Deliverable FX

What is Deliverable FX (DFX)?

Forex (FX) is the market in which currencies are traded. The FX market is the largest, most liquid market in the world. FX transactions are generally conducted over the counter, with banks being the major trading participants.

Deliverable FX (DFX) refers to FX transactions in which the notional amount of the two currencies involved are exchanged and settled between two parties on the same value date.

DFX can also be structured in certain varieties like spot transactions (immediate delivery of notional one or two business days after the trade date, aka spot date), forward transactions (settlement date beyond the spot date), and FX swaps transactions (a simultaneous purchase and sale of identical amounts of one currency for another, with two different value dates).

OTC Clear DFX Product Coverage

HKEX’s OTC Clear offers DFX clearing services for products traded in the USD/CNH and USD/HKD currency pairs. The features of DFX clearable by OTC Clear are specified in the table below. Further product eligibility details for DFX clearing can be found in the OTC Clear Clearing Procedures.

Instrument Currency Pairs Maximum
 Original Deliverable FX Forward Transactions USD and CNY(offshore)  3 years
 Original Deliverable FX Swaps Transactions  USD and CNY(offshore)  3 years

Benefit of DFX Clearing

i)Mitigating settlement risk

The exchange of notional amount for DFX transactions cleared by OTC Clear will be settled via the bulk settlement run service of the Real Time Gross Settlement system (RTGS) operated by the Hong Kong Interbank Clearing Limited (HKICL). This largely mitigates the settlement risk which arises from the asymmetric timing of payments and receipts of different currencies in the typical bilateral settlement process.

ii)Synergies with cleared CCS

DFX and CCS are used interchangeably in the FX market for foreign exchange trading and hedging purposes. The combined clearing service for both DFX and CCS will facilitate the participants to mitigate settlement risks by offsetting the settlement exposure between FX swaps/forwards and CCS trades.

iii)Relieving credit limit constraints

Central clearing can reduce credit line and tenor constraints which typically limit the ability of some banks to trade long dated FX with certain market counterparts.

iv)Addressing the challenge of wrong-way risk

Wrong-way risk is defined as the risk that occurs when credit exposure to a counterparty is adversely correlated with the credit quality of that counterparty. The clearing of DFX products can effectively relieve the wrong-way risk for counterparty which its credit rating may be correlated to the valuation of the underlying currency of the DFX contract.

Updated 30 Apr 2018