FX: Making the best of a bad situation
Determining when a client is in distress is not always a straightforward process – banks and FX platforms need to have processes in place to ensure losses are not compounded.
Increased volatility, extreme market events, the use of algos that can run out of control and ‘flash crashes’ can cause considerable losses to market participants and their underlying clients.
If not managed correctly, they can quickly join the ranks of the distressed.
When a client is under stress, it is not a given that the counterparties will have access to this information in real time and the more that clients diversify their credit providers, the more complex the situation becomes.
If the counterparty is in control of some of the assets affected, this will raise a red flag, but they don’t always have the ability to deny access in real time.
Baton Systems founder and CEO Arjun Jayaram notes that since most FX traders do not have a sufficiently large balance sheet to book their trades and therefore use the services of an FX prime broker, it is not always obvious when they are in trouble.
“However, there are a number of signs that may indicate distress,” he says. “These include large gross and net exposures and obligations; disproportionate counterparty exposures; exposures in non-CLS settled currencies – which leads to settlement risks for both broker and trader; and large positions in spots and futures in volatile markets.”