Global FX Market Shifts Towards Risk Mitigation, Finds Study

CME Group, a derivatives marketplace, has released the results from its third annual Global Foreign Exchange (FX) Market Study of both cash and exchange-traded FX products. Overall, concerns over counterparty risk remain high, albeit reduced slightly from last year.

“This year’s study with our partner ClientKnowledge illustrates that there continues to be a fundamental shift in the global FX market towards risk mitigation,” said Derek Sammann, managing director of financial products, CME Group. “Investors continue to look for alternative ways to mitigate counterparty risk in both the over-the-counter [OTC] and futures markets.”

David Poole, chief operating officer (COO), ClientKnowledge, said: “The combination of the global credit crisis and development of e-trading has resulted in a greater focus on post-trade services, risk management and increased efficiency. FX market participants are balancing taking advantage of opportunities for increased revenue whilst accounting for market, settlement and systemic risk.”

At the time the survey was conducted (September 2009), traders revealed changing priorities when assessing their concerns in troubled markets. The Global FX Market Study showed the following:

  • Banks cite settlement risk as their biggest concern when supplying e-pricing, up to 69% from 52% last year. Worries about counterparty risk remain high, with two-thirds of those surveyed citing it as a concern in 2009. Concern about latency saw a 13% increase, up from 16% to 29%.
  • When assessing systemic risk, investors are more concerned by economic problems than banks. Back office and settlement limitations emerged as the biggest concern for banks, increasing to 47%, up more than twice the 16% cited in 2008. Worries about a liquidity crunch dropped significantly from 51% in 2008 to 33% in 2009, and credit or bank insolvency remains nearly unchanged at 26%, down from 27% in 2008.
  • Investors are more concerned about credit/bank insolvency in their view of exposure. Highly active investors’ concern over credit/bank insolvency is at 44%, up from 36% in 2008. Liquidity concerns, the topmost worry in 2008, came in second at 36%. Worries regarding macro-economic problems jumped back up to 31%, from 14% in 2008.
  • In employing options, banks and investors placed more focus on plain vanilla options versus barrier and exotic options, suggesting that both banks and investors are making the move back to simplicity, liquidity and transparency when trading options. Trading more complex options may be a more effective hedge now, but managing the risk over the life of the derivative still remains a major consideration.


Related reading

New consumer banking head for Citi Asia Pacific