Insight & Analysis

Platform for change or pie in the sky?

Published: Apr 2023

Significant co-operation required to make IMF’s solution to high international payments costs a reality.

In October 2002 the IMF published a working paper on cross-border payments that described the current mechanism for such payments as slow, expensive, and risky and intermediated by counterparties in different jurisdictions which rely on costly trusted relationships to offset the lack of a common settlement asset as well as common rules and governance.

The paper proposed the creation of a multilateral platform (known as X-C) that would improve cross-border transactions by centralising payments and settlement and integrating the functionality needed for cross-border transactions to reduce the cost of FX conversion.

Tobias Adrian, Financial Counsellor and Director of the IMF’s monetary and capital markets department suggests the platform could increase competition, lower spreads, and reduce risks by providing infrastructure, contracts, and markets for just-in-time liquidity transfers for previous contract commitments, a centralised multi-currency market, and instruments and markets for better hedging of risks.

According to Adrian, a better trading infrastructure, improved risk management, and a more predictable policy environment could contribute to lower foreign exchange trading risks and better functioning of foreign exchange markets.

The proposed platform would allow for the introduction of contracts and policies to manage FX risks, but this is unlikely to be a welcome development for the large dealer banks that would be loath to participate in any system that had a centralised FX order book open to all dealers where participants would have to honour any quotes they listed.

Andrea Michael, Director of Institutional Sales at StoneX Pro says she is sceptical about the proposed platform’s ability to reduce the cost of foreign exchange conversion.

“Transaction costs for most institutional players in FX are closer to zero than any other asset class,” says Michael. “Bid/ask spreads available in the OTC market are much tighter and the fee structure lower compared to exchange offerings. It is unclear how or why this proposed centralised platform would reduce costs, other than for the most exotic currencies that do not have well-functioning FX markets. It is hard to see any serious applicability for G10 currencies”.

Currency conversion can be very efficient for large companies if they execute the right way. However, they may choose not to squeeze the last bit of potential efficiency for relationship reasons since their FX trading counterparties are almost always their credit facility banks and they may feel pressured to reward these banks with a certain amount of their FX business.

“This isn’t to say some large companies aren’t paying too much for FX, it is just that I wouldn’t blame that on the currently available execution platforms,” says Scott Bilter, Principal, Atlas FX. “On the other hand, small and medium sized companies are often ripped off. They may not know how to execute efficiently and are usually taken advantage of by their smaller set of available counterparties – sometimes just one.”

However, he doubts the introduction of contracts and policies to manage FX risks would be a quick fix.

“The vast majority of the FX market is OTC, as exchange products don’t have the maturity and notional specifics FX counterparties currently desire,” says Bilter.

According to Michael, dealers are much more willing to show a tighter price to an end user – whose flow is random – than to a trading firm, whose flow is likely to generate losses very quickly.

As for the introduction of contracts and policies to manage FX risks, she observes that sound legal contracts are already a cornerstone of the OTC FX market. “This is a well-functioning system, and it is unclear what problem the IMF is trying to solve,” she concludes.

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