New European Union regulations on foreign exchange trading will make it harder and more expensive to manage currency risk, traders said, especially for large financial counterparties such as hedge funds and insurance companies.
The regulations will impose “variation margins” on banks, companies and funds that use currency forwards and other derivatives to hedge exposure to currency swings. That means they will need to put up cash to back their trades every day.
Market participants say the rules will make it harder for investors to invest in financial markets, because they will have to set aside a greater chunk of their capital.
“The whole European regulation on the increased collateral requirements for currency forwards is a shock to the system, and the impact of this will be particularly felt by the investor community at large,” said James Binny, head of currencies at EMEA at State Street in London.
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The regulations will impose “variation margins” on banks, companies and funds that use currency forwards and other derivatives to hedge exposure to currency swings. That means they will need to put up cash to back their trades every day.
Market participants say the rules will make it harder for investors to invest in financial markets, because they will have to set aside a greater chunk of their capital.
“The whole European regulation on the increased collateral requirements for currency forwards is a shock to the system, and the impact of this will be particularly felt by the investor community at large,” said James Binny, head of currencies at EMEA at State Street in London.
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