Frances Maguire
Frances Maguire

Holding back: is Counterparty Credit Risk still spoiling the forex party?

The FX market has been caught up in the regulatory backlash following the credit crunch. However, as Frances Maguire discovers, the impact is not likely to be as severe as once expected but it will still be resounding and lasting.

In the aftermath of the financial crisis, which pointed to bi-laterally traded over the counter (OTC) derivatives as a key culprit in exacerbating the severity of the crisis, the G-20 resolved that, by 2012, as many OTC contracts as possible would be centrally cleared, and for those contacts that could not be standardised for central clearing, collateralisation levels would be reassessed by the regulators. But while the equities and futures markets have grown up on exchanges, in the FX market, less than 5 per cent of total volume is currently traded on exchange, with the lion’s share of the market traded bi-laterally in the OTC market. Much of this is down to the short-term nature of FX transactions – FX trades have an average balance sheet maturity of one month – and because FX is physically settled, settlement risk, rather than counterparty risk, is a greater concern in the market. However, regulators on both sides of the Atlantic are working on drawing up new legislation to force...continued

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