The world’s top foreign exchange dealers are working on an industry-wide initiative to reduce the risk of a Flash Crash hitting the global currency markets.
The four dealers – Citigroup, Deutsche Bank, JP Morgan and Morgan Stanley – have signed up to use a new real-time risk monitoring service offered by Icap’s subsidiary Traiana called Harmony CreditLink.
The system lets prime brokers monitor their clients’ credit risk across multiple electronic communication networks on a real time basis, act on exceptions in a single integrated dashboard and open, change or close credit lines to manage risk. The system alerts dealers to limit breaches and allows them to either modify credit lines or cut off credit lines with a “KillSwitch capability.”
The new HarmonyCreditLink was developed in response to an increase in high-frequency and algorithmic FX trading by hedge funds, raising the spectre of a volatile Flash Crash hitting the currency market. It is available to all users of Traiana’s Harmony, a post-trade network for forex trades offering reconciliation, matching, prime brokerage, credit and margin management. High frequency and algorithmic trading methodologies were blamed for the flash crash of May 2010 when the Dow Jones Industrial Average tanked 600 points in a matter of minutes before bouncing back.
“This collaborative industry initiative addresses a fundamental and immediate industry need—that of providing trading and limit management to prime brokers to allow them to monitor their clients’ credit risk in real-time,” says Andrew Coyne, head of FX prime and G10 e-Commerce at Citi. “Initiated independently of any regulatory call for change, this new solution will fundamentally change the way the FX industry operates going forward.”