FX

There are many reasons why established financial institutions are starting to trade and invest in cryptocurrencies but their interest is certainly driving the development of services which match what they expect to find in the traditional foreign exchange (FX) and securities markets. Substitutes for the traditional means by which counterparty credit and settlement risk are mitigated are already in use. Service providers are seeking regulated status, and commercial law is catching up with day-to-day market realities. Traditional providers need to start thinking about how they can best adapt their existing services to what might turn out to be an epochal form of change.

There are many reasons why established financial institutions are starting to trade and invest in crypto-currencies but their interest is certainly driving the development of services which match what they expect to find in the traditional foreign exchange (FX) and securities markets. Substitutes for the traditional means by which counterparty credit and settlement risk are mitigated are already in use. Service providers are seeking regulated status, and commercial law is catching up with day-to-day market realities. Traditional providers need to start thinking about how they can best adapt their existing services to what might turn out to be an epochal form of change.

Peer-to-peer platforms are one of the many promises of the blockchain age. More than one has emerged in the giant foreign exchange (FX) markets, as entrepreneurs look to wean institutional and corporate users of the FX markets off their habit of paying too much to banks by netting buy-side trades before going to market. But FX HedgePool, founded by former State Street and BBH currency management veteran Jay Moore, has a specific focus: the predictable monthly and quarterly currency hedging activities of asset owners and managers looking to protect assets and share classes from adverse movements in exchange rates. He told Dominic Hobson why the firm chose to specialise, and why banks as well as buy-side firms gain from what HedgePool does.

The investments in Bitcoin by Ruffer and MassMutual may have caught the headlines, but crypto-currencies are becoming a tool for corporate treasurers to manage their liabilities as well as a source of capital growth for asset managers. Near-zero to negative interest rates and repeated central bank interventions are encouraging a more adventurous approach in the corporate as well as the retail markets. Whether this will end well cannot be known, but treasurers certainly need safe ways to trade and even safer ways to custody the assets, and the conventional banking industry is not rushing to provide them. Rob Gaskell, partner at Appold, the London-based emerging technology advisory and investment company, shared with Dominic Hobson his view of the risks and opportunities.

Despite their importance, size and liquidity the global FX markets have remained largely immune to the digital technology revolution. The reasons for this include their global scale, amorphous and fragmented structure and lack of an over-arching regulatory framework, but the principal cause of the lack of innovation is the domination of the FX markets by a small coterie of large global banks. Even the FX services for consumers developed by household name FinTechs have done little more than reduce the margins banks enjoy in one area of their business. In the wholesale FX markets large corporations, asset managers and asset owners continue to pay high prices for FX execution and hedging. This Future of Finance event engages with a group of innovators that have identified ways to challenge the banking oligopoly in FX.

Foreign exchange (FX) is routinely described as the largest and most liquid financial market in the world. And the most recent triennial survey of FX by the Bank for International Settlements (BIS) reckoned daily turnover hit US$6.6 trillion in April 2019, up from $5.1 trillion in 2016.

The liquidity of the market, in particular currency pairs at particular times, is a lot less reliable than such a scale implies. And, despite the hordes of participants in every currency and country and the shift to from inter-bank trading to on-exchange trading, the FX markets are in reality controlled by an astonishingly small number of banks.