Risk managers set to benefit from drive to address FX operational risks

Foreign exchange risk managers are waking up to new ways of addressing operational risk in the FX markets, Paul Fisher, head of the foreign exchange division at the Bank of England, told delegates at FX Week 's first congress in London this morning. As a result of operational risk concerns and the deployment of new technologies, banks are likely to increase the number of staff in their middle office risk management functions, Fisher said.

The emerging importance of straight-through processing (STP) and the introduction of continuous linked settlement (CLS) (the system built to reduce risk in the global forex markets) means banks can no longer “laugh off errors and blame the 'fat finger' syndrome”, Fisher said.

“CLS, one of the most complicated of projects, finally came to fruition [earlier this month], offering the FX markets a major improvement in risk reduction. CLS may be a landmark for the business but it doesn’t eliminate all risk, since some currencies are not covered,” Fisher added.

Perhaps the biggest development, from an operational risk standpoint, however, is the drive towards STP. But since the costs of implementation are high, only the larger banks are benefiting at the moment, Fisher said.

But because larger banks are increasingly dominating the FX market, reflecting customer demand for a one-stop shop for all banking needs, smaller institutions could face problems in the future, Fisher claimed. “The lack of liquidity in smaller currencies is making it increasingly difficult for niche banks to win FX business. And this could prove to be a major concern,” Fisher said.