it is imperative for trading platforms, dealers, prime brokers, and fund managers to adopt technology that enables better credit management across the FX ecosystem.
Tracey Kent of MaxxTrader (an SGX Group company), argues why access to investment bank style technology is the only way for brokers to win clients unable to access credit from the major prime brokers.
Recent market events have led to major prime brokers pulling out of client relationships. Currently, the core issue lies in the disparity between a client’s credit funding capabilities and the accurate assessment of their collateral with the prime broker, as well as the extent of credit being extended to the wider market.
The problem of credit allocation, which has hung over the FX market for what seems like a very long time now, has to do with resistance from counterparties to fundamentally change the way in which they trade by introducing new methods such as pre-trade credit. A large proportion of the industry would not be against pre-trade credit as it is very relevant for areas such as clearing. The reality is, however, that this does not solve the overarching problem of credit allocation in an FX market of multiple counterparties and numerous trading methods.
It may well be that a hedge fund client possesses a $20 million dollar requirement, which the major prime-broker arms of the banks are currently disinclined to accommodate. However, there may be a broker-dealer with a balance sheet in well excess of $20 million who is willing to extend credit facilities to other market participants. Alternatively, the same hedge fund may have a liquidity issue, and as a result, can’t access enough credit at the right place and at the right time. Another possibility is that the hedge fund may simply not have the appetite for credit risk. Regardless of the situation’s specifics, finding a solution is crucial to enable transparent trading on the same market. Resolving the credit issue stands as a key enabler in achieving this objective.
Addressing the issue by merely removing it from the books is not a credible enough solution. Dissecting the problem is one thing, but to actually solve it, it is imperative for all trading platforms, dealers, prime brokers, and fund managers to adopt technology that enables better credit management across the entire FX ecosystem. This is the most realistic way to resolve this issue, which has frankly been around for far too long. Deploying investment bank-style technology would allow for a wider range of options in accessing credit, enabling broker-dealers to adopt a more dynamic approach to credit allocation.
