>>>
Additionally, the increase in capital requirements is also shrinking the playing field, Brand continues. He says that in the US, there are very few firms that would be able to meet the stringent requirements set forth for RFEDs and FCMs. “Any time there is a reduction in the number of players, there is a reduction in competition which would translate into worse pricing. Tightening the playing field widens the spreads. As it stands, the increase in regulation will not only shrink the market, it will also increase costs and reduce profitability for dealers.”
Margin calculations
When examining what’s involved with traditional FX margin calculations and how brokers might vary their margining, Dave Nelson, product manager at Financial Software Systems, says that in the past, margin calculations have been based on a combination of thresholds, haircuts against collateral, netting methods, and calculation methods run as part of the end of day process.
T
he global financial system has been going through and will continue to go through significant reform, says Michael Brand, head of
compliance at Boston Technologies. He remarks that the financial crisis seen worldwide has highlighted a need to reduce exposure and risk.
“As a result, margining has become increasingly crucial for managing this risk in FX. Retail and institutional FX brokers alike find themselves needing to properly monitor and control exposures associated with their customers’ positions and enhance the use of collateral and the revaluation of assets, and increase transparency with regulators and investors. One of the ways regulators have tried to reduce these risks has been to increase margin requirements in products that in the past have been highly leveraged. Te use of credit and cash for margin will become a thing of the past so there is a need for flexible margining opportunities. Collateralised margin seems to be the future, though it does present some challenges in execution and monitoring,” he added.
Today, many interbank institutions are moving to a real time margining solution to better manage the counterparty exposure of their CSA clients, states Nelson. “In the collateralised margining space, retail broker dealers are expanding their business to multiple ECN offerings, new branches and regions, plus new asset class offerings. Tese expansions require brokers to have a real time multi-platform, cross-asset margin solution.”
“As traditional calculations, (such as percentage of NOP, or per lot margin) do not provide the flexibility to meet these needs, we have seen strong interest in a cross-asset, multi-platform margin solution that accommodates broker dealers expanding their core business and interbank dealers who wish to gain visibility of default risk,” notes Nelson.
He adds that examples of margin techniques include: Bifurcation of margin percentages (eg net long apply x%, net short apply y%); Binary option provisional worst case handling (synthetically marking a single binary as if it triggered); Capping Greek exposures and margin charges (delta, gamma, and vega); Treshold percentages; Margin tiering based on open position.
Managing risk
Mark Biezup, product manager at Sungard, explains that two main aspects of FX margining are allowing a customer to trade higher amounts than they could
april 2011 e-FOREX | 135
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134 |
Page 135 |
Page 136 |
Page 137 |
Page 138 |
Page 139 |
Page 140 |
Page 141 |
Page 142 |
Page 143 |
Page 144 |
Page 145 |
Page 146 |
Page 147 |
Page 148 |
Page 149 |
Page 150 |
Page 151 |
Page 152 |
Page 153 |
Page 154 |
Page 155 |
Page 156 |
Page 157 |
Page 158 |
Page 159 |
Page 160 |
Page 161 |
Page 162 |
Page 163 |
Page 164 |
Page 165 |
Page 166 |
Page 167 |
Page 168 |
Page 169 |
Page 170 |
Page 171 |
Page 172 |
Page 173 |
Page 174 |
Page 175 |
Page 176 |
Page 177 |
Page 178 |
Page 179 |
Page 180 |
Page 181 |
Page 182 |
Page 183 |
Page 184 |
Page 185 |
Page 186 |
Page 187 |
Page 188