LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

VIA CFTC Portal

13 October 2020

Mr Christopher Kirkpatrick

Commodity Futures Trading Commission

115 21st Street NW

Three Lafayette Centre

Washington DC 20581

Dear Mr Kirkpatrick

Non-deliverable Options

Pursuant to CFTC regulation §39.5(b), LCH Limited (“LCH”), a derivatives clearing organization 

(“DCO”) registered with the Commodity Futures Trading Commission (the “CFTC”), is submitting nondeliverable European Vanilla FX Options (“NDOs”) in certain currency pairs for determination of 

whether mandatory clearing should apply.

Background

LCH intends to extend the ForexClear product offering to include NDO contracts on five G10 

currency pairs (AUD/USD, EUR/USD, GBP/USD, USD/JPY, USD/CHF) and four EM currency pairs 

(USD/BRL, USD/INR, USD/KRW, USD/TWD). ForexClear currently clears deliverable FX Options and FX 

Forwards in the same G10 currencies.

An NDO is settled by a net cash payment in the settlement currency (i.e. USD) reflecting the 

difference between the strike price and the settlement rate of the reference currency. Market 

participants trade NDOs typically for protection against unfavourable exchange rate movements.

Factors for determination

 

The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing 

data 

 

The FX market is fast paced, global and well established with a clear product set. The majority of FX 

transactions are short dated and volume has grown considerably over the last ten years. Table 1 

shows total options average daily volumes for proposed currency pairs (Source: BIS Triennial FX 

Survey 2019).

Table 1

(USD 

millions) 

AUD/USD USD/BRL USD/CHF EUR/USD GBP/USD USD/INR USD/JPY USD/KRW USD/TWD Total

Total 

options 

13,942 10,224 4,288 57,659 20,043 5,248 50,585 9,675 2,472 174,136
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

The price data currently used in the ForexClear service is provided real-time directly by clearing 

members. Price data includes FX spot rates and swap points for specified tenors as well as implied 

volatility points for specified tenors and deltas for all currency pairs. 

The availability of rule framework, capacity, operational expertise and resources, and credit support 

infrastructure to clear the contract on terms that are consistent with the material terms and trading 

conventions on which the contract is then traded 

LCH has a well-developed rule framework and support infrastructure for clearing FX transactions. 

LCH will continue to leverage this existing operational capability to clear NDO contracts.

In order to prepare for the launch of this product, LCH has been performing testing, including 

capacity testing. 

Further to this, LCH have notified its Clearing Members of a number of changes to the LCH Rulebook,

which include changes to the contracts terms, procedures and regulations applicable to Clearing 

Members that are Futures Commission Merchants (“FCM Clearing Members”) and non FCM Clearing 

Members. The changes have been submitted for self-certification to the CFTC and are available on 

the LCH website. 

The effect on mitigation of systemic risk, taking into account the size of the market for such contract 

and the resources of the DCO available to clear the contract 

The operational capability to manage the product is already in place in LCH, which will leverage some 

of the processes that apply to the clearing of FX Options (e.g. in terms of exercise or expiry of 

contracts). 

LCH expects current ForexClear Clearing Members to start clearing NDOs following the go-live date. 

A subset of existing Clearing Members clearing non-deliverable products will be ready on the go live 

date and plan to execute a few trades. More existing Clearing Members are expected to be ready in 

the new year where volumes/open interest in the eligible currencies are expected to increase. 

Based on the statistics of the latest Triennial Survey of the Bank for International Settlements, the 

daily average turnover in FX Options in the relevant nine currency pairs represents less than 5% of 

the global market daily turnover. The FX market has a diverse set of participants but the top 7 banks 

are involved in 62% of all FX business, whilst the top 10 banks cover 80% of it. The market share of 

the ForexClear Clearing Members represents less than 20% of the average daily turnover. Therefore, 

allowing clearing of NDOs is unlikely to have a significant impact on the risk profile or total resources 

held by the ForexClear service. As such, the systemic risk profile of LCH remains unchanged as a 

result of the new product offering.

The effect on competition, including appropriate fees and charges applied to clearing 

CME Clearing offers clearing of Cash Settled Options (“CSO”) in G10 currencies. LCH is not aware of 

competitors clearing NDOs in EM currencies at present.

Following the launch, scheduled for 19 October 2020, NDOs will be subject to the current fee plan 

applicable to the ForexClear non-deliverable service. The fees will differ according to the tariff 
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

chosen by Clearing Members (i.e. Bronze or Silver) and may consist of an annual charge and a charge 

based on the clearing activity. 

The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one 

or more of its clearing members with regard to the treatment of customer and swap counterparty 

positions, funds and property 

The level of legal certainty around the clearing of NDO Contracts is in all material respects the same 

as that of the products already cleared in the ForexClear service at LCH.

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH would be 

wound up under English law.

 

Further information §39.5(b)(iii-viii) 

The specifications of products eligible for clearing in the ForexClear service are set out in the LCH 

Product Specific Contract Terms and Eligibility Criteria Manuals, which are publicly available on the 

LCH website1. These will be updated with the specifications of the eligible NDO Contracts.

