Foreign Exchange

Access, pricing and future issues for foreign exchange participants

Originally published in the June 2012 issue

With the global marketplace for foreign exchange officially estimated at exceeding a daily turnover of $4 trillion per day in 2010, it is now thought that the market reached a peak of $5 trillion per day at the end of last year (Bank of International Settlements, 2012). However, though no official figures have yet been released, it is thought that market volume has fallen significantly since the beginning of this year. A self-feeding cycle of higher perception of risk in financial markets has equated to lower exchange volumes. This has, in turn, led to higher levels of price volatility which, representing a measure of uncertainty with regards to how to assess a value for an asset over time, fosters an environment which makes it more difficult for all entities involved in commercial transactions to plan and manage future their transactions.

However, despite this increase in volatility and the potential for a further increase in response to the severe economic deterioration in the Eurozone, foreign exchange markets remain both highly liquid and highly accessible for trading purposes. This is irrespective of movements in pricing as major currency pairings begin to touch levels not seen since the beginning of the global liquidity crisis in 2007.

Liquidity then, given the size of foreign exchange markets, is not likely to be the issue of primary concern. As the ability to access foreign exchange contracts and prices is at an all-time high, what are the most significant problems facing foreign exchange market participants?

At Eiger FX, a London foreign exchange broker forming part of the Eiger Group, we predict that both counterparty risk and security are going to be the two most critical points of inflection for foreign exchange market participants in years to come.

Whether it is on a global trading or local payment level, the last two years have started to see significant challenges emerge for large foreign exchange intermediaries which have had to increasingly rely upon ever smaller ‘spreads’ in order to maintain their business operations. However, there is much debate over how many foreign exchange intermediaries are taking their own direct risks in the market in order to enhance their profit lines. MF Global, the US-based broker, World Spreads, and Crown Currencies, both UK brokers, are three such examples of how this activity has ended in disaster. These companies have now left thousands of their customers facing loss of funds, with failed proprietary trading resulting in both companies falling into sudden administration.

The lessons to learn from this however are complex. Companies, individuals and funds alike all use foreign exchange intermediaries for the simple reason that the costs tend to be much lower than those associated with dealing directly with banks. Ideally, a foreign exchange intermediary is also able to give much more precise and detailed information on issues affecting foreign exchange markets than many dealers in bank call-centres and dealing rooms.

In the past such a service appeared relatively elementary. Coupled with the increasing ease of being granted simple regulatory authorisation and a credit line from a bank, many firms could soon present themselves as ‘specialist financial providers’. Indeed, the recent rise in foreign exchange intermediaries that offer currency trading and services through a variety of social-media platforms supports this premise. However, foreign exchange transactions, precisely because they involve counterparty risk and trading-risk, need formidable security-controls in place and all participants need to be aware of this in order for them to make accurate decisions on what is transacted. The FSA have clamped down on companies within this sector by the implementation of the Payment Service Regulations 2009 for payment services, but there are still some companies who are lacking in certain departments.

Therefore, what is really needed from foreign exchange intermediaries is not endless extolling of ‘technology’ and ‘best pricing’, but a genuine background of experience in financial markets at the wider-level. Foreign exchange execution does carry counterparty risk, and as financial markets become more volatile, these risks will only increase. In this vein, the team at Eiger FX believe that their joint background at the institutional market level over 10 years, with a management team that has a combined 50 years’ experience at this level, is invaluable. Joint owner and operational Director of both Eiger FX Ltd and Eiger Securities LLP, Richard Ashton, states “Eiger FX is founded on the same principal as Eiger Securities. We do not believe there is longevity in technology-hyped fads and empty vague promises about pricing. Trust and security is first, excellent pricing and delivery is merely a by-product of this, and does not need to be constantly shouted about.”

Eiger FX is this month launching its new online FX dealing platform, designed to reflect what it believes are the most critical concerns in foreign exchange markets today – trust and security. Aware that its clients and the market-place in general are moving away from hollow fads such as ‘cheap pricing’ and ‘proactive service’, the platform combines high-end security with the backing of the Eiger Group:
‘What global entities need to be most concerned about with foreign exchange intermediaries, is not their use of exciting rhetoric, but whether they have professional experience and standing to manage their position in increasing volatility and subsequent risk’ Minona Fund, client of Eiger FX.

Fully owned and operated by management, the Eiger Group turns over billions in sterling per month and is respected and trusted at the interbank level by a diverse range of individually demanding clients such as Goldman Sachs and the Royal Bank of Scotland. Furthermore, institutional-sized credit lines mean that Eiger FX is not likely to be in a position where it compromises its clients money by having to bear market risk.

Andrew Binns, Co-Founder of the Eiger Group, states that “Our credit lines enhance our clients’ security. Not only do they safeguard their funds, it also means we make money where other entities have to book losses to convince unsuspecting companies they have ‘cheapest’ pricing.”

Head of Sales at Eiger Foreign Exchange, Samuel Garnett, outlines his main concerns: “What is currently developing across the wider foreign exchange market, in terms of participation, is similar to the explosion in concern about counterparty risk at the institutional trading level during the ‘credit crisis’ – all of a sudden institutions were very worried about being exposed to certain prime brokers and clearing entities”.

The key client base for Eiger FX, which focuses mainly on funds, fund administrators and large corporates, will be dealing with robust institutional level-prices from a well-founded group of professionals. The aim is to offer an alternative to other retail FX companies, that currently flood the market, posing as ‘financial professionals’ and attempting to dazzle with seemingly glitzy technology and buzzwords. Eiger FX is purely concentrated on security of information and its group pedigree, at the core of which is sound risk management.

Eiger Foreign Exchange will be launching its electronic foreign exchange platform in mid-June. For entities ranging from funds to corporates, the Eiger FX platform will be offering institutional-level pricing at maximum security and processing levels. The team at Eiger encourages those who are concerned about security in foreign exchange markets, from a pricing to a counterparty perspective, to visit the platform launch page and find out how to open a line to deal foreign exchange, for payment and hedging, with a trusted counterparty.

Samuel Garnett has worked in financial markets for the last six years. He joined the Eiger Group in 2011 to set-up the foreign exchange desk.