The concept of using central counterparties, or a clearing house, has been very much in the news over the past couple of weeks. At times, it seems there is a propaganda campaign being waged by those in favour of CCPs and those who prefer the bilateral credit-trading model that dominates FX.
Both models have their merits and their weaknesses. It is often claimed that trading on regulated exchanges is safer than in OTC because of the use of a CCP as risk mitigator. However, what the CCP also does, as the SocGen debacle has shown, is effectively disguise who is the counterparty to the other side of trades.
It is inconceivable that SG would have been able to rack up such a huge position and loss in a bilateral, OTC market because it would have inevitably filled many of its credit lines. Furthermore, compliance officers at its counterparties would surely have contacted the bank and asked if the trading was legitimate. Eurex did this, but SocGen ignored it. Would it have been able to ignore multiple requests from counterparties as easily as from a single clearer?
Talking to a very prominent hedge fund this week, I heard that it has a desire to see a CCP in FX, provided that it can net and then settle through CLS.