Articles tagged by Risk
Asian corporates and CFOs cited FX risk as the financial
risk that they are most concerned about, according to a new survey from Thomson
Reuters and Asset Benchmark Research.
In the report accompanying the research results, it notes
that as ...
With the latest Bank for International Settlements (BIS) survey showing the first contraction in the size of the FX market since 1998, some market participants have commented that this is further evidence that the banks – long the principal source of liquidity – have stepped back significantly from the market.
This has left a clear opening for alternative liquidity providers, some of whom have been very public about their ambitions in the FX market. Some of these alternative liquidity providers have been quick to emphasise the fact that they do hold positions and take risk in the market, as opposed to just recycling liquidity or arbitraging between different areas of the market.
Saxo Bank is increasing margin requirements on certain FX pairs, equity and fixed income products ahead of next month’s US election.
Saxo says that it will implement margin changes on products expected to be affected by the outcome of the election such as some single equity, index and fixed income CFDs, and certain FX pairs.
This includes taking most major FX pairs up to 2-3% with RUB and MXN going to 10% and 15%, respectively, while the minimum margin requirement on CFD indices will be 4% based on market volatility and liquidity leading up to and through the election.
With a very pleasant “Happy Australia Day” to my local readers (none of whom will be actually reading this of course), I want to pose the question: Are systematic traders about to have a very bad three or four years?
I ask the question in all honestly, without wishing to provoke people (too much), because although I don't know the answer I have a nagging doubt that FX market conditions are changing in a direction away from systematic trading towards discretionary.
Profit & Loss talks to Tod Van Name, Bloomberg's global head of FX and commodities electronic trading, about how technology is changing the way that corporate treasurers operate.
Profit & Loss: With a lot of global macro uncertainty anticipated for the year ahead, are corporate treasurers under more pressure when it comes to managing their FX exposures?
Tod Van Name: There’s no question that corporations are always considerate of market pressures, and while there haven’t been wild currency swings in the US, where the dollar has been strong and stable recently, for treasurers not in the US it has become a particularly big issue.
Societe Generale (SocGen) has launched a new Web app that uses FX options to monitor the pricing of risk events, such as elections, central bank meetings or economic releases.
The app, the SG FX Event Tracker (SG FX-ET), computes the overnight forward volatility that the FX options market expects for any trading day up to one year ahead, linked to the bank’s internal data and the weights that its market makers attach to risk events.
The charting module is designed so that users can dynamically compare the relative pricing of an event according to different currencies and can directly compare the pricing of different events.
Speaking at Profit & Loss’ Forex Network London, Paul Chappell, CIO of buy side firm C-View, explained how liquidity trends are being negatively impacted by the Fix scandal.
In a featured new segment introduced at Profit & Loss’ Forex Network London called BURSTS, Paul Chappell, CIO of buy side firm C-View, sought to explain liquidity trends in the FX market in the context of the recent scandals that have plagued the industry.
In this TED Talks-styled presentation, Chappell sought to address why there are, in his opinion, only a few genuine market makers left in the FX market that everyone else prices off, and why currency managers have seen their returns significantly reduced.
Although Dmitri Galinov, CEO of FastMatch, defends the controversial practice of last look in FX, he also claims that it will be eliminated within the next two years.
Explaining why last look has become such a hotly debated topic within the FX industry, Galinov explains that it is “a valuable tool” that enables liquidity providers to quote tighter prices to their customers.
The problem, as he puts it, is that “consumers want tighter prices but they don’t want last look”. For now, however, the two appear to be mutually exclusive, which is why this is a difficult issue for the industry to solve.
Market making in emerging market currencies is a key way for liquidity providers to differentiate themselves in an increasingly competitive G3 landscape, says Kevin Kimmel, global head of e-FX at Citadel Securities.
“Where there’s a lot of demand and where there’s also an opportunity to differentiate yourself as a liquidity providers is in the less liquidity currencies, in the Scandies, in Ems, where you don’t necessarily have as many people with really tight top of book liquidity,” he comments
In contrast, G3 spot FX market making has become so commoditised and the pricing is so tight already that Kimmel says that he is unsure whether a new market maker pricing just these currencies would really add significant value to the overall FX ecosystem.
What are the biggest challenges still facing FXPBs today and how can they be overcome? Galen Stops takes a look.
There’s no getting around the fact that regulation has changed the economics of the FX prime brokerage (FXPB)
business, and not for the better.
“You can classify PB costs into three basic categories – technology, human resources and direct transactional costs,” says Sanjay Madgavkar, global head of FXPB at Citi.
