Thursday, August 20, 2009

FX Clearance: Centralized or Multi-Tier System?

The big banks want the smaller ones to clear currency trades (net out daily gain/loss) through a firm owned by them. Cost, among other reasons, make the small banks resistant. If the big banks really feel there is a settlement risk than they shouldn't trade outside the centralized clearing system; if that creates a two-tier pricing structure, all the better, as now firms have increased options and some type of market pricing mechanism(the difference between the rates) for currency settlement risk.

From the Financial Times:

"Banks that do not settle currency trades through a central system could be shut out of dealing at the best prices, according to one of the biggest foreign exchange banks.

Zar Amrolia, global head of FX at Deutsche Bank, one of the three biggest foreign exchange banks, said a two-tier system could become a reality as banks reassess their risks in the wake of the credit crunch."