Non-Deliverable FX Forwards – No EMIR Clearing, Yet

On 4 February 2015, the European Securities and Markets Authority (ESMA) published a feedback statement to its consultation on the clearing obligation covering non-deliverable forwards (NDFs) under the European Market Infrastructure Regulation (EMIR). Based on comments received, ESMA states that it is not proposing a clearing obligation for NDF classes at this stage.

NDFs are cash settled, as opposed to physically settled, foreign exchange (FX) forward contracts. The NDF market has traditionally developed in the face of legal or regulatory constraints imposed by some countries on the convertability of their currencies. Such constraints may hinder counterparties located outside those countries from entering physically-settled FX forward contracts. This has given rise to increased demands for NDFs, which do not require payment in the non-convertible currency.  

The clearing of NDFs is a recent development and to date LCH.Clearnet Ltd is the only European Central Counterparty authorised to clear them. While NDFs are also being cleared by a number of third country CCPs, these have not yet been recognised for EMIR purposes.  

In response to its consultation, ESMA received 38 responses many of which expressed reservations regarding the mandatory clearing for NDFs, mainly because of the relatively undeveloped stage of the NDF market and the need for international convergence on the issue of an NDF clearing obligation. As a result, ESMA concludes that “more time is needed to address appropriately the main concerns raised in the responses” while simultaneously indicating that this conclusion is without prejudice to the possibility of ESMA proposing an NDF clearing obligation at a later point, depending on market developments.