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their client base. Also, many assumptions [in this risk
area] that were made in the past have obviously been
proven to be incorrect.” While there have been
infrequent negative events in the FX markets - usually
due to the liquidity of certain currency pairs having
dried up - brokers giving out credit (leverage) to their
customers are keen to preserve their capital.
Margin calculations
In terms of the elements usually required for
calculating a customers’ available FX margin in the
Retail space, the core elements are the opening cash
balance, customer foreign exchange positions, the
leverage ratio per instrument and a particular
customer’s call and close-out values.
Cognotec’s O’Donnell says here: “Next generation
platforms greatly assist the process of determining a
customer’s available margin by tracking changes to all
of this data, with the best of these systems
undertaking this in real-time.”
Lucas says Fortex has gone “a step further” when it
comes to calculation of the margin calculations for its
clients (the brokers) and added an extra layer of risk
comfort. In addition to the brokers setting initial
margin requirements, maintenance requirements and
liquidation requirements for a trading client, by utilising
Fortex technology, maximum position limits per
currency pair can be set, as well as limits per orders and
Sean O'Donnell
“Next generation platforms greatly assist the process of
determining a customer’s available margin by tracking
changes to all of this data, with the best of these systems
undertaking this in real-time.”
106 | january 2010 e-FOREX
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number of orders. It can even be applied to customers
trading more than one account. (Critically though the
customer can never override the broker’s limit).
He adds: “What we’ve done is to develop tools that can
set limits that are more restrictive depending on the
currency in question. For all those margin requirements
mentioned, if a trader hits the maintenance level, we
will generate real-time emails for all the relevant
constituents involved.” With cash deposits made in
brokerage accounts by clients usually receiving the full
margin calculation (i.e. no market risk), posting
securities into that same account will likely be subject
to a margin ‘haircut’ (i.e. to offset the market risk).
Fortex’s extra layer takes into consideration differing
margin requirements on different currency pairs. For
example, traders probably have a good idea of what
the margin required is when trading a G8 currency
(US$, Yen, etc.), and that the requirement is close to
the actual risk. But when it comes to a more exotic
currency, the margin requirement could well be
higher to reflect the potentially greater risk.
Also, if a trader trading on margin decides to say
initiate an FX position, they might have to post a 2%
margin. By making a $100,000 deposit, this would
provide the potential to have a US$5m position (i.e.
leverage of 50x). If the maintenance requirement level
is set at 1% (US$50,000) and the trader’s equity falls
below that figure, Fortex would again generate an
email alert to all parties involved. This would include
the customer (Retail trader), the broker’s risk
department as well as an introducing broker - if used.
Scalable and multi-dimensional
Dennelly at SunGard Sierra says crucially “Whatever
solution is going to be purchased, one needs to make
sure that it can handle all types of [FX] products that
clients are going to need to use. On top of that the
margining calculation engines need to be extremely
flexible and scalable.” Presently in Sierra, there are over
68 different margining algorithms. They also provide
an open API, so that if the customer has something
that is unique and proprietary to them, they can “plug
that in” and use it. The Sierra platform is “expected to
be margining plus limits”, Dennelly says.
FX margin calculations could also take a lesson from
using a SPAN ® approach from FXBridge, a global
provider of innovative software solutions to
companies operating in the high-volume/low latency
FX. “Look at the entire product portfolio, assess risk,
and then determine margin,” says Joe Cunningham,
head of FX at FXBridge, based in Atlanta, Georgia.