A panel of experts from XTX, EBS, Sucden, and Traiana argue why all major FX market participants should come together to engage and adopt existing solutions to solve credit risk challenges.
Why resolve the problem of credit allocation in FX by removing the line of business completely, especially when there is an obvious solution, industry experts recently said at a Traiana-hosted Tech Forum. Recent market events have led to some prime brokers pulling out of certain client sectors or increasing margin requirements.
Recorded on 29 June, Mike Irwin, COO at non-bank market maker XTX Markets, said: “Trying to solve this problem by just removing it off your books isn’t really a credible solution. We all know what the problem is and how to fix the problem, but to actually solve it you need adoption from all trading platforms, dealers, prime brokers, and fund managers to adopt a way in which credit can be managed to the greater benefit of the entire FX ecosystem.”
Also on the panel was Noel Singh, Head of eFX Business development at Sucden Financial, who reinforced Irwin’s call for industry to work together: “Currently, there is a dislocation between the ability to pay for the credit, and no concept of how much collateral the client has with us vs. how much credit we are giving out to the wider market. The only real way to solve this problem, which has frankly been around for too long, is for everyone to adopt a more dynamic distribution of credit, rather than having these static limits.”
The problem of credit allocation, which has hung over the FX market for over a decade now, has been in part due to understandable resistance from counterparties to fundamentally change the way in which they trade by introducing new methods such as pre-trade credit, dynamic distribution of ECN limits, and designation notices. Irwin went on to say: “I’m not against pre-trade credit as it is very relevant for areas such as clearing, but the reality is that does not solve the entire problem of credit allocation in an FX market of multiple counterparties and numerous trading methods.”
Andrew Cheesman, Head of Prime Brokerage and Credit Management at EBS, concurred with Irwin and Singh’s comments, but also claimed that without a solution to the credit issue there will not be a distribution network that everyone needs to get best execution: “Is it a liquidity issue that certain market participants can’t get access to enough credit at the right place and at the right time? Or is there just not the appetite for credit risk? Regardless of the answer, we need to make sure everyone can trade transparently on the same market and credit is a facilitator of that.”
In order to find a solution, multiple vendors have been trying to encourage as many market participants as possible to adopt a network-wide solution. Igor Zubkov, Head of Credit and Documentation Services at Traiana concluded: “Adoption, engagement, and involvement is the name of the game. The processes and solutions are available, and we are seeing more and more market participants trying to understand how to use the technology, including existing FX credit services such as DNM, CreditLink, and Rebalancer. Ultimately, credit grantors need to know the overall utilization across all liquidity pools, and how much credit is available that can be dynamically distributed across all the different ways in which FX is traded in as close to real-time as possible.”
CME Group’s Traiana operates the leading market infrastructure for post-trade processing and risk management across asset classes and provides client service and risk management technology across the financial sector. Global banks, broker/dealers, buy-side firms and trading platforms use our cross-asset class services to automate risk management and pre-trade/post-trade processing of listed and over the counter transactions. Traiana’s network is comprised of the global financial community’s leading voices – providing insight, thought leadership and connectivity.