CORRECTED-Behind the scenes, FX industry prepares for euro break-up

Fri Jan 6, 2012 11:36am EST

* Most big FX banks seen handling post-euro break-up trade
    * HSBC looks at how to trade any new currencies
    * ICAP CEO: EBS can turn on new FX pairs 'overnight'

    By Naomi Tajitsu	
    LONDON, Jan 6 (Reuters) - Before the euro's launch in
January 1999, the Bank of England issued a 110-page plan -
everything from settlement timetables to roadworks on the big
day - to ensure a smooth introduction of the common currency in
the world's largest financial centre.	
    The plan was among quarterly reports, complete with
euro-themed cartoons by the BoE's resident artist, issued by the
bank from 1996 to 2002 to iron out bumps as euro zone members
abandoned their old currencies. Britain stayed out.	
    Fast forward to 2012 and banks and brokerages in London are
quietly preparing for a more unpredictable but potentially more
destabilising event - the possible break-up of the euro.	
    This time they do not have the luxury of such detailed and
leisurely preparations as they seek to minimise the volatility
and disruption to their business that could follow if a country
left the euro zone or the whole bloc broke up.	
    Such moves would not only trigger deep economic and credit
risks, the unprepared could face the nightmare of having to
quote and trade euro-replacement currencies in the $4 trillion a
day FX market.	
    Many of the industry's big FX banks, clearing houses and
trading platforms say they are looking at ways to ensure their
systems can quickly deal with any change in the composition in
the euro, the world's most traded currency after the dollar.	
    Some institutions say they have been preparing for a
possible break-up since mid-2010, when Greek default fears
flared.	
    In a recent interview, HSBC said it had analysed its ability
to trade new currencies as soon as possible after they were
announced, but added it was not yet in full contingency mode.	
    "It's not that we are expecting a break-up of the euro, but
we need a plan to deal with adding new currencies and how to
settle them," said Vincent Craignou, global head of FX and
precious metals derivatives at the bank, ranked No. 6 by market
share in Euromoney's closely watched FX survey.	
    Banks had years - and more money - to prepare for the euro's
launch, but the 2007-2008 credit crisis has left many in a
weaker position to deal with a break-up, which could happen
suddenly to minimise damage to the value of assets issued by an
exiting country.	
    "It took many years for the euro to come together," David
Rutter, chief executive of ICAP Electronic Broking, which
operates the electronic trading platform EBS, recently told
Reuters. 	
    "A large number of people in the industry believes that, if
the euro comes apart, it will come apart more quickly." 	
    FX participants acknowledge the difficulty of preparing for
an event which could be kept secret until the last minute. 	
    Industry experts say smaller institutions are underequipped
to deal with the initial disruptions to trade that could result
should a country leave the euro, while adding that most big
banks' FX desks are expected to weather the transition.	
    If Greece, for example, left the euro, banks would need to
update dealing systems to trade a "new drachma" against other
currencies - from the dollar to the Swiss franc - on a spot and
forward basis.	
    The process may be more complicated than
reviving dormant trading pairs, such as
drachma/dollar, as the old trading software might be
incompatible with modern systems.	
  	
    	
    MITIGATING TRADE RISK	
    While it remains unclear what a euro dissolution would look
like, the event would unleash market volatility and fluctuations
in volumes if investors sought a rapid exit from the new
currencies that would follow.	
    A spike up in euro volumes in May 2010, when the single
currency sold off on growing speculation about a Greek debt
default, was an eye-opener for Barclays Capital, as it
highlighted the need to constantly improve its trading systems.	
    "The volumes we saw then were manageable but it gave us an
indication of where the market would go," said Mike Bagguley,
global head of foreign exchange at the No. 2 FX bank.	
    "The volumes we've seen (last) year have far exceeded those
volumes. So it was worthwhile to start to prepare." 	
    To ensure it can handle potentially volatile and unusually
active trading, ICAP says it has conducted tests to see if its
EBS system - the largest currency platform in the world  -- can
effectively quote and trade all 17 legacy euro zone currencies.
    "Because we've tested the currencies, we are ahead of the
market, and the pairs we have tested, we can turn them on
overnight," ICAP's Rutter said.	
    Many in the industry say a currency exit would likely take
place over a two- or three-day weekend, which would be enough
time for trading systems to prepare.	
    "(Our) currency dealing systems are specifically designed so
that we can add or remove currencies very easily and quickly,"
Thomson Reuters, which also operates an FX trading system, said
in a statement.
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