CME Study: Counterparty Risk And Risk Of Insolvency Are FX Market's Key Issues

CME Group releases results from its second annual Global Foreign Exchange (FX) Market Study of both cash and exchange traded FX products, reinforcing indications that credit constraints have led to an increased focus on counterparty and systemic risks. A year

By None

CME Group releases results from its second annual Global Foreign Exchange (FX) Market Study of both cash and exchange-traded FX products, reinforcing indications that credit constraints have led to an increased focus on counterparty and systemic risks.

A year after the first Global FX Market Study, 2009’s edition showed the following:

-Banks cite counterparty risk as their biggest worry when supplying e-pricing, up to 84% from 72% last year. Worries about settlement risk dropped from 64% to 52%, while only 16% regarded latency as a concern, down from 19% in 2007 – a continuing trend.

-When assessing systemic risk, a liquidity crunch remained topmost worry at 43%. But tellingly, insolvency emerged as of nearly equal concern, up massively from 15% a year ago to 35% immediately prior to the Lehman Brothers insolvency. Correspondingly, worries regarding macro-economic problems fell from 30% to 14%; major e-systems failure dropped from 26% to 13%; and back office/settlement limitations retreated from 26% to 12%.

In volatile conditions, traders continued to value efficient execution:

-When assessing the impact of technology, banks rated better market access as top priority at 59% (up from 52% in 2007), including liquidity management, aggregation and order routing to give greater choice and control. This came in ahead of more/less volatility (down from 60% in 2007 to 55% in 2008).

-In analyzing transaction costs, bid-offer spreads are the greatest cost concern for investors (highly active 76%, real money 50%), remaining at 50% for real money investors and falling from 8% for highly active.

-Growing pressure on bilateral credit lines is revealed in slowing demand for prime brokerage services, increasing from 36% in 2007 to 38% in 2008, after a jump from 23% to 36% the previous year.

“The latest study confirms that both counterparty risk and the risk of insolvency were key issues for respondents, even before the events of September 2008,” says David Poole, COO, ClientKnowledge. “At this time there seems to be a clear demand for innovative post trade solutions that reduce risk and increase efficiency.”

“This year’s study provides a telling snapshot of attitudes within the FX market as credit markets around the world continued to compress in late 2008,” says Derek Sammann, managing director, global head of FX Products, CME Group. “Market participants’ growing concerns about liquidity and counterparty credit have driven demand for electronic trading, better market access, and proven counterparty clearing solutions.”

L.D.

«