In December 2014, the Foreign Exchange Markets Subcommittee (FEMS), a subcommittee of the CFTC, issued a report to the CFTC Global Markets Advisory Committee (GMAC) regarding a prospective clearing mandate for foreign exchange non-deliverable forwards (FX NDFs). In the report, FEMS recommends that, should the CFTC decide to proceed with a US clearing mandate for NDFs, that mandate should include a clear timeline and method of implementation to ensure that market participants have appropriate opportunity to address the issues outlined in the report. According to FEMS, the appropriateness of a clearing mandate is critically linked to the objective of mitigating systemic risk, consistent with the goals of the G20. While a CFTC clearing mandate for FX NDFs would result in a system-wide reduction of counterparty credit risk, it may not reduce systemic risk in the financial system given the FX NDF market’s small size (about 2% of the overall foreign exchange market) and short-dated tenor (over 90% of volumes are transacted in tenors of less than three months). The FX NDF market will represent the third asset class to be moved under rules for clearing and execution agreed to by the G20, after rates and credit derivatives have migrated towards central clearing over the past few years.

The report is available at www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/gmac_ fxndfmandate122214.pdf.