FXPB versus CCP put to the test

On September 21, Goldman Sachs and Morgan Stanley were given a lifeline when they received approval from the US Federal Reserve to become bank holding companies and diversify their funding base. Two days later, value investor Warren Buffett pumped $5 billion into Goldman Sachs. Once the frenzy of the previous weeks subsides, the fundamentals of both banks will become increasingly recognised.

However, not all banks are this privileged. According to Igor Suzdaltsev, head of financial institutions at OTP Bank in Moscow, a regular direct credit line, or the daily settlement limit, for the top 50 Russian banks from foreign banks is the equivalent of $30 million. This allows Russian banks to reach turnover at a level of several hundred million US dollars a day.

Herein lies the benefit of foreign exchange prime brokerage. The daily settlement limit from regular prime brokered credit lines to the same top Russian banks by foreign banks is the equivalent of $200 million. This allows Russian banks to reach turnover at levels of more than $2 billion a day. The caveat, however, is that it took around two years for an FX prime broker to sign on OTP Bank as a prime brokerage client to trade ruble on LavaFX (see page 9).

The flurry to find some way of managing counterparty credit risk has so far failed to yield an outright winner as dealers report clients are still interested in the central-counterparty model. And although some argue the doors have swung open for the exchange model to thrive in spot FX, others continue to beat the drum of distributing risk through multiple prime broker relationships.

But at some point there should be a little more clarity about whether multiple models can really co-exist in FX. Banks' on-boarding teams are going to be busy for a while, setting up accounts and changing accounts in the current environment. However when this is done, it should be interesting to see whether any one model receives more flow as a consequence of the heightened demand for counterparty credit risk protection.