RETAIL e-FX PROVIDER
Yet, FX margin trading can become a winner because of the financial crisis, adds Behnstedt. He explains: “As opposed to traditional credit line-based trading approaches for hedgers, FX margin trading techniques based on collateral and real time position revaluation provide a far more sophisticated and up to date trading controlling mechanism.
“Banks and brokers are well advised to make strategic steps now towards scenarios where they leverage FX margin trading techniques to monitor all client type trading activities, not just for investors but also for hedgers. Tis certainly will require higher running costs on IT infrastructure, maybe interfaces and other software builds that are required to establish that. Tis will also lead some market participants towards the big question: Are we staying in the market or not? But clearly IT will be more and more important in FX, really becoming the critical success factor,” comments Behnstedt.
As to what ways recent regulatory measures have impacted on traditional FX margining techniques, forcing them to be both more flexible and granular, Biezup states that the CFTC’s recent regulations last autumn to reduce leverage on both major and minor currencies has been significant. Leverage on major currencies is now reduced to from 100:1 to 50:1, while non-major currencies are expected to be at 20:1.
Commenting, Biezup says: “While down from the initial 10:1 proposals, such regulations spell the end of the flat rate margining, and require variable margining percentages by currency or currency pair. As the regulatory institutions are still modifying regulations whilst determining domain amongst themselves, we can expect further changes that make variable margining a necessity. Adding to these regulations is increased awareness among margin providers that they better manage their own risk associated with customer positions, and hence the need for even more granular margining techniques.”
Nelson says the flexibility of the margining technique used is crucial, as firms attempt to interpret and predict new regulatory requirements. He comments: “Having the ability to alter and reformulate their methodologies by changing parameters is essential for rapid time to market. Inherent within the flexibility is the granularity of the calculations in order to reformulate the results, as clarity on regulations is achieved and the adoption of new constraints is required.”
138 | april 2011 e-FOREX
Ralf Behnstedt “FX margin calculations have to be
separated into two parts; the client position reval and the collateral reval. Tere is a strong need 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.”
Pressure to monitor and control
As to what pressures are being placed on FX brokers to properly monitor and control exposures associated with client positions, Nelson comments: “Market volatility and the increase of algorithmic trading over the last several years have forced FX brokers to monitor their clients positions in a real time manner, as well as valuing the underlying collateral in real time in order to offer the broker the risk mitigation on client exposure. Te volume of activity requires a scalable multi-tier architecture to provide deal execution response times the clients demand. Clients require access to their lines and positions in real time over the web and via mobile devices as access to information is assumed.”
Biezup says recent NFA requirements have forced FX brokers to send the NFA several reports on a daily
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