ACI Foreign Exchange Committee (ACIFXC) meeting in New York, held in November last year. ACI’s interests have always been in ensuring well functioning and free financial markets. Founded in 1955 we mainly work in the background. Our wide ranging achievements have included: a worldwide network of individual traders, an examination and certification program, the exchange of expertise at traders level, the Model Code (code of conduct), becoming a co- founder of the Euribor ACI fixing (together with the EBF – European Banking Federation), establishing the ACI Foundation (supporting examination in emerging markets countries) and many others.
In particular the TMC (Te Model Code) and the education program helped our FX and MM traders smoothly maneuvering through the worst times of the financial crisis. Having always been a self-regulating market some parts of the FX business now seem to be under a threat being driven by popular political decisions. And it is exactly this development which concerns ACI and its members.
CLS
CLS (Continuous Linked Settlement System) is the successful evidence of such a self-regulatory initiative by the industry. Owned by the foreign exchange community CLS was founded to create a global settlement system, eliminating settlement risk in the foreign exchange market. In collaboration with Central Banks CLS went live in June 2002. Today CLS is handling seventeen currencies, which total some 95% of the daily traded FX volume across the world. CLS and the self-regulating FX market went well through the recent crisis – the markets are international diversified and provide very deep liquidity.
As far as I remember, the only problem seen in OTC FX markets occurred with the Icelandic Krona (ISK). Driven by a political decision putting Icelandic banks under receivership in October 2008, local banks had to stop their payments in FX -settlement and therefore not fulfilling their obligation towards foreign counterparts. Tat led to an outcry by all the affected banks across the world. Since the Herstatt scandal in 1974 this was probably the first concentrated bail- out in western history under the supervision of local
government. Up to date I am discussing the morality and acceptance of such a modus operandi. Knowing about the political decisions and their inability for settling, Icelandic banks should not have accepted the payments from foreign banks. Unfortunately the ISK was and still is not eligible for Settlement with CLS.
Taking appropriate action
If regulators want to take appropriate action in the foreign exchange markets they will have to balance very carefully all the steps and consequences of making very significant changes to the operation of the world’s biggest financial market. Some of the key questions for me are: ’How to define an OTC-FX-Derivatives? And ‘What is a standardized OTC-FX product?’
Are we really able to count foreign exchange Swaps or Forwards as a Derivative? Tese products are pure and simple mathematics and represent some 58% of the daily FX volume. Tere is no future fixing and no future difference payment. All cash flows are known in advance at contract termination. Tey are short dated and only used in exchanging liquidity in the markets without any speculation in the background.
Spot 1.5 trn Transparency
I am not tired in repeating that OTC FX is possibly the most transparent of all trading activities. Market participants largely know and are able to value their customer. Every quoted price by a market maker delivers enormously important information to any market participant; i.e. is the market more ‘bid’ or ‘ask’. Exchange trading would increase the anonymity of price quotes and will reduce the sensitivity of market valuing. Whilst trading hours within free markets for OTC products are available nearly all the time, Exchange trading will be limited to time- windows reducing business time.
At ACI we are fully backing any initiative improving transparency and liquidity in the markets. But let us use the tools which have already proven themselves in practice.
april 2011 e-FOREX | 23
Forwards Swaps 0.5 trn
CCs Options 1.8 trn 43 bn 200 bn
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