FX PB credit: High time for the industry to come together

Industry experts debate the role of credit in modern day FX markets at Traiana webinar

Greater engagement is required from all counterparties and venues across the FX ecosystem to improve credit risk management, according to industry experts from the prime brokerage arms of J.P. Morgan, Citi Group, and BNP Paribas.

Discussing how over-allocation of credit in FX affects market participants at the Traiana Tech Forum last month, Mariam Rafi, North American Head of OTC Clearing and FX PB at Citi Group, said, “If the market wants to continue to get access to the best sources of liquidity, it needs to quickly come to terms with the fact that we need to move beyond the old paradigms and deploy much more sophisticated technology in order to address longstanding issues with credit in FX.”

Leah Mallas, J.P. Morgan’s Global Head of FX Prime Brokerage and FX Clearing, reinforced Rafi’s call for industry collaboration, “Part of the reason we have seen so many firms dip in and out of the PB space is the lack of attention that has been paid to credit allocation. While we have seen more people waking up to the problem recently, the reality is we still have a long way to go. The devil is very much in the detail. For example, there needs to be much more granularity around designation notices.”

FX PBs have recently placed a greater emphasis on exactly what instruments, currencies, and tenors can be traded by their clients. The challenge is that due to the scope, volume, and frequency of different FX instruments being traded, it has become much harder but not impossible for to them to control risk with the right technologies in place.

Rafi added, “There is no reason, given the current innovation taking place amongst vendors, that risk cannot be mitigated through technology solutions. For example, a hub model where you can dynamically reallocate credit between all the different counterparties and venues would ensure much tighter risk management.”

Nathaniel Litwak, Global Head of FX Prime Brokerage at BNP Paribas, concurred with Rafi but also maintained that an industrywide solution was still some way off, “We have been living through this tech revolution which has been highlighted by COVID, so there is reason to be optimistic that there will be new solutions in the market that will help. That said, nobody can deny that there is a way to go before we find an answer to this longstanding challenge.”

In order to find a solution, multiple vendors have been trying to encourage market participants to adopt a network-wide solution. Igor Zubkov, Head of Credit and Documentation Services at Traiana added: “We are continuing to expand the depth and breadth of our solution in order to support different types of documentation –– from FXPB legal agreements, three-ways, four-ways, to Master Give Up Agreements (MGUA). We are re-engineering the components that comprise our credit-risk suite in order to provide a seamless end-to-end process from creation of designation notice, through credit monitoring, kill switch, and dynamic distribution of credit in collaboration with a growing number of ECNs.”

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Traiana Tech Forum – Credit Risk in FX

Join Kevin McPartland, Greenwich Associates and a panel of experts from BNP Paribas, J.P. Morgan, Citi, and Traiana in a discussion on how the over-allocation of credit risk in FX impacts the largest prime brokers and other market participants.

Webinar recording