Dr Yuval Levy Chief Technology Officer, SuperDerivatives
Dr Yuval Levy Chief Technology Officer, SuperDerivatives

The push for standardisation - can we risk changing the future landscape of FX?

The recent disasters in the global banking system and the ensuing fallout in the derivatives markets fundamentally changed the way market participants use FX derivatives. The crippling widespread disappearance of liquidity and leverage as well as the over-regulation that many doom sayers predicted has not materialised; instead, market participants are refocusing on the core uses of derivatives that built the industry. Concurrently, there are greatly increased efforts at addressing systematic problems with efficiency and operational risk. In addition, regulators are preparing sweeping reforms to the OTC derivatives markets on both sides of the Atlantic and FX derivatives are in danger of being caught up in these reforms.

Over the past decade, structured products, in which FX (and other asset class) derivatives have been used to create ever more complex and often highly tailored risk profiles in bonds and other investment vehicles, have become the driving force of revenue for many derivatives dealers.  Over-the-counter derivatives remain the most effective and useful vehicles for hedging a critical commercial risk.While the use of simple derivatives in liability side hedging, asset side hedging, and hedge fund speculation remained important core drivers of the industry, it became increasingly difficult to see these flow activities through the forest of structured products hands ‘high-fiving’ each other over the latest highly leveraged and highly complex structured bond issuance. As a natural result of this evolution, competition, for many derivatives dealers, became focused on creating the newest, most innovative structures a few weeks before every other dealer could price them and enjoying a short but very...continued

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