Frances Maguire
Frances Maguire

Counterparty and Settlement - FX investors look to risk mitigation benefits of centrally cleared products

While the recent financial turmoil continues to reshape the financial markets, indications are that counterparty risk will come under the spotlight, along with the need for greater transparency. For these reasons, it is expected there will be trend away from over-the-counter (OTC) products towards standardised exchange-traded listed products that bring with them the benefits of central clearing to mitigate risk counterparty risk and greater automation that lowers operational risk.

Derek Sammann, managing director and global head of foreign exchange at CME Group, says that volumes in CME's FX futures and options continue to grow year on year, showing continued acceleration and expansion as they outpace growth figures in the OTC market. Yet, he does not believe that FX will migrate to just one model. He says: “I think we will see continued interest in growing on-exchange FX as a complement to the OTC market. The flexibility and the benefits that market participants have to trade in the OTC market make it interesting for a lot of people, but I think we will see an opportunity for combining the best of the OTC market with the best of a cleared model, for the clearing and netting efficiencies.” Risk in the spotlight Sammann says that the high volumes in FX led to market participants starting to under-price risk, whether it was settlement risk or counterparty risk. Events like the closure of Bear Stearns and Lehman Brothers put risk back in the spotlight.Derek...continued

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