City of London to Leverage the BRICs

Last week, when we learned of the first set of cash-settled foreign currencies that would be cleared by LCH.Clearnet, it seemed an odd assortment. From FXWeek.com:

London-based CCP is set to launch clearing for NDFs in six currencies in mid-November, having shelved plans for options clearing while banks discuss settlement-related issues with regulators

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LCH.Clearnet plans to launch its widely anticipated foreign exchange clearing platform for non-deliverable forwards (NDFs) in mid-November, sources close to the offering's development tell FX Week.

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The new clearing service, dubbed ForexClear, has been in development since late 2010. LCH.Clearnet declined to comment for this article, but it is understood the platform will launch with NDFs covering six currencies against the US dollar: Chinese yuan, Brazilian real, Indian rupee, Russian ruble, Korean won and Chilean peso.

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While it had initially been expected to cover FX options and NDFs, the clearing house is understood to have temporarily shelved options pending discussions that were initiated in June between the US Federal Reserve and the major banks about the management of settlement risk for options.

Only yesterday, we learn that the local exchanges in many of these countries are joining forces to cross list their markets. From the FT:

Six of the world’s largest emerging markets exchanges have unveiled an alliance, in an unprecedented arrangement that aims to capture increasing investor interest in key “Brics” markets at a time when exchanges globally have been consolidating.

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Under the alliance Hong Kong Exchanges and Clearing, BM&FBovespa of Brazil, the National Stock Exchange of India, Bombay Stock Exchange, Johannesburg Stock Exchange and the two Russian exchanges that are in the process of merging – Micex and RTS – will cross-list each others’ stock index futures contracts. They will be listed in the local currency of each exchange, it was announced at the annual meeting of the World Federation of Exchanges in South Africa.

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The bourses will also work towards devising a Brics index that traders could use to gain broad exposure to emerging market indices.

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The development is a sign that exchanges in the Brics countries see an opportunity to expand globally at a time when their rivals in developed markets in the US and Europe are battling pressure on their margins from competition in cash equities trading from rivals and “dark pools”.

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The idea for the alliance was devised by HKEx, which first approached the other exchanges in June. Romnesh Lamba, head of the market development division at HKEx, told FT Trading Room: “From a revenue and investor perspective, we don’t expect there will be cannibalisation of each others’ markets.”

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The first stage of the project will see the exchanges begin cross-listing of financial derivatives on their benchmark equity indices by June 2012. The members will look to develop new products for cross-listing on their exchanges, which would be traded in local currencies.

As a reminder, LCH.Clearnet provides clearing services for the Hong Kong Mercantile Exchange (HKMex), the commodities wing of HKEx, and some have theorized the HK Merc was DOA until LCH was brought on board. As another reminder, foreign exchange is Geithner's loophole to Dodd-Frank. So, it looks like CLS Bank will leverage the developed world while LCH leverages the developing.

More here, at the now-free (and defunct) FT Tilt:

http://tilt.ft.com/#!posts/2011-10/32431/brics-exchanges-forge-global-alliance