Paradigm shift in forex means new risks

The changing paradigm of the foreign exchange markets might create a new set of pressure points for the industry that need to be addressed, warned delegates at the FX Week Asia congress in Singapore last Tuesday.

Speakers on the day said the growing trend for banks to create internal liquidity pools, and the soon-to-launch CLS/Traiana joint-venture ticket aggregation service, might expose the market to a different set of risks.

Some echoed similar concerns surrounding the use of central clearing initiatives. Critics have questioned whether clearing does, in effect, cause a new systemic - or concentration - risk. Like the too-big-to-fail banks, commentators have argued central counterparties (CCPs) might create a few concentrated points of failure. Last month, economists at the Bank for International Settlement said CCPs could require public sector support in the event of simultaneous defaults of a number of participants (FX Week, September 21).

Similarly, brokers speaking at FX Week Asia noted the electronic communications networks (ECN)-type model emerging within banks, where clients can effectively trade with each other, also introduces concentration risk. Anthony Northam, sales director for Asia at Thomson Reuters, admitted that, while independent ECNs will probably see a reduction of volumes as a result of the trend, because of their independent status they will always need to exist. "The market needs to decide if it is happy about such a concentration of risk," he said.

Meanwhile, other speakers commented on the need to react quickly to get an inventory of positions, whether trades have been processed or give-ups incomplete. By aggregating tickets at a fourth party, there is a risk of introducing ambiguity as trade information extends outside of the executing broker, client and prime broker. Concerns were raised over the impact of a potential delay on reconciliations data during volatile markets, unless of course, real-time response can be achieved and ambiguities reduced.

That said, even at the custodian level, ambiguities can exist. A simple timestamp could perhaps have resolved the problem...

Saima Farooqi, Editor

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