Cobalt Pilots Dynamic FX Credit Module

Critical risk and data services provider Cobalt has announced its working group of seven global banks is participating in a pilot to evaluate the full benefits of dynamic credit.

The pilot, which started in October, is using production trade data from each participating execution venue to fully demonstrate how credit can be managed more effectively in the market.

The firm argues that existing credit management falls short of the FX Global Code guidelines (principles 29 and 41), lacking market access control and poor ROE. “Carve-outs never reflect the true exposure or full appetite,” the company states. “Credit limits are updated locally and rely solely on trades executed at that specific venue. Furthermore, each venue has their own local credit management tools for adding, updating and removing credit resulting in a huge administrative burden on credit providers.”

Via Cobalt, however, it says the over allocation of credit is fully addressed and clients are empowered with the ability to set one overarching limit per counterparty that simultaneously feeds all execution venues.

By providing a one-off email approval to permission trade flow into a secure, anonymised environment, Cobalt says it can demonstrate exactly how dynamic credit can benefit a trading business.

The successful creation of a dynamic credit model would certainly create waves in the FX markets where typically, among the multi-dealer platform community, credit is approved on a trade-by-trade basis, thus creating a degree of (admittedly minimal) latency. By being able to allocate credit where it is needed, Cobalt would empower platforms outside of the primary venues – where credit is often pre-loaded – to challenge the incumbents, especially in markets like FX swaps and even spot FX.