Concerns About Counterparty Risk Remain High
CME Group, the world’s leading and most diverse derivatives marketplace, today released results from its third annual Global Foreign Exchange (FX) Market Study of both cash and exchange-traded FX products. Overall, concerns over counterparty risk remain high, albeit reduced slightly from last year.
"This year’s study with our partner ClientKnowledge illustrates that there continues to be a fundamental shift in the global FX market towards risk mitigation," said Derek Sammann, managing director of Financial Products, CME Group. "Investors continue to look for alternative ways to mitigate counterparty risk in both the over-the-counter (OTC) and futures markets. By offering liquidity, transparency and credit risk mitigation, we provide investors with the solutions they need to manage their risk on exchange. In addition, we plan to offer a post-execution clearing service for OTC FX trades through CME ClearPort giving market participants increased security, efficiency and flexibility."
"The combination of the global credit crisis and development of e-trading has resulted in a greater focus on post-trade services, risk management and increased efficiency," said David Poole, coo ClientKnowledge. "FX market participants are balancing taking advantage of opportunities for increased revenue whilst accounting for market, settlement and systemic risk."
At the time the survey was conducted (September 2009), traders revealed changing priorities when assessing their concerns in troubled markets. The Global FX Market Study showed the following:
* Banks cite settlement risk as their biggest concern when supplying e-pricing, up to 69 percent from 52 percent last year*. Worries about counterparty risk remain high, with two-thirds of those surveyed citing it as a concern in 2009. Concern about latency saw a 13 percent increase, up from 16 percent to 29 percent.
* When assessing systemic risk:
o Investors are more concerned by economic problems than banks. Back office and settlement limitations emerged as the biggest concern for banks, increasing to 47 percent, up more than twice the 16 percent cited in 2008. Worries about a liquidity crunch dropped significantly from 51 percent in 2008 to 33 percent in 2009, and credit or bank insolvency remains nearly unchanged at 26 percent, down from 27 percent in 2008.
o Investors are more concerned about credit/bank insolvency in their view of exposure. Highly active investors’ concern over credit/bank insolvency is at 44 percent, up from 36 percent in 2008. Liquidity concerns, the topmost worry in 2008, came in second at 36 percent. Worries regarding macro-economic problems jumped back up to 31 percent, from 14 percent in 2008.
* In employing options, banks and investors placed more focus on plain vanilla options versus barrier and exotic options, suggesting that both banks and investors are making the move back to simplicity, liquidity and transparency when trading options. Trading more complex options may be a more effective hedge now, but managing the risk over the life of the derivative still remains a major consideration.
The research was conducted by ClientKnowledge, the provider of expert research, analytics and strategy for the wholesale financial markets. A summary of the survey is available at www.cmegroup.com/globalfxstudy.
Video content from Derek Sammann can be found here: http://powerhost.powerstream.net/008/00102/100210Sammann1.wmv
