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RETAIL e-FX PROVIDER<br />
Joe Cunningham<br />
“At FX Bridge, we evaluate a currency pair, such as EUR/US$,<br />
by looking at the total <strong>com</strong>bination of long and short spot<br />
positions, calls, and puts. Then we evaluate the risk<br />
assessment of the portfolio by changing the underlying asset<br />
up and down as well as the volatility.”<br />
Client benefits<br />
As to why more effective real-time risk management<br />
leads to more accurate margining and what benefits<br />
Retail FX brokers can pass onto clients by having an<br />
improved margining and risk management capability<br />
on their trading platforms, Cognotec’s O’Donnell<br />
says: “All risk management systems operate by acting<br />
on events that either raise or lower the risk to the<br />
participants involved - in this case the bank/broker<br />
and the customer.”<br />
By having a real-time risk management system, the<br />
bank/broker can react to changing events (market<br />
prices, customers positions, leverage ratios, etc.), thus<br />
reducing the risk to both parties. This can enable<br />
higher leverage and more attractive credit lines to be<br />
provided to clients. O’Donnell adds: “For example, if<br />
a risk management system of a bank/broker is being<br />
supplied with prices once every second (and not in<br />
real-time), then they will have to lower the leverage<br />
per instrument as there is a possibility that a price<br />
change will occur within the one second interval that<br />
could cause a customer to be closed out.”<br />
By its very nature failure to provide real-time risk<br />
management creates risk. “Gaps in time create gaps in<br />
market coverage,” Cunningham adds. “And, in order<br />
to be <strong>com</strong>fortable offering aggressive leverage to<br />
clients, the broker needs a high degree of certainty in<br />
closing out clients prior to a negative equity<br />
110 | january 2010 e-FOREX<br />
situation.” The closer to “real-time risk management”<br />
in conjunction with auto margin management, the<br />
greater the leverage a broker can offer clients without<br />
be<strong>com</strong>ing subject to undue market risk.<br />
Competitive advantages<br />
As to the new business opportunities and <strong>com</strong>petitive<br />
advantages banks/brokers can obtain by ramping up<br />
their risk and margining infrastructures, the events of<br />
the past year highlight that they must understand<br />
their own exposure along with their customers’ credit<br />
exposure if they want to run effective businesses.<br />
As O’Donnell puts it: “Those operators who can<br />
manage their risk with real-time margining platforms<br />
will be able to ensure that they are able to handle the<br />
volatility of the markets, support very large numbers<br />
of customers whilst still offering leverage/credit terms<br />
that are aggressive - without <strong>com</strong>promising risk.” As a<br />
pointer to future opportunities and enhancements,<br />
SunGard Sierra’s Dennelly notes in relation to FX<br />
margining more and more clients are wanting to FX<br />
margin FX options. Retail clients usually start off<br />
trading spot FX, might follow that up with a move<br />
into forward market and eventually embrace the<br />
options market. Again this underscores the need for<br />
choosing a solution that can cope with all types of FX<br />
products.<br />
Despite certain legal restrictions currently in place,<br />
Dennelly suggests that the next big trend in the<br />
market could be well be “cross margining” FX<br />
products, whereby integrated statements are produced<br />
for clients showing their cash margin positions,<br />
futures positions and the overall consolidated picture.<br />
FXBridge’s Cunningham says that banks and brokers<br />
open a new world of product and revenue<br />
opportunities by offering trading accounts with<br />
<strong>com</strong>bined spot and options margining. “First, the<br />
account holder can implement trading strategies for<br />
volatile and non-volatile markets that can rise, fall or<br />
remain range bound,” he explains. “Second, the<br />
account holder can implement risk management<br />
strategies that simple stop and limit orders cannot<br />
provide.” He adds: “By keeping an active account<br />
holder longer, the dealer not only derives more<br />
opportunity for revenue, but reduces one of the most<br />
significant costs, namely that of customer<br />
acquisition.”<br />
Critically though, as Fortex’s David Lucas says:<br />
“Everyone in the foreign exchange market food chain<br />
has an interest in managing their risk effectively,<br />
because no one can make money from a customer<br />
who goes out of business.”
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