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for variety, as in the past typically just cash collaterals have been taken, then demand evolved more towards the usage of other collaterals, such as stocks. Having said that, banks and brokers are being forced to rethink existing collateral management strategies as stocks, for example, require reval methods with several dimensions, depending on market segment, currency exchange rate, political events and the rest. Tat needs to be reflected accordingly.
“On the flip side,” continues Behnstedt, “Banks and Dave 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.”
normally afford without taking delivery, which results in higher fees or spread for the provider, and managing the risk of the customer positions so that the margin provider is not affected beyond the customer’s collateral. Finding a better balance between these two, as the margining space becomes more competitive and regulated, is driving FX margining solutions into greater variety of margining methods.
Biezup comments: “To more accurately monitor one’s customer risk, variances have arisen such as margining by products to better gauge their inherent risk levels, requiring additional margin for forward dated positions, requiring higher percentages for more volatile currencies, and requiring additional margin for larger volume or concentration that might take longer to liquidate in the market.”
While Ralf Behnstedt, managing partner, FXArchitects, comments: “FX margin calculations have to be separated into two parts; the client position reval and the collateral reval. Tere is a strong need
136 | april 2011 e-FOREX
brokers are forced to rethink existing client position revaluation and management approaches. Positions in less liquid currencies or positions from products like options have to be reflected differently than a simple EUR-USD FX Spot trade. Tis is important to protect both clients and bank and brokers as non-linear payoff products, for instance, can accelerate trading towards margin calls and damage bank and broker reputations. “Personally, I think the next determining feature will be that FX margin trading tools will provide clients with automatically generated proposals, for example to reduce exposure and therefore utilisation of collateral. We’ll also see algos being made more available for clients,” concluded Behnstedt.
Impact of Regulation
Te financial crisis will still strongly influence the way the FX OTC market will work in future, states Behnstedt. He says the last crisis brought up again the discussion that the OTC market should be more controlled, by moving onto an exchange-based clearing technique. He adds: “Te FX market can certainly expect that more government induced regulations will appear, ranging from common controls in contracts, common procedures and operational standards, enlarged central reporting requirements towards products which are not allowed to be traded anymore in specific legal jurisdictions. As opposed to recent attempts, due to the global impact of the financial crisis, these implications will also be driven and supported globally by most governments,” he predicts.
Behnstedt continues: “In general we will see that in future, investing in FX as an asset class will continue to be an attractive alternative to existing well established assets classes, but will be more controlled, regulated and monitored as it has been in the past. Tis can also end up in less revenues for brokers and banks as the to-be-designed ‘regulation rules’ might over-regulate the market or parts of the market, and therefore markets will not be as attractive as they are now.”
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