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Compression Comes to FX
As leverage requirements make FX exposures a bigger pain point for the banks, many are looking towards compression services to solve for this. Galen Stops looks at how these services work and what they could mean for the industry. One of the responses by global regulatory bodies to the 2008 financial crisis was to require banks to hold more capital against their financial exposures, creating a bigger buffer to protect them against adverse market conditions. Capital constraints have widely been cited as a reason for declining activity in some markets and liquidity events in other, therefore it is not surprising that compression services, whereby offsetting trades are netted off against one another to reduce the notional amount on banks’ balance sheets, have found favour amongst banks and major dealers.

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