A panel of experts from XTX, EBS, Sucden and Traiana argue why all major FX market participants should come together to engage and adopt existing solutions to solve credit risk challenges.
Why resolve the problem of credit allocation in FX by removing the line of business completely, especially when there is an obvious solution, according to industry experts speaking at a Traiana hosted Tech Forum. Recent market events have led to some prime brokers pulling out of certain client sectors or increasing margin requirements.
Recorded on 29 June, Mike Irwin, COO at non-bank market maker XTX Markets, said: “Trying to solve this problem by just removing it off your books isn’t really a credible solution. We all know what the problem is and how to fix the problem, but to actually solve it you need adoption from all trading platforms, dealers, prime brokers and fund managers to adopt a way in which credit can be managed to the greater benefit of the entire FX ecosystem.”
Also on the panel was Noel Singh, Head of eFX Business development at Sucden Financial, who reinforced Irwin’s call for industry to work together: “Currently, there is a dislocation between the ability to pay for the credit, and no concept of how much collateral the client has with us vs how much credit we are giving out to the wider market. The only real way to solve this problem, which has frankly been around for too long, is for everyone to adopt a more dynamic distribution of credit, rather than having these static limits.”
The problem of credit allocation, which has hung over the FX market for over a decade now, has been in part due to understandable resistance from counterparties to fundamentally change the way in which they trade by introducing new methods such as pre-trade credit, dynamic distribution of ECN limits and designation notices. Irwin went on to say: I’m not against pre-trade credit as it is very relevant for areas such as clearing, but the reality is that does not solve the entire problem of credit allocation in an FX market of multiple counterparties and numerous trading methods.”
Andrew Cheesman, Head of Prime Brokerage and Credit Management at EBS, concurred with Irwin and Singh’s comments, but also claimed that without a solution to the credit issue there will not be a distribution network that everyone needs to get best execution: “Is it a liquidity issue that certain market participants can’t get access to enough credit at the right place and at the right time? Or is there just not the appetite for credit risk? Regardless of the answer, we need to make sure everyone can trade transparently on the same market and credit is a facilitator of that.”
In order to find a solution, multiple vendors have been trying to encourage as many market participants as possible to adopt a network-wide solution. Igor Zubkov, Head of Credit and Documentation Services at Traiana concluded: “Adoption, engagement and involvement is the name of the game. The processes and solutions are available, and we are seeing more and more market participants trying to understand how to use the technology, including existing FX credit services such as DNM, CreditLink and Rebalancer. Ultimately, credit grantors need to know the overall utilization across all liquidity pools, and how much credit is available that can be dynamically distributed across all the different ways in which FX is traded in as close to real-time as possible.”
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As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals. The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world’s leading central counterparty clearing providers, CME Clearing. With a range of pre- and post-trade products and services underpinning the entire lifecycle of a trade, CME Group also offers optimization and reconciliation services through TriOptima, and trade processing services through Traiana.
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