NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Richard M. Levich

NBER Working Paper No. 18256
Issued in July 2012
NBER Program(s):International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w18256

Published: “FX Counterparty Risk and Trading Activity in Currency Forward and Futures Markets,” Review of Financial Economics, September 2012, Vol. 21, No. 3, pp. 102-110.

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