Banks open global forex clearing house

JOHN EISENHAMMER

Financial Editor

The City's position as the world's pre-eminent centre for foreign exchange dealing is enhanced today with the opening of the first global clearing house for interbank foreign exchange.

Echo has been set up by a group of big commercial banks, including Barclays and Midland, to improve the settlement procedures in an international market estimated at $1,000bn of trades a day.

"Banks have invested heavily in trading operations, people and sophisticated technology, both to win business and to trade, but they are using settlement mechanisms still rooted in the 18th century," said Graham Duncan, Echo's chief executive.

The driving force behind setting up the clearing house, which will operate on the same principles as the well-established clearing houses in the derivative markets, has been to minimise the risk involved in settlements.

"Settlement losses occur more often than many people realise. The scale of the risk is huge - it is not uncommon for two banks to owe each other $2bn overnight in settlements," Mr Duncan said.

By stepping in between the trading counter-parties, the clearing house removes the need for all trades to be settled individually. Instead, a bank will only have each day to settle the net amount of its trades with its opposite number.

Under the present system, banks have to settle their currency obligations before knowing the bank on the other side of the transaction has paid it. With the introduction of the clearing house, the risk will be reduced to the net amount of all the deals.

The formation of Echo, on which an initial group of 15 banks have been working for several years, has been driven by the explosive growth in foreign exchange trading. Twenty years ago the average deal size was $750,000. Today it is $10m.

The liberalisation of exchange rates, the growth in global capital flows and the increase in hedging of risks has fuelled the market's development.

London has established itself as the pre-eminent centre for forex dealing.

The last survey by the Bank for International Settlement, in 1992, found the average daily net foreign exchange market turnover in Britain was $300bn, compared with $192bn in the US and $126bn in Japan.

The newest survey, which is out at the end of this year, is believed to show that London has consolidated its position.