![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
Heavyweights move to tackle rising unnamed counterparty risk
Top foreign exchange banks are joining forces with central banks and industry groups to eliminate unnamed counterparty risk.
"If I am dealing with an investment adviser [IA] and the client they are acting for is not known to me, that has serious implications. Although my contact is with the IA, my risk is with the unnamed counterparty," said one forex manager at a US bank in London. The situation has been highlighted by a series of recent situations in which unnamed counterparties have found themselves in "credit-challenged positions", added another global head of forex at a bank in New York.
New guidance from the Federal Reserve Bank of New York’s foreign exchange committee, which comprises senior officials from 20 of the world’s largest names in foreign exchange, came last month in an open letter to forex market participants: "The committee... recommends that investment advisers and dealers alike begin to undertake measures that will ultimately eliminate the current practice of trading on an unnamed basis. Specifically, investment advisers and foreign exchange intermediaries should develop a process whereby client names are disclosed to the credit and legal/compliance staffs of dealers before the execution of foreign exchange trades. In turn, dealers should have procedures in place to ensure that the identity of the intermediary’s clients remains strictly confidential and is not revealed to their trading staff."
In the UK, the British Bankers' Association (BBA) is also tackling the problem. "A number of our member banks came to us last year and said current practice was well past its sell-by date," said Simon Hills, director, wholesale and regulation team, at the BBA in London. As a result, the BBA, in conjunction with the Bank of England, is in the process of updating the Non Investment Products Code (NIPs) – a guideline on best practice in forex and money markets. "Concern had grown following the events of September 11 and the introduction of ‘Know Your Counterparty’ regulations in the United States. The banks involved believed it would be right to place an outright ban on this activity, through an amendment to the NIPs code," said Hills.
Many firms have already adopted the measures suggested by the New York Fed committee and the BBA, but there is still some way to go before unnamed counterparty risk is eliminated. "One of the practices we are strongly suggesting is already common in the industry – the Chinese wall between credit and front office," said David Puth, global head of forex at JP Morgan Chase in New York and chairman of the New York Fed foreign exchange committee. "We are not saying this [unnamed counterparty trading] can be eliminated immediately, but we hope these are steps that will make a better market for all."
But the situation is not clear-cut. Many market participants, usually institutional investors or central banks, value the veil of anonymity that obscures the size or direction of moves they are taking and which protects their positions. In situations where the client is a central bank, disclosure of the client’s identity can threaten successful intervention or other foreign exchange operations undertaken by the central banks.
"The last thing a central bank or large institutional client wants is a dealer spreading details of their foreign exchange transactions," said one forex sales head in London who declined to be named.
The practice of block trading, where a fund manager trades for a number of clients and allocates the trades to separate clients at a later date, will not be affected by the guidelines.
For more foreign exchange news, visit FX Week.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Iosco delays pre-hedging consultation to November
Review into controversial practice splits industry
Honey, I shrunk the Fed. (Not a sci-fi fantasy)
Promoting the discount window may be the Fed’s key to shrinking its $7trn balance sheet, says Bill Nelson
Insurance double-hatters like Apollo can expect more scrutiny
Regulators are homing in on conflicts of interests at private-equity-owned insurers
The boy who cried ‘outlier’: false alarms could dog EBA test
Analysis reveals banks deemed outliers by net income test are profitable post-shock, so how useful is the test?
Modernising compliance functions with regtech
Regtech addresses the complexities of regulatory requirements, offering innovative tools to modernise compliance functions, streamline processes and enhance efficiency. This article explores its role in compliance and reporting within the banking sector,…
For the Fed discount window, destigmatisation starts at home
US supervisors must change tack to encourage central bank liquidity utilisation, writes Bill Nelson
Study finds just 10 banks plan to apply for FRTB models
Research provides extra insight on reasons for decline in internal models
EU banks hedge net interest income to pass new IRRBB test
Would-be outliers look to cut sensitivity of cashflows to rate moves, but at what cost?