How FX Clearing Works

Trades are negotiated and traded bilaterally in accordance with current market practices. Each party independently submits their trade side to the Matcher.

Once matched, the trade is transmitted to LCH for clearing and novation through ForexClear. Notification of trade status updates are relayed from ForexClear to members via the Matcher.

ForexClear calculates margin requirements throughout the 24-hour day and undertakes the risk netting and settlement of trades on maturity.

Net daily financial settlement is made, throughout the life of the trade, using PPS. Distinct settlement at trade maturity is unnecessary due to the daily exchange of P&L via variation margin.

Members access a full suite of LCH and ForexClear-specific reporting via the LCH  Portal.

Service availability 

24 hour service Members can register trades 24 hours a day, 5.5 days a week. Once received, trades are registered within 60 seconds; Members must hold sufficient collateral in order for their trades to be novated.

The transfer of cash collateral, trade settlement and any other transactions associated with ForexClear are facilitated by PPS, a direct debit arrangement under which participating banks commit to meet cash calls within one hour of receiving instruction from LCH  PPS is operated by LCH and recognised as a payment system under the Banking Act 2009 (overseen by the Bank of England).

Risk Management

LCH is  uniquely experienced in  the management of OTC risk.

Our risk management principles are based on rigorous membership criteria, ensuring that prospective members meet standard minimum requirements.

Calculating margins

ForexClear calculates margin using:

  • A full revaluation filtered historical simulation VaR model using 10 years of market data.

  • A 5 day holding period (the time required for transfer or close-out in the event of a default). With the advent of client clearing, or in the event of a country default, this can be amended according to requirements.

  • A 99.76% confidence interval.

There are two types of margin:

Initial Margin – delivered to cover potential future losses, in relation to member positions.

Variation Margin – daily delivery or receipt of margin; covers value changes of member positions.

The ForexClear Default Waterfall

Containing risk, minimising contagion

Our approach to risk is based on a ‘defaulter pays' model, in which the defaulter's margin is used to manage their default. 

This is intended to contain the impact of the default and minimise the risk of contagion. 

Each member's  own default fund contribution provides all members with financial protection for potential default situations where the losses may exceed the defaulting member's Initial Margin.