Consultation on the mandatory clearing of foreign exchange NDF has sparked fears over the rising cost of trading
On 1 October 2014 the European Securities and Markets
Authority (ESMA) a pan-European regulatory body launched a
consultation on the mandatory clearing of foreign exchange
non-deliverable forwards (FX NDFs), an issue also being looked
at by US authorities. Users of the contracts, which allow a
firm to gain exposure to a currency’s movement
without taking physical delivery of the currency, are concerned
as central clearing will increase the cost of a useful hedging
ESMA would limit clearing to 11 currencies vs dollar pairs,
including the currency of all of the BRICs countries.
John Grout, policy & technical director at the
Association of Corporate Treasurers says, "One of the things
about FX NDFs is that they tend to be used in currencies where
there is not free movement. They do not share exactly
consistent patterns [of cash flows] but risks can still be
managed effectively using NDFs and it is not understood why
they are often singled out by authorities."
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