Is It Time to Change the Credit Model in FX?

In a new video interview with Profit & Loss Rick Schonberg, global head of ForexClear product development at LCH, is unequivocal in expressing his view that the current credit model in the FX industry is due for a change.

“The model definitely needs to change,” he says. “What’s interesting is that the BIS numbers —  to the extent that we’ve all digested them — show growth on the forward side and the NDF side, so EM is growing and the NDF component is growing along with that. So the model is changing with clearing stepping in, that’s a given.”

According to the latest data from the Bank for International Settlements (BIS) the most rapid areas of growth within the FX market are indeed in the non-spot products. And it is within these products where clearing has initially found the most traction.

However, Schonberg also notes that frustration regarding the varying levels of access to credit in the spot FX market is driving market participants to look towards new models to help alleviate this problem.

“On the spot side people want change, they’re sick and tired of being off-boarded. Over the last ten years there have been rolling off-boardings and it’s not sustainable for their model and participation, it’s too volatile for their business,” he says.

Schonberg adds that clearing could be one alternative model, pointing out that LCH can and does clear spot FX right now, but just not to the scale that would be required by the market.

“So perhaps we need to scale our solution or perhaps something new needs to step in,” he concludes.

Click below to watch the full interview, where Schonberg discusses how and why FX clearing has now gathered some real pace, the remaining operational hurdles facing firms thinking about clearing and the potential for the FX industry to move towards a more all-to-all trading model.

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Galen Stops

Galen Stops