Risks of failure in $6.6 trillion forex market at record high, study shows

Early Friday, the Financial Times (FT) came out with the analysis suggesting increased risk of failures while trading forex. The news relies on the data/updates from Continuous Linked Settlement (CLS) to arrive at the worrisome conclusion.

Key quotes

The risk of failed trades in the vast global foreign-exchange market has never been higher, according to the chief executive of CLS, the central bank-backed settlement service, which admits that it has struggled to keep pace with rapid growth in the industry.

In a study to be published on Friday by the Global FX Committee, the standard-setting body for the currency market, CLS found that it now handles just one-third of the deals that are eligible for settlement. On top of that, some $1.25tn of daily transactions are now outside its scope thanks to particularly strong growth in renminbi and rouble trading.

The warning echoes remarks from the Bank for International Settlements, which observed in December that the share of deals backed by CLS had fallen, leaving trillions of dollars of transactions vulnerable to default risk. Last month the GFXC expressed concerns too, saying currency markets faced “potentially very significant” risks due to the amounts involved.

CLS has faced growing competition in recent years, mainly from start-up Cobalt, which is backed by Citigroup, Standard Chartered and IHS Markit.

Market implications

Although the news doesn’t offer any direct market reaction on publish, it does suggests fears of trading in the world’s largest financial market, which in turn may give rise to lesser volume and wild spikes, if followed strictly. However, we’re not living in a perfect world and hence such warning have generally being ignored amid a search to benefit from trading.

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