The participant eligibility standards for NDOs are the same as those for existing ForexClear Clearing 

Members. 

As noted above, the market data is provided real-time directly by Clearing Members.

There are no material changes within the service. In particular, there are no changes to the operational 

model or material risk management changes. Initial Margin calculation, Variation Margin and 

settlement will all be in USD in line with the current NDF offering. The Sovereign Risk Margin (SRM) 

framework is going to be enhanced so that the calculation of the SRM add-on for NDOs, as well as

NDFs, denominated in EM currencies will take into account the ‘likelihood of currency action’ (LCA). 

The objective is to proactively highlight currency risk/devaluation for relevant emerging market 

currencies and provide for additional margin as the risk rises.

LCH will make a number of changes to its Rulebook, the majority of which will be in the Product 

Specific Contract Terms and Eligibility Criteria Manuals and will set out:

- The NDO Contract terms

- The NDO Contract eligibility criteria 

- The NDO Contract Templates

The other changes will include:

- Conforming changes in the Default Rules, General Regulations, FCM Regulations, Procedures 

Section 2I (ForexClear Clearing Service) and FCM Procedures.

1 https://www.lch.com/resources/rulebooks/lch-limited
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

- A number of new definitions in the General Regulations to reflect the introduction of the 

concept of “ForexClear Deliverable Service” and “ForexClear Non-Deliverable Service”, as 

well as definitions specific to the NDO Contracts.

- A new section 2.2.19 “Changes in Automatic Exercise of FCM ForexClear NDO Contracts” in 

the FCM Procedures and an amended equivalent section in the Procedures Section 2I

(section 1.17).

The rule changes have been submitted to the CFTC pursuant to §40.6(a).

LCH engages its Clearing Members in the design and testing of new products at an early stage, 

through regular meetings and working groups. Clearing Members have been formally notified of the 

changes which LCH is required to make to its Rulebook.

Notice of this submission under CFTC regulation §39.5(b) was given to ForexClear Clearing Members 

on 24 September 2020 and a copy of this notice is provided at Appendix A. Furthermore, this 

submission is publicly available2.

LCH intends to launch these products with its Clearing Members and clients no earlier than 19 October

2020.

Should you have questions please contact me.

Yours sincerely

P.P. 

Julian Oliver

Chief Compliance Officer

LCH Limited

2 https://www.lch.com/resources/rules-and-regulations/regulatory-responses
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

Appendix A

Notice to Clearing Members regarding the 39.5 (b) submission on NDOs
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

Memo

To ForexClear Clearing Members

From Loic Moreau, Head of In-Business Risk ForexClear

Date 24 September 2020

Subject Non Deliverable Options (“NDOs”) submission for determination of clearing 

requirements 

Pursuant to CFTC regulation §39.5(b), LCH Limited (“LCH”), a derivatives clearing organization 

(“DCO”) registered with the Commodity Futures Trading Commission (the “CFTC”), is submitting nondeliverable European Vanilla FX Options (“NDOs”) in certain currency pairs for determination of 

whether mandatory clearing should apply.

As per CFTC regulation §39.5(b)(viii), LCH is required to notify Clearing Members of its submission. 

This note does not constitute a notification that the products are live for clearing. A notice 

announcing the live date and arrangements for the formal product launch may be published 

separately. 

LCH intends to extend the ForexClear product offering to include NDO contracts on five G10 

currency pairs (AUD/USD, EUR/USD, GBP/USD, USD/JPY, USD/CHF) and four EM currency pairs 

(USD/BRL, USD/INR, USD/KRW, USD/TWD). ForexClear currently clears deliverable FX Options and FX 

Forwards in the same G10 currencies.

An NDO is settled by a net cash payment in the settlement currency (i.e. USD) reflecting the 

difference between the strike price and the settlement rate of the reference currency. Market 

participants trade NDOs typically for protection against unfavourable exchange rate movements.

Factors for determination

 

The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing 

data 

 

The FX market is fast paced, global and well established with a clear product set. The majority of FX 

transactions are short dated and volume has grown considerably over the last ten years. Table 1 

shows total options average daily volumes for proposed currency pairs (Source: BIS Triennial FX 

Survey 2019).

Table 1

(USD 

millions) 

AUD/USD USD/BRL USD/CHF EUR/USD GBP/USD USD/INR USD/JPY USD/KRW USD/TWD Total

Total 

options 

13,942 10,224 4,288 57,659 20,043 5,248 50,585 9,675 2,472 174,136
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

The price data currently used in the ForexClear service is provided real-time directly by clearing 

members. Price data includes FX spot rates and swap points for specified tenors as well as implied 

volatility points for specified tenors and deltas for all currency pairs. 

The availability of rule framework, capacity, operational expertise and resources, and credit support 

infrastructure to clear the contract on terms that are consistent with the material terms and trading 

conventions on which the contract is then traded 

LCH has a well-developed rule framework and support infrastructure for clearing FX transactions. 

