Do not invest more money than you can afford to lose.
The forex market experiences a $1.3 trillion credit gap in daily volume due to bank prime brokers’ unwillingness to continue to accept the associated risk, UAE-based forex brokerage house ADS Securities said on Thursday. There is a drop of an estimated 25% in available forex trading lines and this gap needs to be filled and the only way to do this is if brokers step in and take on some of the risks.
“A daily global forex industry credit gap potentially affecting as much as $1.3 trillion in daily volume is extremely significant and is changing the overall balance of the market,” said Marco Baggioli, COO at ADS Securities London. “The lack of credit will lead to much wider spreads and increased pricing for all, from banks, to hedge funds, international businesses and all forex traders and, at the moment, no one is facing up to the problem,” he said.
The credit gap has been forming in the past several years since the financial crisis of 2008, further deepened by the market hurdle caused by the unpegging of the Swiss franc from the Euro in January 2015, ADS Securities said. Due to the market conditions, a number of tier-1 banks have taken a more conservative approach to risk.
“A credit gap potentially affecting US$1.3 trillion in forex turnover cannot be overlooked, and will cause issues through all sectors of Financial Services. If brokerages do not respond then the gap will continue to grow and all traders will be faced with a much less efficient market,” said James Watson, managing director at ADS Securities London.
According to ADS Securities, the average daily forex volume in the global market is estimated to reach $6.5 trillion by September 2016, compared to $5.3 trillion in 2013, but due to the market dynamics combined with the declining number of forex prime brokers, the volume may barely increase and even decline, instead of posting a double-digit growth. The figures are based on a survey conducted triennially by Switzerland-based Bank of International Settlements.
Growth in the global forex markets is staggering due to the decline of prime brokers, tighter regulation, and reduced risk appetite. Forex prime brokers have dropped to six major players in total in the past two years, after six others stopped providing services. The rest prime brokers are becoming more risk averse and only accept clients with strong balance sheets. One reason for this is that many countries have introduced tighter regulations, among which higher capital requirements, causing some tier-1 banks to refrain from offering forex-only prime brokerage services.
“Two years ago a broker with $5million capital might have been able to access a prime broker, but the capital they must now have has gone up to as high as $50million-$75 million – so many cannot get the credit lines they need,” according to Baggioli. “Some smaller firms may be able to trade bilaterally with each liquidity provider and post margin accordingly, but this approach has a lot of limitations, including netting of risk and margin requirements. The situation is as dire for start-up Hedge Funds or those whose assets under management do not make the cut with the forex prime brokers,” he added.
According to Baggioli, the forex market is in need of prime-of-prime services with direct access to liquidity.
“If the market is going to maintain a mix of balanced FX flows and competitive pricing, then it must develop new solutions,” he said. “The FX industry has seen many years of highly profitable growth which has allowed investment in technology, so the systems and knowledge are in place to allow true downstream credit intermediation. Leading brokerages should have a role sitting between clients and their own prime brokers, providing access and sharing their credit lines.”
ADS Securities is based in Abu Dhabi and licensed by the Central Bank of the United Arab Emirates (UAE). It offers retail and institutional financial services, including trading in forex and contracts for difference (CFDs).
Source: RealWire
