The plans of Reuters and CME joint venture FXMarketSpace to bring exchange-like efficiencies to the spot foreign exchange market appear to have been dealt a huge blow. Core to FXMarketSpace’s proposed business model is the use of CME Clearing as the central counterparty (CCP) to trades.
The use of a CCP makes trading anonymous and lowers credit risk, as the clearer is the counterparty to all transactions. FXMarketSpace had been widely touting the benefits of its model, saying that it would open the FX market to a new range of participants because credit was removed as a discriminating factor in sourcing liquidity. Exchanges also tend to net deals, and FX participants had been waiting for clarification on whether or not the new platform would adopt this initiative.
By netting, fewer trades are sent for final settlement, reducing the ultimate cost of trading for some market participants. The ramifications of FXMarketSpace’s launch have been discussed widely, and of particular interest was the impact it would have on CLS, the FX settlement system.
Few in the industry would disagree that CLS has worked very well, removing Herstatt or settlement risk as a factor; CLS is accounting for a growing percentage of the market’s volume.