LCH will continue to leverage this existing operational capability to clear NDO contracts.

In order to prepare for the launch of this product, LCH has been performing testing, including 

capacity testing. 

Further to this, LCH have notified its Clearing Members of a number of changes to the LCH Rulebook,

which include changes to the contracts terms, procedures and regulations applicable to Clearing 

Members that are Futures Commission Merchants (“FCM Clearing Members”) and non FCM Clearing 

Members. The changes will be submitted for self-certification to the CFTC and will be made available 

on the LCH website. 

The effect on mitigation of systemic risk, taking into account the size of the market for such contract 

and the resources of the DCO available to clear the contract 

The operational capability to manage the product is already in place in LCH, which will leverage some 

of the processes that apply to the clearing of FX Options (e.g. in terms of exercise or expiry of 

contracts). 

LCH expects current ForexClear Clearing Members to start clearing NDOs following the go-live date. 

A subset of existing Clearing Members clearing non-deliverable products will be ready on the go live 

date and plan to execute a few trades. More existing Clearing Members are expected to be ready in 

the new year where volumes/open interest in the eligible currencies are expected to increase. 

Based on the statistics of the latest Triennial Survey of the Bank for International Settlements, the 

daily average turnover in FX Options in the relevant nine currency pairs represents less than 5% of 

the global market daily turnover. The FX market has a diverse set of participants but the top 7 banks 

are involved in 62% of all FX business, whilst the top 10 banks cover 80% of it. The market share of 

the ForexClear Clearing Members represents less than 20% of the average daily turnover. Therefore, 

allowing clearing of NDOs is unlikely to have a significant impact on the risk profile or total resources 

held by the ForexClear service. As such, the systemic risk profile of LCH remains unchanged as a 

result of the new product offering.

The effect on competition, including appropriate fees and charges applied to clearing 

CME Clearing offers clearing of Cash Settled Options (“CSO”) in G10 currencies. LCH is not aware of 

competitors clearing NDOs in EM currencies at present.

Following the launch, scheduled for 19 October 2020, NDOs will be subject to the current fee plan 

applicable to the ForexClear non-deliverable service. The fees will differ according to the tariff 
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

chosen by Clearing Members (i.e. Bronze or Silver) and may consist of an annual charge and a charge 

based on the clearing activity. 

The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one 

or more of its clearing members with regard to the treatment of customer and swap counterparty 

positions, funds and property 

The level of legal certainty around the clearing of NDO Contracts is in all material respects the same 

as that of the products already cleared in the ForexClear service at LCH.

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH would be 

wound up under English law.

 

Further information §39.5(b)(iii-viii) 

The specifications of products eligible for clearing in the ForexClear service are set out in the LCH 

Product Specific Contract Terms and Eligibility Criteria Manuals, which are publicly available on the 

LCH website3. These will be updated with the specifications of the eligible NDO Contracts.

The participant eligibility standards for NDOs are the same as those for existing ForexClear Clearing 

Members. 

As noted above, the market data is provided real-time directly by Clearing Members.

There are no material changes within the service. In particular, there are no changes to the operational 

model or material risk management changes. Initial Margin calculation, Variation Margin and 

settlement will all be in USD in line with the current NDF offering. The Sovereign Risk Margin (SRM) 

framework is going to be enhanced so that the calculation of the SRM add-on for NDOs, as well as

NDFs, denominated in EM currencies will take into account the ‘likelihood of currency action’ (LCA). 

The objective is to proactively highlight currency risk/devaluation for relevant emerging market 

currencies and provide for additional margin as the risk rises.

LCH will make a number of changes to its Rulebook, the majority of which will be in the Product 

Specific Contract Terms and Eligibility Criteria Manuals and will set out:

- The NDO Contract terms

- The NDO Contract eligibility criteria 

- The NDO Contract Templates

The other changes will include:

- Conforming changes in the Default Rules, General Regulations, FCM Regulations, Procedures 

Section 2I (ForexClear Clearing Service) and FCM Procedures.

3 https://www.lch.com/resources/rulebooks/lch-limited
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

- A number of new definitions in the General Regulations to reflect the introduction of the 

concept of “ForexClear Deliverable Service” and “ForexClear Non-Deliverable Service”, as 

well as definitions specific to the NDO Contracts.

- A new section 2.2.19 “Changes in Automatic Exercise of FCM ForexClear NDO Contracts” in 

the FCM Procedures and an amended equivalent section in the Procedures Section 2I

(section 1.17).

The rule changes will be submitted to the CFTC pursuant to §40.6(a) ahead of the launching date 

expected to be in October.

LCH engages its Clearing Members in the design and testing of new products at an early stage, 

through regular meetings and working groups. Clearing Members have been formally notified of the 

changes which LCH is required to make to its Rulebook.

Further information will form part of the full §39.5 filing which will be publicly available on the LCH 

website. 

Please do not hesitate to contact me regarding any questions raised by this submission.