local Chilean banks and large, fast-growing pension funds could
especially benefit from the service, he said.
Operationally, it was also an easier currency to kick off the
service, he added.
"The Chilean peso seemed like a perfect step forward for us
because it is a smaller currency, so the requirements to get
started are not potentially as demanding as other currencies,"
LeVeille said.
The newly launched service also arrives in step with expected
regulatory changes in the U.S., which will likely mandate NDF
contracts to go through a clearing process, LeVeille said.
Still, "it's not about the mandate...it's really about solving
an issue for market participants, and to boot, it helps because it
looks like there's going to be a mandate on it anyway," LeVeille
said.
The move also reflects growing investor interest in Latin
American and other emerging-market currencies, analysts said.
"There's just more and more trading popping up in emerging
markets," said Win Thin, global head of emerging-market strategy at
Brown Brothers Harriman.
The growth of local Chilean markets, along with the country's
"fairly clean" monetary and fiscal policies have helped increase
market demand for the Chilean peso, said Benito Berber,
foreign-exchange strategist at Nomura Securities.
"It's very interesting that CME is expanding to these markets,
and this highlights the interest or the demand that we also see
here from macro hedge funds in terms of play in Chile," he
added.
-By Erin McCarthy, Dow Jones Newswires; 212-416-2712;
erin.mccarthy@dowjones.com
--Matt Jarzemsky contributed to this article.
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