FX Report 2011: Trading A Changing Landscape
Below is an excerpt from the 2011 FX Trading and Technology Trends in 2011 survey report. To download the report in its entirety please complete the short form here
Overview
Rules of swap trading regulations in the Dodd-Frank Act are expected to be finalized in 2011. As the initial deadline (July, 2011) has passed1, market participants continue to express their skepticism on the timing of these rules implementations, the technical costs associated with implementing them, and the impact of the regulations on their business and market liquidity. Nevertheless, Congress has set a strong tone by granting the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) full authority to oversee financial institutions and their trading activities. These activities include pre-trade risk controls, collateral and margin requirements, over-the-counter (OTC) trading, clearing, proprietary trading and high frequency trading.
During this time of regulatory change, much attention has also centered on the global foreign exchange (FX) market, which has a $4 trillion daily turnover according to the latest Triennial Central Bank Survey conducted by the Bank for International Settlements2. Surprisingly, the 20% increase in daily turnover since 2007 is not driven by the global commercial banks, but instead by non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and institutional investors. The growing participation in the FX market from these so-called “non-financial institutions” is a result of fast-adopted electronic execution methods. Aite Group estimates the use of electronic trading to exceed 70% by the end of 2012.
In early 2011, StreamBase Systems carried out its 3rd annual online survey to explore the latest trends and developments in FX trading and technology. A total of 135 respondents participated in the survey – 55% identified themselves as buy-side firms and 36% on the sell side. Some 84% were from the Americas, 10% were from the Europe, Middle East and Africa (EMEA) region, and the remaining 6% were from other regions (See Figure 1).
Some 31% of respondents use a custodian bank to handle their FX transactions, 8% use a currency overlay management firm, and 60% do not use services provided by either type of organization.
FX Products and Currency Management
As expected, majors were the most traded currency pair. Some 95% of respondents traded the majors, some 67% traded crosses and some 25% traded exotics/emerging markets pairs. With regard to FX products, the most noticeable difference…
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