FX providers adapt to the financial crisis

The foreign exchange industry has faced a range of challenges since the onset of the financial market crisis. Banks have had to adapt to a tighter credit environment while meeting demand for liquidity and managing clients' exposure to declining mark-to-market valuations. We talk to Clifford Cheah, Deutsche Bank's head of global finance and foreign exchange in Asia, about the new world order of foreign exchange.

What have been the greatest challenges for FX providers since the onset of the credit crisis and how has this changed the way you do business?
Of particular difficulty for all banks has been balancing clients' need for liquidity against a backdrop of widening bid-offer spreads, rising market volatility and the constraints of a tighter credit environment.

Wider spreads have increased the risk for institutions in terms of counterparty exposure, particularly on structured trades, while ensuring consistent pricing on the flow side has very much depended on an institution's access to large pools of investor liquidity. While FX markets are known for being the world's most liquid, the extreme market events seen during the summer of 2008 did result in pricing on some Asian currency pairs varying considerably among providers, illustrating the extent of stress felt at the time. While spreads have since come in, this highlights the importance of an institution's ability to reach as broad a client base as possible, ensuring pricing can be provided regardless of market conditions.