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Crisis, what crisis?

  What an amazing current financial set up; the US Sub Prime market (remind anyone of a certain age of junk bonds?), the falling US$, a weak £STG, oil at $100 a barrel and gold at $1,000 an ounce, platinum prices  falling and rising $50 an ounce in a single session, Bear Stearns, Northern Rock and consumer confidence at the edge of a precipice.  The heads of the USA and UK seem oblivious and we all steam ahead on the good ship commerce.  Sounds like a rock and hard place but we're in a better position than previous times, we’re all more efficient, aren’t we? In the world of Foreign Exchange - e-commerce, prime brokerage and rampant markets is leading to record levels of trade volumes and settlement. In this modern era of the games console; transactions are completed at the touch of mouse, the click of a button or even a mobile device.  As limit levels are breached the algorithmic trading kicks in and computer programs wheel and deal in a sterile computer versus computer dealing game to complete stop/loss orders. The evolution of the electronic trading platforms has enabled access to the feeding frenzy, banks of every persuasion, FI’s,  SME’s, Hedge Funds, and Private Investors are all in there punting the stuff and the result - unprecedented volumes crashing against the walls of the back office.  Has the back office of the banks moved on sufficiently to cope? Sure some will have built in a huge percentage of availability on their systems to cope with 50, maybe 100% of added volume, but not all of them will. Many banks will still be running legacy systems that are past their sell by date, and worse still, will still be running with silo'd legacy procedures, over night Nostro reconciliations etc. . Of course the CLS will bear the brunt of the volume spikes and everyone will breathe easy, but the In/Out swaps will dump large amounts of risk back into an already volatile market and there’s no certainty of delivery. As banks search for new revenue streams and explore new markets their exposure is as likely to be in one of the exotic currency pairs than in the majors. I wonder if effects of the last major observation of banking settlement processes, the Allsopp or Orange Book (the cover was Orange), have dissipated over time. Is there a member of senior management and the board who is aware of the nuances of FX settlement, the risks involved and the effect on their credit should a transaction fail? I don’t know the answer to that, but I’ll wager there are a few sleepless nights ahead.
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Comments: (2)

A Finextra member
A Finextra member 19 March, 2008, 10:10Be the first to give this comment the thumbs up 0 likes

Hi Roy of the Rovers,

"we’re all more efficient, aren’t we?" more efficient at what, leveraging up to do deals that are of no benefit to society? Yes, sure we're busy doing nothing, clicking the whole day through... trying hard to socialise the risk.

We're in a bubble and maybe it’s just like all other bubbles that can’t be seen until they have crashed then everyone knows how stupid they were, tulips, South Sea, Mississippi, Florida land, Japan land, dotcom, sub-prime.

best regards

A Finextra member
A Finextra member 20 March, 2008, 14:42Be the first to give this comment the thumbs up 0 likes Hi Tony, I hope you're well and thanks for the comments.