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Settlement Risk Key Concern for FX Markets - Triennial BIS Central Bank Survey

Settlement Risk Key Concern for FX Markets - Triennial BIS Central Bank Survey

(5 December 2022 – Global) As key FX participants sift through the results of the latest Bank for International Settlements (BIS) triennial FX survey, settlement risk is highlighted as a major driver of business FX decision making.

Turnover in over-the-counter (OTC) FX markets averaged US$7.5 trillion per day in April 202 according to the latest triennial survey by the BIS, an increase of 14 percent from its April 2019 survey. The lift in volumes was chiefly attributed to inter-dealer volumes as opposed to customer activity. FX Options accounted for four percent of global turnover, down from five percent three years ago.

The period of data collection coincided with heightened volatility due to changing expectations about the path of future interest rates in advanced economies, rising commodity prices and geopolitical tensions after the Russian invasion of Ukraine. It is also possible that the actual figure was even higher, since pandemic restrictions were in place in several reporting jurisdictions including China and Hong Kong.

Euromoney conducted interviews with major stakeholders on their opinions regarding implications of the key findings.

“There has been a particularly noticeable jump in renminbi trading, which has increased by more than 50 percent since 2019. This has amplified the need for on-demand settlement to reduce the possibility of a trade moving against a counterparty and impacting their ability to settle. The trading volume poses important questions about settlement risk, specifically the growth in trading in non-CLS settled currencies” commented Baton Systems President Jerome Kemp,

“Chaos in the FX markets made the decision to hedge risk relatively easy. King dollar was mostly a one-way trade this year, but there were a few times when traders were confident that the peak in the dollar was in place. Companies can’t afford to risk their profits playing the FX market, so currency risk management has been a top priority” stated Oanda Senior Market Analyst, Ed Moya.

“The difficulty with FX options really comes down to the US regulatory landscape, which treats OTC FX options as swaps under Dodd-Frank. This means that only an ‘eligible contract participant’ can trade them and generally only a registered swap dealer can serve as a market maker” said StoneX Group Global Head of Institutional FX, Eric Donovan.

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