The first two of these are fixed costs that an FXPB has to pay, but the new regulations under Basel III have made it more expensive for banks to provide FXPB services to certain clients, meaning the overall profitability of some portfolios has fundamentally declined.
So we’ve just published our Q3 edition of Profit & Loss magazine, which includes our prime services special report, and I wanted to share some thoughts about one segment of it.
When I first started the report I was very negative on the prospects for FX prime brokers, over the eighteen months or so I’d heard so many complaints about credit constraints, about offboarding – I don’t think that was even a phrase that I’d heard prior to SNB – and the general retrenchment of FXPBs.
Now obviously SNB was a catalyst for a lot of these issues, but really it just exacerbated a trend that already existed and this was caused by the introduction of new regulations that made it more expensive for banks to offer FXPB services to a lot of clients.
Lucera has built out a low latency pre-trade credit control tool that is fully integrated with its LumeFX stack, in a bid to help prime services providers detect and prevent credit limit breaches.
The solution, which is already live and being used by Lucera clients, enables prime service providers the ability to get real-time alerts when one of their clients is approaching their credit limit.
“We got feedback from our clients that some of the products that they were using for pre-trade credit checking were difficult to administer or difficult to understand because they didn’t always make it clear why these credit limits were being triggered.
Galen Stops takes a look at some of the potential risk concerns associated with the prime-of-prime model in FX.
I n a recent survey conducted by Profit & Loss 57.25% of respondents said that they think the trend towards more firms using prime-of-primes (PoPs) rather than traditional FX prime brokers (FXPBs) could increase the impact of a shock event.
This is in contrast to 27.48% who said that it won’t and 15.27% who think the impact of a shock event would be unaffected by this change. The logic underpinning this concern is based on the fact that risk is increasingly being pushed towards less well-capitalised institutions.
Geopolitics represents the single biggest threat to financial markets, warned Ben Bernanke, former chairman of the US Federal Reserve, at an event in Toronto yesterday.
Speaking at the Swell event hosted by Ripple, Bernanke noted that the financial crisis of 2007-2008 was so severe because different elements of the financial system has become so interlinked that stressful conditions in one area soon spread to other parts of the system. However, he argued that the financial markets are systemically safer now and that the biggest threats to these markets come from external sources.
The US Office of Financial Research (OFR) has launched two new tools aimed at monitoring and measuring the risks and stress levels of financial markets.
The first tool, the Financial System Vulnerabilities Monitor (FSVM), is replacing the OFR’s existing Financial Stability Monitor, which combined signs of vulnerabilities and stress.
By contrast, the FSVM focuses exclusively on monitoring vulnerabilities in the financial markets to signal potential risks, while the new Financial Stress Index (FSI) focuses on monitoring the stress levels of the financial markets.
Rostin Behnam, a commissioner at the US Commodity Futures Trading Commission (CFTC), will sponsor the agency’s Market Risk Advisory Committee (MRAC).
The CFTC also announced temporary sponsors for the Agriculture Advisory Committee and the Global Markets Advisory Committee, until additional commissioners are confirmed by the US Senate.
Behnam will lead the MRAC, which advises the commission on matters related to evolving market structures and movement of risk across clearinghouses, exchanges, intermediaries, market makers and end-users.
“I look forward to continuing the important work of my predecessor for this committee, which studies an area that’s critical to the Commission’s mission,” says Behnam.
At a recent buy side event hosted by Profit & Loss and CME Group in New York, a panel of cryptocurrency experts discussed how institutional investors and traders should think about these assets within a portfolio.
Interest in cryptocurrencies has skyrocketed amongst investors and trading firms over the past year, as the market capitalisation for this nascent asset class has increased dramatically and volatile price action has offered the potential for outsized returns compared to many traditional asset classes.
Yet some firms still consider cryptocurrencies to be too risky to include in their portfolio, a position that Ari Paul, managing partner and CIO of the hedge fund BlockTower Capital, took issue with on the panel.
The use of a last look window by market makers will decrease in 2018, but don't expect the practice to disappear any time soon, says Galen Stops.
If you're sick of reading endless articles and hearing lengthy debates at conferences regarding last look, then the first part of this prediction will be music to your ears: in 2018 the industry conversation will move on from this topic.
This prediction comes despite a second one, that last look will not disappear in 2018.
Yes, XTX Markets made headlines by committing to a zero hold time on their FX trades – not to be confused with offering firm liquidity – while other market makers have made more private assurances of a similar kind.