FX Counterparty Risk and Trading Activity in Currency Forward and Futures Markets

Richard M. Levich

No 18256, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2012-07
Note: IFM
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