Working Paper: NBER ID: w18256
Authors: Richard M. Levich
Abstract: The Global Financial Crisis initiated a period of market turbulence and increased counterparty risk for financial institutions. Even though the Dodd-Frank Act is likely to exempt interbank foreign exchange trading from a central counterparty mandate, market participants have the option to trade currency futures on existing futures markets which standardize counterparty risks. Evidence for the period 2005-11 indicates that the market share of currency futures trading has grown relative to the pre-crisis period. This shift may be the result of a perceived increase in counterparty risk among banks, as well as changes in relative trading costs or changes in other institutional factors.
Keywords: FX market; counterparty risk; currency futures; trading activity
JEL Codes: F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased counterparty risk (F65) | migration of trading activity towards centralized trading and clearing organizations (G18) |
| perception of increased counterparty risk among banks (F65) | shift in trading activity from interbank currency forward contracts to currency futures (G15) |
| shift in trading activity from interbank currency forward contracts to currency futures (G15) | growth in market share of currency futures (G15) |