Asia Risk Congress: FX derivatives should stay bilateral, says BNP Paribas trader

Regulators should back away from plans to force the $49 trillion notional foreign exchange derivatives market onto exchanges and clearing houses, according to Hubert de Lambilly, deputy global head of foreign exchange and hybrids trading at BNP Paribas in London, speaking today at the Asia Risk Congress in Hong Kong.

De Lambilly noted that the foreign exchange market remained unregulated throughout the crisis and has not shown any sign of collapse - unlike the panics and liquidity freezes that have periodically affected other products and asset classes. As such, he claimed, it would not be appropriate to change the market's structure, especially as a large volume of the trade in derivatives is done for hedging purposes with corporate clients who are opposed to the regular margining that would be required to support central clearing. Instead, de Lambilly argued that it would be enough to improve transparency in the market by promoting disclosure of derivatives positions - for example in yearly results - rather than pushing through more dramatic change.

He also warned of risks lurking in the Asian foreign exchange market - for example, the unwillingness of clients to buy options. "Buying options is against your religion," he told the audience. "You have many religions, you believe in many gods, but there is one god you all believe in, the same one – selling options - and that’s dangerous.” When markets are uncertain, he warned, clients must buy more options than they sell.

Separately, de Lambilly highlighted one potentially dangerous foreign exchange derivatives trade involving the Hong Kong dollar. He said there has been a long-standing strategy in which investors take positions on the Hong Kong dollar – which is bound within a pegged range to the US dollar – and use a digital option to bet that the Hong Kong dollar will not fall below this range. He called this “abusing the peg”. As long as it remains intact, investors will make money - but if the peg breaks, the consequences would be disastrous.

"It's a very good product – it has made lots of money for both investors and banks – but it’s potentially a very lethal product,” he warned. The losses if the market breaks could potentially be billions of dollars.