The London Clearing House is looking to move into the forex markets with a pre-settlement clearing service for forward foreign exchange contracts.
The clearing house is understood to be formulating plans to extend the centralised SwapClear and RepoClear multilateral netting concept to cover FX pre-settlement risk - the risk arising from the failure of a counterparty after the trade is done but before it is settled.
While the Continuous Linked Settlement bank deals with the massive Herstatt exposure faced by banks from loss of the entire principal amount of a trade through counterparty failue, LCH is concentrating on the risk to trading profits in the days and hours after execution but before settlement occurs. This pre-settlement credit risk is subject to hefty regulatory capital charges.
The LCH has been quietly touting the idea of an FX central counterparty service to large market-making banks for the past year. With regulatory attention now focused on bank capital and collateral management, the Clearing House is preparing to step up its efforts as the idea of a pre-settlement risk reduction service gains currency and begins to merit closer inspection.