The growth in FX trading and particularly
online FX trading over the past 5 years has been mirrored in the
growth in margin trading. With the growth in margin trading, comes
the need for solutions that offers the capability to deliver the
trading functionality, while also providing the risk management and
monitoring capability that is required for this business.
Features : Collateralised FX trading: the growing need for real-time Margin
Peter KelleherProduct Director, SS& Technology, MarginMan Division
Peter Kelleher outlines the range of solutions that are required to
cater for the growth of margin trading.
Traditionally, margin trading was a niche business offered by
private banks, offering this capability to their High Net Worth
clients, who traded FX in a similar manner to trading Equities, and
typically being margined at relatively high margin levels. The
advancement of technology has opened up this market place to all
levels of customer, which, coupled with financial institutions
seeking new opportunities to generate both FX flow and revenue, has
led to a need for systems that have the functionality to manage the
portfolio on clients behalf, while monitoring the risk from the
Growth in Margin Trading
According to the International Swaps and Derivatives Association
(ISDA Margin Survey of 2005, $1.21 Trillion of collateral was in
use, this compares to a figure of $491 Billion is use in 2003, an
increase of almost 60%. Within this increase, Hedge Funds and
Institutional investors are the major contributors to the growth.
From a banks perspective, there has been a significant push towards
collateralised trading, driven by several factors, primarily the
difficulty in processing credit applications within banks, and the
credit worthiness of the prospective clients. Banks are reluctant
to offer credit facilities to the types of client now looking for
FX trading facilities, due to very tight balance sheet management.
Margin trading does not impact on asset allocation, and potential
clients are looking for facilities far in excess of the potential
credit lines that a bank would normally offer.
The second major factor giving rise to the increase in
collateralised agreements is the introduction of new categories of
clients, particularly in FX margin trading. These categories
include Hedge Funds, who traditionally traded in Equities and Fixed
Income, Institutional Investors, who are also relatively new to the
FX world, and Retail clients, who have entered the FX space, due to
the relative stability and lack of volatility in the Equity
markets, and more importantly due to the opening up of the FX
markets. The proliferation of online FX margin trading solutions
allows this range of clients to trade with the simple click of a
button, following the creation of an account online. These online
solutions range from sophisticated products from banks and
financial institutions to the simpler products targeting retail
clients, who offer a more simplified offering.
The third factor which has contributed to the increase in
collateralised trading is Prime Brokerage. A significant number of
banks have recently introduced Prime Broker facilities, either as a
new product offering, or as a result of client demand for such
facilities Many Prime Brokerage facilities are now put in place
with a collateral requirement, in addition to traditional limit
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