The foreign exchange markets are unlikely to follow the credit default swaps (CDS) market by establishing central counterparties in the near future.
At the FX Week Europe conference in London yesterday, a panel of industry specialists rejected the idea that a forex central counterparty would soon be established.
"It's not that it's not a good idea," said Will Boss, global head of forex operations at UBS. "I'm just not sure [a central counterparty] is short on the horizon, given the industry's widespread nature in terms of numbers of clients."
"I would advocate a central clearing house," agreed Jonathan Kemp, head of forex operations at Citi in London, "but I just think as an industry we're still someway off that". Much of the over-the-counter derivatives market will move to central clearing houses before the end of the year.
Speculation had mounted that regulators would also reform forex markets. One London-based forex trader even predicted that a forex central clearing house would be operational by mid-2009. But the panel rejected this assertion, claiming refinements are needed rather than major initiatives.
Frank Smith, a consultant at DealHub, a company providing information on FX trades, believed settlement risk could be reduced by half with the help of electronic and advisory services. The panellists also confirmed CLS Services, which operates the world's largest multi-currency cash settlement system, would continue to be the major trading platform.
"There are still going to be gaps, and at the end of the day we're going to have settlement risk," said Boss. "At one extreme you get that central counterparty, at the other extreme you get stop payments. There needs to be some level of discussion about what we would do with that gap if CLS doesn't exist."
CLS announced a 71% year-on-year increase in the volume of FX trades for the September-October period.
More on Settlement Risk
Icma ERC continues to push for plans to improve Bridge settlement times
RMB volumes set for growth but settlement remains an issue
Working with banks and CCPs to facilitate central clearing of OTC forex options is 'high priority strategic initiative' for CLS this year, says chief executive David Puth
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