Uptick is driven by UMR as well as volatility due to the war in Ukraine, with new interest from buy-side firms driving dealer activity.

The number of cleared non-deliverable forwards (NDFs) processed by OSTTRA Clearing Connectivity for FX has increased by almost a third this year, up from 4% YoY 2019 to 2020. Data by OSTTRA, an end-to-end trade-processing provider, also showed the volume of cleared NDF trades rose to a record high of 213,150 in March this year, with additional volatility due to macro events, particularly the conflict in Ukraine, contributing to this.

Overall, year-to-date, OSTTRA processed a monthly average of 180,559 NDF trades. The volume showed continued growth in 2022, with trades up 30.6% in the first half of 2022, compared to the same period in 2021. Ukraine related volatility only accounts for a relatively small portion of this growth: even when excluding the record-breaking March figures, monthly average NDF clearing volumes are up 25.8% in the first half of 2022, compared to the same period in 2021.

What’s driving the growth in NDF trading and clearing? Clue: three letters, six phases
OSTTRA’s analysis of trading and clearing volumes has found that each phase of Uncleared Margin Rules (UMR) correlates directly to volume growth. As UMR Phase 5 was postponed in 2020, the growth is reflected in 2021, where we see an increase of 28% versus 4% in 2020. While we saw volatility spikes, NDF growth has been steady and generally driven by UMR phases. With the deadline for the final phase of UMR – phase 6 – looming on September 1 this year, firms will need to keep a close watch on their trading activity in order not to breach the $50m UMR threshold.

Who’s driving the growth in NDF trading and clearing? Rounding up the usual and some new suspects
OSTTRA’s Patrick Philpott comments: “NDF Volume on OSTTRA Clearing Connectivity for FX is driven by large dealers. However, there are also some new participants over the period we analysed. These are mainly regional banks and investment management firms looking to gain an edge by clearing their FX portfolios. These firms are distributed globally and include companies in Asia and Australia as well as UK and Americas-based firms, with the market on the European continent being somewhat slower.”

Overall, Philpott explains, there is a clear uptick in buy-side interest in NDF clearing. Block and allocation workflows are a pain point for which buy-side firms are increasingly seeking solutions. While these are not yet a requirement for asset managers, they are expected to be a requirement for hedge funds if they start to clear. OSTTRA Trade Manager is increasingly being adopted by investment managers, and OSTTRA has already developed a block allocation solution for hedge funds.

Investment Management adoption is also driving additional dealers to clear NDFs, in response to large asset managers wanting to trade with them and clear. Philpott predicts that Canadian dealers will also start to clear this year.

How does OSTTRA support market players with the post-trade processing of NDFs?
OSTTRA’s clearing connectivity enables sell-side and buy-side firms to submit trades directly to leading CCPs, without the need to build out direct clearing connectivity. Against the background of UMR, more firms now seek to optimise their balance sheet by clearing more of their FX trades. OSTTRA provides a timely and scalable NDF clearing facility.

For more information on OSTTRA Clearing Connectivity, please contact us at info@osttra.com.