FX, better safe than SEF!

If confirmed, this will be a big win for FX Markets, and good news for FX Single Dealer Platforms, and will enable banks to continue to service clients with highly differentiated and innovative offerings.

It’s looking like FX markets have been successful in lobbying the US Treasury to exempt FX Swaps and Forwards from Dodd Frank legislation, according to a story carried in today’s FT (here).

FX Derivatives (Swaps, Options and perhaps long dated Fwds) fall under Dodd Frank Act (DFA), unless specifically exempted by the US Treasury (here)


Exempt FX: Global FX trade bodies have argued that FX derivatives are very different from other OTC derivatives, and that counterparty risk which DFA seeks to eliminate is not a major issue in FX, and the more important settlement risk, is already fully managed by the CLS Bank settlement system. I have covered this in an earlier blog here.

Include FX: The CTFC (tasked with implementing DFA), has been seeking to have FX included under DFA. Also, a Washington based think tank was lobbying for FX to be included (here)

7 Responses

  1. “counterparty risk which DFA seeks to eliminate is not a major issue in FX”–> says who? On FX Swaps and Forwards, you compute a replacement risk which is far from being insignificant. Besides, the amount of the fx swap is usually huge. So, the ones who say that are the same who put us in this crisis.

    “the more important settlement risk, is already fully managed by the CLS Bank settlement system”–> wrong again. The delivery risk is only computed for FX Spots so the scope is small. Besides, not all clients are CLS members.

    Please, stop your stupid lobbying.

    • Hi Kevin, welcome to our blog!

      Not sure what you mean by “stop your stupid lobbying”, me or the Global FX Trade bodies?

      Either way, with regard to counterparty risk not being a major issue, that’s the conclusions of a study by Oliver Wyman (AFME 2011 European Liquidity Conf slide 22: here). They found that settlement risk dwarfs all other risks in the FX market.

      They estimated that settlement risk accounted for some 94% of the estimated maximum loss exposure in a transaction involving FX instruments with a maturity of 6 months and 89% for instruments with a maturity of 2 years.



  2. Hi Paul,

    Thanks for the link to the slide. That pushes me in thinking this study is funded by some anti-regulation lobby.

    In your opinion, what investment is the more risky: trade a 1 M EUR/USD FX Spot OR trade a 50M PLN/TWD 10 year swap? In the first case, you have a period of exposure of two days on a small amount and on a mainstream pair. On the last case, you have a period of exposure of 10 years on an obscure cross pair. Obvious.

    Then, you think how an expert ended up with such result: well, evil lies in the details. On the slide, it is being said “6 months average exchange rate fluctuation is used for short-dated instruments and 2 year average exchange rate fluctuation is used for long-dated instruments”. AVERAGE. How can an average exchange rate give you an accurate idea of a risk? How many black swan events do you need ?

    An interesting article:

    Besides, regulation must not been seen as a business blocker. People like you should think “Ok, how about making an MDP from our SDP?”. Or, “how making RFQ/RFS transparent to all clients?”. According to me, the future of this FX/FI industry is to quote standardized instruments. No one coming from Stocks & Futures never understood why the FI/FX world is different.


    • Hi Mike,

      Thanks for the link, will read on business trip tomorrow night!

      We provide technology that banks use to build their SDPs, in order to deliver highly differentiated services to their clients. Those clients trade on the SDP (in preference to the MDP) precisely because of the extra value that the platform delivers (however the client chooses to measure that extra value – not always in terms of price).

      Neither the banks, nor the clients want banks to convert SDPs into MDP – they already exist, so why “dumb down” a highly valuable SDP to make a lower value MDP. The client can always trade with that bank on the MDP, if they wish.

      However, we are aware that a number leading Top Tier eTrading banks have been working on strategies (should regulation require it) to convert those sections of their SDP that are impacted by new regulations, into a sort of DMA routing gateway in order to route trades and orders through to either SEFs, or perhaps onto exchange should that be required. But the banks will want to continue to ‘own the client relationship’ channel, and we believe the client will want that as well.

      With regard to your final comment, trading FX/FI in standardised size on exchange is not really an issue. If it’s in a liquid instrument, you will certainly be able to get your amount done. The issue arises, when trading in non-standard size, or non standardised contract terms, where the SDP model is totally different from trading on an exchange based model, in one key respect.

      The SDP world, is a “relationship” model, where banks provide customised liquidity on demand (and in most cases, continues liquidity with streaming one-click rates) to clients, to enable clients to manage risk in their “full amount”. By contrast, in an exchange model, nobody (least of all banks) has an obligation to provide a risk price for clients, and in the case of FI, which is very much an inventory based market, there is no guarantee a price will be available on exchange, which is why market making obligations were mandated on MDP platforms such as MTS!

      So, whatever happens with regard to regulations, I still see bank SDPs continuing to provide highly valued services to clients, which will co-exist with exchanges, SEFs, and MDPs.



      • Hi Paul,

        I see the future of SDPs as not only a façade but a complete front-to-trading system: it will include a workflow engine (partnership with a vendor like Streambase should be a plus), streaming services, commercial margin services, credit check services, administration services and maybe pricing services.

        That is my vision and that will differientiate you from “classic” MDPs even though you/your clents are forced to go multi dealer.


  3. Hi Mike,

    Totally agree with you, infact we have been saying this for a long time. SDPs will increasingly deliver greater pre and post trade services, and innovative banks will continue to provide a far higher level of service to clients than the multi dealer platforms.


  4. […] The paper highlights the degree of uncertainty amongst many banks interviewed, with regard to the interpretation and potential implement of much of the proposed regulatory changes (assuming of course that FX (swaps and fwds) are included in the new regulation – which is still not clear – see previous post on this point here). […]

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