FXMarketSpace's advantage is eroded

Some say volume growth on the platform is as good as the market's buy-in of the central counterparty (CCP) model. But others believe the issues go further and surround the execution of the initiative, and its delivery on the netted-CLS – or CLS-bypassed – portion of the original model.

The key advantage of the FXMS platform was its ability to significantly lower the cost of forex trading by circumventing CLS's ticket-by-ticket settlement. The plan was to leverage the existing agreements on the settlement of the FX futures held by the Chicago Mercantile Exchange (CME), which allowed it to submit a single, netted ticket to CLS at end-of-day for settlement.

Unfortunately, FXMS was unable to secure the arrangement's transitivity, and, say some, was effectively stripped of its key competitive advantage.

One of the significant alternatives, they were not able to deliver on, was using CME's existing clearance and settlement system GCC to bypass CLS altogether. "This would have been a great play, as it would have dramatically lowered execution costs on the platform, thus returning the competitive edge to FXMS," said a source. Also, since many of the prospective FXMS members were already set up on GCC in one form or another, they could leverage their existing documentation and capital into this market with relative ease.

According to the source, GCC would provide even more robust default risk protection than CLS, as it can deliver true counterparty transaction delivery, whereas CLS can only guarantee delivery versus payment.

Arguably, the market seems to have adapted to a hacked-CCP model already. The prime brokerage setup on ECNs allows entities lacking the capital or other resources for bilateral commitments to leverage the credit and bilateral relationships of the top participants – for a fee. This has not only allowed third-party participants onto these platforms, but also potentially allowed smaller banks to leverage larger banks' balance sheets and bilateral relationships in substitute for their own.

Leveraging the prime-broker services of the top-tier banks allows almost any participant to trade with almost anyone else on the ECNs in a sort of intermediated, multi-counterparty model, although 'multi' typically amounts to half a dozen major players at the most.