A group of large prime brokerage banks are trying to reduce their costs and risks in foreign exchange settlement by standardizing the processes of clearing high-velocity trades for hedge funds and other retail traders.
Organizers of a joint venture plan to announce today that three additional banks, Bank of America Corp., Credit Suisse and Morgan Stanley, have agreed to support the standardization effort. They join a group, announced in April, of Citigroup Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Royal Bank of Scotland Group PLC.
All seven participate in currency trading using continuous linked settlement through CLS Bank International to reduce counterparty risk, and all of them also use Traiana post-trade processing technology from ICAP PLC, a British interdealer broker, to communicate with their clients.
By supporting the joint venture, a subsidiary of CLS that is 49% owned by ICAP, the founders have agreed to use Traiana for their interbank communications.
Jonathan W.H. Butterfield, director of communications at CLS, described the strategy as an "aggregation solution" employing a proven technology that banks already use with their clients.
Nick Solinger, the chief marketing officer of Traiana Inc., said world currency markets have undergone drastic changes in recent years, with a wider range of participants, including hedge funds and other retail traders overtaking the traditional interbank market, where banks trade currencies for corporate clients involved in international commerce.
"Over-the-counter FX markets have been one of the best-performing markets during the tumult of the last couple of years," making them more attractive to traders, Solinger said.
Butterfield said that 80% of the trading volume through CLS represents just 10% of the currencies' value, but those low-value transactions the equivalent of $1 million or less may be high-velocity, algorithmic trades or other computer-driven strategies. In many cases such traders net out to a zero position by the end of each trading day, he said.
The joint venture is finalizing the workflows that all the participants will use, and it is beginning the regulatory approval process with the Federal Reserve Board in the United States and with other countries, Butterfield said. The goal is to have the interbank network operating by yearend.