Regulation, transparency and risk: meeting the need for more flexible FX Margining configurations >>>
basis to ensure transparency to the regulatory body. Reports such as order extracts, daily trades including price at time of trade, and monetary adjustments to trades, are all aimed at increasing the transparency to at least the NFA. Regulations surrounding customer account statements increase account transparency to traders, better informing them of the breakdown of items affecting their account. He adds we can expect further regulations going forward, as this march to transparency continues.
While Brand comments that in some cases, it is not about pressure; it is simply a regulatory requirement. He explains that with higher mandated margin requirements there is an increase in the need to diversify the ability to meet those requirements beyond cash.
“Te leverage has always been one of the more attractive facets of FX trading, the less cash down the better. Terefore there is a great need to find
alternative margin forms so that cash isn’t tied down,” Brand says. “Brokers need to find alternative margin solutions and the appropriate resources to monitor them, so that they can stay competitive in the industry. Te solutions in the marketplace will add transparency since often they include many connections to various price feeds and financial institutions that creates a de facto transparent market.”
Moving from static to variable
On the impact caused by the move from static to more variable methodologies on product, tenor, volume, concentration and customer type margining capabilities, Brand comments: “Te impact in this regard is significant, since there will be a need for a comprehensive solution to monitor and manage varying margin products. Technology will have to be relied upon to manage this in real time and around the clock, since the FX market is a 24 hour market.”
He adds: “Tere would be significant cost involved in purchasing and maintaining these solutions. It will require additional resources, which while creating additional job opportunities, also increase cost and lower profit margins. Additionally, since technology is not infallible this also presents another area in which if a system is not functioning flawlessly more problems are created.”
While Nelson remarks: “Firms are already utilising variable margining, whether this is a currency based variable (EUR at 2%, USD at 3%) or a positional variable (NOP apply 4%) method. Both types of variable margin have been in place for some time. Te key to success is to have a flexible solution to allow definitions at a system level and to provide modifications of the system level at the client class level, client level, as well as trade level overrides where appropriate.”
Mark Biezup
“As the regulatory institutions are still modifying regulations whilst determining domain amongst themselves, we can expect further changes that make variable margining a necessity.”
Te move to more variable margining and netting methodologies allows brokers to monitor their risk more specifically, says Biezup, allowing their clients to trade greater amounts in some products and currency pairs, and thus increase fees or spreads. Biezup adds: “At the same time, such margining calculations will reduce trading ability in other instruments, but will better protect both the broker and the customer, as the customer will be less likely to lose their collateral due to instrument volatility.”
april 2011 e-FOREX | 139
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