Capital calculation for institutional FX firms when clearing trades has become a considerably more complex procedure post-implementation of the worldwide governmental rulings including the Dodd-Frank Act, European Market Infrastructure Regulation (EMIR), and Basel III, in that uncleared OTC derivatives now incur Credit Valuation Adjustment (CVA) risk capital charges, default risk capital charges and minimum initial margins.
As a result of this, ensuring the future-proofing of systems employed to carry out risk management has become a matter of importance, with GFI Market Data having today announced that it has entered into an agreement with Australian risk management solution provider Vector Risk in order to supply a cloud solution with market data on several of the key asset classes which the company provides, which along with credit derivatives, bonds and interest rate options, includes FX.
OTC Data Use In CVA
GFI Market Data is a division of North American firm GFI Group, and has detailed that these OTC datasets have been added to Vector Risk in order to better calculate up-to-date and accurate risk measures across a range of financial instruments covering the yield curve – for both on and off balance sheet credit exposures.
Richard Brunt, Global Head of Market Data at GFI made a corporate statement that: “In the current regulatory environment we have seen a significant rise in the demand for high quality OTC data for use in Credit Value Adjustment and other Risk Management metrics. Working with Vector Risk’s cloud solution made for a very timely and natural synergy of high quality OTC data and a best of breed fully hosted Risk solution”.
Justin Taylor, Managing Director of Vector Risk Inc. further added: “The Vector Risk team is proud to partner with GFI’s Market Data group to power its cloud based risk engine service. Access to quality credit spread and hard to find option volatility data will greatly improve the service for our clients.”
Which Jurisdiction And Reserve Currency Is The Next Big Thing?
With the regulatory framework surrounding the method by which the trading of FX and other OTC products within institutional firms having become all-encompassing in Europe with EMIR and North America with the Dodd-Frank Act, the world’s most prestigious executing venues in Chicago, New York and London have had to invest in substantial infrastructure changes in order to remain effective as well as compliant.
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In terms of FX, it also serves to demonstrate the GBP and USD’s future longevity as reserve currencies for FX trading among major Tier 1 financial institutions and trading desks at large global banks, as the infrastructure is required to be leading edge in order to maintain such as status, which could result in technology firms and brokers replicating the US and European environment in Russia.
Whilst GFI Market Data has taken the decision to invoke a cloud-hosted system, Russian firm IXcellerate produced a white paper earlier this year which categorizes capital expenditure, operating costs, power supply and cooling, infrastructure upgrades taking into account hardware equipment changes which take place constantly and rapidly, impacting the supporting of fixed infrastructure equipment.
Whether in the light of the Ruble’s upwardly mobile aspirations, this approach may be sidelined in favor of that taken by GFI Market Data and Vector Risk is an interesting notion.
Forex Magnates today spoke with Emmanuel Carjat, Managing Director of Canadian infrastructure provider TMX Atrium in order to gain his perspective on this, especially bearing in mind the company’s concentration on providing point to point connectivity between Moscow and London, as Moscow Exchange (MOEX) becomes increasingly popular as an alternative executing venue, and as the Ruble vies for prime currency status.
Mr. Carjat explained that “The amount of FX trading is increasing massively within Russian venues. Banks are looking to get access to Russian liquidity, and all of the world’s Tier one banks have announced that they are going back to Russia.”
Whether this will result in Russia’s government embarking on the implementation of a set of rulings emulating those of the Dodd-Frank Act is food for thought among institutional market participants, mainly because in order for the Ruble to be considered a major currency, not only the trading infrastructure must be state of the art, but so must the governmental oversight and clearing procedure.
“There is a real desire to make the Ruble a reserve currency” explained Mr. Carjat today. “In order to do this, the Russian venues and government are putting everything in place from an infrastructure perspective, so that the Ruble can really be considered a reserve currency.”
“If you want to ensure that a unit can really become a reserve currency you also need to have bond clearing. Some of the russian government bonds are now cleared through Euroclear. When the government issues new bonds, they are making sure that everything is in place so that it can become a much higher volume currency” concluded Mr. Carjat.
With latency, according to TMX Atrium’s figures, down to 40 milliseconds between London and Moscow, and 120 milliseconds between Chicago and Moscow, this could become a land of opportunity for technology, data and institutional FX trading firms alike.