Traiana has extended the scope of its CreditLink service to include a kill switch capability for single dealer platforms in FX trading.
The kill switches offered by Traiana are designed to work in harmony with the existing limit monitoring capabilities of CreditLink in order to help eliminate the risk for prime brokers (PBs) of over-allocating credit.
Traiana claims that the increasing speed of the foreign exchange market and the use of execution algorithms exacerbates certain risk factors in the market. “If a model goes wrong, every single credit line could get filled before anyone can blink an eye. This has obvious implications if a client gets into financial difficulties,” said Jill Sigelbaum, head of FX and alliances at Traiana, in a recent interview with Profit & Loss.
She now adds: “The expansion of CreditLink’s kill switch to single dealer platforms improves risk management controls in the FX markets, bringing the bank trading portals into line with the capabilities we’ve built with the ECNs. By enabling prime brokers and their clients to monitor risk in real time and take swift actions, the market will be further insulated from technology risks and the losses they can rapidly create.”
Citi’s platform, Velocity, has been named as the first single dealer platform to support the new capability, although it is understood that Traiana is building more at other SDPs. “We at Citi have been very focused on enabling industry-wide solutions to reduce systemic risk and promote transparency,” says Bapi Maitra, global head of FX institutional e-commerce sales at Citi. “The implementation of Traiana’s real-time risk management capability, including its kill switch, is a vital step in that direction.
Traiana began deploying real-time kill switches to major multi-dealer FX trading platforms in June 2011. Now, as electronic FX trading continues to grow on SDPs, Sigelbaum says that they represent “a key area of technology risk in global FX markets”.
James Sinclair, CEO of MarketFactory, which also provides pre-trade limit monitors and kill switches across a range of venues, says that although kill switches are an important risk management tool, it rarely gets to the point where a trade is blocked.
“People don’t get into the situation where their limits are breached and the kill switch comes into effect because they get warning messages when they get close to their limits,” he says.
These limits can be customised by banks or funds using kill switches and there are often multiple layers of limit monitoring and kill switches within one of these firms. “I don’t expect that we’re the only system in a bank. They might have a number of different systems, including our one and Traiana’s,” says Sinclair, who adds that overall he considers risk management in the FX market to be very well developed due to the structure of the market whereby risk is spread across multiple prime brokers rather than concentrated in one large counterparty.