I never fully subscribed to the view that every day is different in FX. Back in my time, many were tediously the same. The routine was: arrive, make your budget by 7:30, put your feet up, get told off, take a position, lose your day’s profit and a bit more, go down the Mithras for lunch before returning, abusing the rest of your colleagues and indulging in a bit of afternoon dealing. As I’ve speculated before, I’m sure that the period of low volatility in FX had more to do with dealers staying sober than any new market paradigm created by electronic trading.
Anyway, a lot happened in the market last week and I missed it all because I was on holiday. While it’s true that in terms of rate action and volume, April is shaping up to be the quietest month of 2009 so far, the announcement by CLS and Icap that they were forming a joint venture to aggregate – not net – trades is highly significant. I’ll be looking into this more in next month’s Euromoney magazine, but although it is a very different proposition from inserting a central counterparty (CCP) into the market, it does raise the simple and familiar question beloved of old spot dealers: “How are you left?”
Obviously, the use of a CCP can deliver many efficiencies, especially when it comes to the mitigation of credit risk – provided the end user is happy to have all its eggs in one basket at the clearer. Recently, the Chicago Mercantile Exchange released a report that, perhaps not surprisingly, argues that credit risk is acting as a catalyst for change in FX. “Market participants’ growing concerns about liquidity and counterparty credit have driven demand for electronic trading, better market access, and proven counterparty clearing solutions,” claims Derek Sammann, global head of FX products at the exchange.
The report adds that banks say counterparty risk is their biggest worry when supplying e-pricing. And yet, taking a quick look at this year’s FX poll would suggest that it is not. If it were, one would expect that those banks that have done their best to blow their balance sheets apart would have been massively punished and seen a huge loss of FX flow. Without giving too much away, this does not appear to be the case.
When FXMarketSpace was launched, it soon found that credit was not an issue in FX. Times have changed. Will the market really adopt a CCP? This is an even-more pertinent question now that CLS and Icap have unveiled their JV to reduce operational risk and relieve some of the technological pressures on banks’ back offices. Furthermore – and this is possibly the key issue – will FX really accept the use of a for-profit CCP domiciled in the US? I can’t see too many central banks agreeing to that. For the moment, the implementation of a CCP, if it happens, is looking like the solution to a problem that may not exist.