Do risk managers need
to fundamentally re-think their approach to markets? Specifically, are they
paying enough attention to liquidity risk, assuming, of course, that there is
even a way to accurately and dynamically determine this risk in markets?
I ask ...
That we are still debating the positive or negative impact of non-bank market makers on the FX market doesn’t surprise me – what does is the simplistic level of debate over what I consider to be a fairly complex issue.
Yes the big prime brokers could shut these firms down with a hefty rise in prime brokerage fees or a withdrawal of credit totally - that would send most of them back to where they first emerged – the cleared world with its very limited spot foreign exchange market opportunities.
Richard Preschern, CEO of Robosig and Co-Founder at FX Vision, talks to Profit & Loss deputy editor, Galen Stops, about the lessons he’s learnt from recent risk events.
Speaking about the volatility following the Swiss National Banks’ decision to pull its peg to the euro, Preschern comments: “What you understand is that the execution that you get during these events is nothing to do with what you model because the market is simply not there.
“So what you have to do in terms of risk management is look at your extreme points in terms of exposure because you just don’t know that you’re going to be able to get out, which is what causes a lot of wreckage in the market.”
Today we tip-toe into delicate (and to me largely unknown) territory. It remains to be seen whether or not Bitcoin will be a true phenomenon that changes the world – my instinct is still that it will inevitably be reigned in by “The Man” and become as regulated as fiat currencies – but whether or not it does revolutionise the global economy and indeed financial markets, I have a couple of concerns about how it is being treated by some brokers.
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.
One of the reasons I enjoy our conferences so much is the capacity of the high quality speakers with whom we are fortunate to engage to raise a point that just makes you think, “why have we not done this before?”
This week we held our inaugural Frankfurt conference and during our Technology Futures session the discussion turned to the role of technology in making markets safer. It was one of those great sessions where I turned up to moderate armed with a bunch of themes and questions following (ahem) “extensive research” and got to ask one of them!
Next Tuesday sees Mark Johnson’s bail application heard in New York and the documents filed by prosecution and defence are available online, which gives the wider world an opportunity to study both sides of the case through one prism. I've taken a look at both documents and, as someone with more than 40 years experience in this industry, it concerns me that a central plank of the prosecution's case is backed up by an obvious and fundamental lack of understanding as to how the FX market handles large risk.
In total, 70% of corporate chief financial officers (CFOs) said that their company suffered reduced earnings in the last two years due to avoidable, unhedged FX risk, according to a global survey of 200 CFOs and nearly 300 treasurers.
In the survey, conducted by HSBC and FT Remark, 58% of CFOs in larger businesses said that FX risk management is one of the two risks that currently occupy the largest proportion of their time, while 51% said that FX is the risk that their organisation is least well-placed to deal with.
Meanwhile, 72% of treasurers said that FX risk management is one of the most important aspects of their job and 53% said that they expect changes in FX regimes and regulation to materially impact their risk management strategy in the next three years.
There were a number of revealing statistics in the results of a risk management survey released this summer by HSBC in which 200 CFOs – or equivalent members of the finance department – and 296 senior treasury professionals took part.
The most immediately eye-catching amongst them was the fact that 70% of CFOs said that their companies have experienced lower earnings due to significant unhedged FX risk in the past two years, and moreover, that these were risks which their treasuries could have avoided.
For many corporate treasurers, deciding what products to use in order to hedge their FX exposures is the easy part of the job. The hard part is working out exactly what their FX exposures are. Galen Stops reports.
When it comes to effectively hedging FX exposures, it seems that the biggest challenge facing corporate treasurers is simply getting an accurate view of what these exposures are.
“Getting a centralised view of our FX exposures is very difficult. It’s always an issue, it’s something that we work on constantly and we’ll probably never get to the point where we have a perfect view on this,” says a source at one European corporate with revenues over $22 billion.
The communications channels have been buzzing following Thursday's column about banks taking more risk in their FICC businesses - especially FX - and some really good points were made by correspondents. But while there was general agreement that more risk-takers would benefit the broader industry, my correspondents and I diverged on a key point. To me this is not about spreads or the advantage of man over machine (or vice versa), it is about the risk taking role adding something different.
The Basel Committee, established under the auspices of the Bank for International Settlements, has issued a statement highlighting its concerns that “the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.”
The Committee, which reports to the Group of Central Bank Governors and Heads of Supervision, acknowledges that the crypto-asset market remains “small” and that banks have “limited direct exposures”, however it argues that such assets do not “reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value”.