currencies in favor of the euro is pushing foreign exchange trading into fewer and fewer hands.

Bankers and analysts estimate that a dozen big banks and securities firms, including Chase Manhattan Corp. Deutsche Bank, Citigroup Inc., HSBC Holdings PLC, and UBS AG now handle three-fourths of all trading. Meanwhile, foreign exchange trading volume continues to grow every year.

The increase in volume coupled with a decline in the number of players is raising concerns in some quarters that the failure of a single large counterparty could trigger a market meltdown similar to the collapse of Bank Herstatt in the 1970s.

Both the Federal Reserve Bank and the Basle-based Bank for International Settlements are working to reduce the risk of a so-called systemic breakdown in financial transactions, which would stem from the failure of one party to settle a large trade.

Banks have until Nov. 30 to submit their comments to the BIS on its proposals for tighter risk management and increased capital against foreign exchange settlements. Simultaneously, U.S. and European banks are now working together with the Society for Worldwide Interbank Financial Telecommunications, or Swift, to launch a sophisticated clearing system known as Continuous Linked Settlements Bank that would dramatically reduce the time of settlement and the of a counterparty failure.

Still, no one has any reason to doubt that daily trading volume will continue to rise and the number of players shrink, especially as bank consolidation accelerates in Europe.

As new electronic systems reduce the number of middlemen involved in trades and margins get still thinner, only large players with large amounts of capital are going to be able to make money in foreign exchange, analysts predict.

"It's a much more competitive market these days, and only the biggest players are going to survive,'' predicted Andre Cappon, president of the CBM Group.

He and others noted that although a large number of new currencies, such as the Argentine peso, Polish zloty, and South Korean won, are now being traded and margins on these currencies can be hefty, volume in them still remains limited.

According to the last survey conducted by the world's central banks in conjunction with the BIS, global daily turnover in foreign exchange including spot trades, forward contracts, and foreign exchange swaps hit nearly $1.5 trillion in April 1998. That compares with $1.2 trillion in 1995 and $600 billion in 1985.

Daily trading volume totaled $351 billion in 1998, up from $244 billion three years earlier. Reflecting some of the decline in the number of players, only 93 dealers participated in a New York Fed survey, compared with 130 three years earlier.

According to some forecasts, the dollar, the euro, and the Japanese yen will increasingly set exchange benchmarks to which other regional currencies will peg their own rates.

Despite regulators' best efforts to ensure a measure of stability in these enormous markets, no one is prepared to predict whether there will be another blowup in the ever-growing foreign exchange market.

"Pricing may be getting commoditized, but the forces driving foreign exchange are becoming more unstable,'' said Jeremy Fand, chief foreign exchange strategist at FleetBoston Corp.

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