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Dynamic Credit

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September 5th 2023

3 min read

MythBusters: Why Addressing the Credit Issue should be a priority for FX trading desks

The Global Forex Exchange Division (GFXD) is galvanising the FX industry to implement dynamic, real-time credit management and allocation tools to address the long-standing issue of the over-allocation through multiple static credit limits.
Myths from the FX industry

The Global Forex Exchange Division (GFXD) is galvanising the FX industry to implement dynamic, real-time credit management and allocation tools to address the long-standing issue of the over-allocation through multiple static credit limits.  

These tools can rapidly transform banks’ FX operations, resulting in cost savings, better market access and risk mitigation. Yet, despite the clear benefits, widespread adoption of credit management tools is slow, largely due to some common misconceptions.

In this article, Andy Coyne, Founder of CobaltFX, part of United Fintech, shares the most frequent concerns  he has encountered about implementing a solution to solve the FX industry’s overarching credit issues:

1. The bank will have to do a lot of technical work to integrate a Dynamic Credit solution.

This is certainly not the case. CobaltFX can have banks up and running with Dynamic Credit without any technology involvement from the bank. We’re already connected to all major execution venues. All the bank needs to do is simply give email permission to each venue to turn on drop copies to the CobaltFX platform. CobaltFX can then start consuming executions and re-broadcasting the limits. It’s as simple as that – and it’s instant!

If a bank wants Dynamic Credit to go a step further and to be connected for voice and single dealer platform trades, CobaltFX receives these from the bank’s risk systems. The only action required from the bank’s technology team is to share their risk system API with Cobalt FX’s implementation team who will undertake all the implementation work.

In short, banks can start immediately by requesting venues to send executions to CobaltFX and add the full service when they are ready to expose their trade API.

2. Cutting costs is a current priority, not spending money on additional technology.

Cost savings are one of the key benefits of CobaltFX’s credit management solution. The Return on Investment can be achieved within a matter of weeks as the CobaltFX platform automates key processes normally handled manually. We’re giving banks improved access to liquidity, a simple way to administer credit, ultimate control and less work for credit administrators.  In fact,  as demonstrated by our proof of concept a year ago, banks using CobaltFX’s Dynamic Credit typically deploy up to 50% less credit while accessing more liquidity. 

Our solution helps banks to be much more profitable, and in combination with our compression module also allows improvement for Uncleared Margin Rules (UMR) and the Standardised Approach for Counterparty Credit Risk (SA-CCR) regulations. The benefits far outweigh the cost.

3. The bank already has its own in-house credit system and uses cross-asset, PFE and Value at Risk methodologies.

There is a difference between a back-end credit engine and credit for FX market access. Any back-end credit system is typically multi-asset and there is a credit appetite for each counterparty for each financial product.  CobaltFX focuses on FX market access, based on net open position and daily settlement limits. Traditional and more complex proprietary multi-asset credit engines can interoperate with CobaltFX via API. By linking both systems there’s an opportunity to really be in control of credit exposure for any counterparty in all asset classes.

Also, many institutions run FX-specific credit engines that act after the trade has been done and provide little protection. A common and shared credit infrastructure quickly establishes industry standards as set by the primary market operators. 

Actively Solving An Industry-Wide Problem That Regulators Are Focused On

Regulatory bodies are now very aware there is a credit distribution problem causing systemic risk that needs to be resolved. CobaltFX can help banks address this – quickly, easily, and cost-effectively. For banks wanting greater functionality, such as credit optimisation, this can also be easily added.

For now, our message is clear. Addressing the credit issue and being more profitable should be a priority for FX trading desks – set-up is simple and benefits can be reaped immediately. 

  • CobaltFX’s  Dynamic Credit simplifies and streamlines the allocation of credit for FX transactions between counterparties, preventing them from being over exposed by eliminating carve outs.
  • It puts banks and financial institutions in control of their credit as the calculation agent, enabling credit providers to manage credit in real-time, across all market end points, from a single centralised point – with one global limit set for all FX executions.
  • Dynamic Credit optimises the disbursement of credit for FX trades, improving market access and control. It replaces manual credit allocation processes with an automated, real-time credit management solution.



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