CORRECT: CME Launches NDF Clearing Services For Dollar Vs Chilean Peso

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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