The benefits of multiple market models

It might have been the timing of this year's FX Week USA congress, but an underlying theme that seemed to resonate was the need for the foreign exchange industry to lobby to prevent FX being swept up into the central counterparty clearing storm.

In some respects it seems shocking that this should even be a concern, and indeed few at the event thought it was imminent. Relative to other markets, the FX industry did and continues to operate smoothly, not least because of a nimble ability to resolve concerns before they become an issue.

A prime example is the weekend of Lehman Brothers' bankruptcy filing, when an emergency third-party information clearing house was created to facilitate the unwinding of open FX positions (FX Week, September 22, 2008). The facility, formed by a consortium of financial institutions, including top-tier global banks, and endorsed by the US FX Committee, was dropped a day after launch as banks settled some of their exposures directly, abandoning the need for a central clearing facility.

As David Reid, director in FX prime brokerage at Citi, said, to say the FX market had survived the crisis is wrong, because it functioned reasonably well through extremely difficult circumstance whether in terms of liquidity or volumes going through the market. "What we need to focus on is just making sure we've got our house in order, that we are getting adequate representation in front of legislative bodies, whether that's through the Bank of England and the Fed Committee, that we are stating our case and that there isn't a move to cause harm by attempting to prevent it."

As far as having houses in order, there's also a natural entrepreneurial interest as well. Jacqueline Liau, head of FX and rates prime brokerage, and chief operating officer of global fixed-income prime brokerage at Deutsche Bank, said the FX prime brokerage business is going to evolve in the next three to five years from simply clearing and credit provision, to helping clients manage risks. "The prime brokerage model will have to change over the coming months as we learn how to help our clients solve the new issues that have come up - because there have been new issues in the past five months."

That's not to say there's no room for the exchange model - far from it. But multiple models for this industry seem to have helped to avoid a problem during times of stress, whether it was through an exchange, conversational dealing, post-execution name give-up, or prime brokerage. It's not clear how anyone can disagree with that.

Comments? Email saima.farooqi@incisivemedia.com