Currency Markets Check Plumbing on Potential Greek Spasm

The operator of a key piece of the foreign-exchange market’s financial plumbing says it’s readying its systems for potential spasms in trading if Greece leaves the euro.

“It makes sense to prepare your systems for all eventualities,” said Dino Kos, the head of global regulatory affairs at CLS Group Holdings AG. “We are certainly doing so at CLS.”

CLS settles more than $5 trillion of currency transactions every day. It was established in 2002 to eliminate the risk that a party to a currency trade would fail to deliver an asset after the transaction had been executed. U.S. regulators have designated it a Systemically Important Financial Market Utility whose failure could threaten market stability.

Even as they brace themselves for the possibility of Greece leaving the euro, the companies that run the world’s trading infrastructure are mostly reluctant to discuss their plans. That’s partly because they fear appearing to predict or favor one outcome over another.

“I see no reason why FX infrastructure providers, not just ourselves, but the trading platforms as well, should not be able to handle that added volatility,” said Kos.

Greece’s fate will be determined within days as the country’s politicians haggle with its creditors. The euro area’s finance ministers and leaders met with their Greek counterparts yesterday in an attempt to reach a deal on the reforms needed to unlock further bailout cash. German Chancellor Angela Merkel said Greece’s most recent reform proposals were a “step forward,’ though ‘‘the most intensive deliberations lie ahead of us.’’

Swiss Miss

The world’s currency-trading infrastructure has already undergone one major test this year. On Jan. 15, the Swiss National Bank unexpectedly ended its policy of capping the franc’s value against the euro. The Swissie’s subsequent 41 percent rally sparked waves of losses among currency dealers.

Some brokers even attempted to renege on trades that had already been executed.

The event revealed retail trading platforms as a weak link in the currency market. FXCM Inc., the largest U.S. retail broker, almost failed. Alpari (UK) Ltd., a London-based currency broker, entered insolvency. Jaclyn Klein, a spokeswoman for FXCM, didn’t respond to requests for comment by telephone and e-mail.

In addition to settlement and execution, the foreign-exchange markets also rely on banks to provide prime-brokerage services. The term refers to the credit that banks supply to customers such as hedge funds and high-frequency trading firms to trade currencies.

Citigroup Inc. is widely regarded as the largest provider of prime brokerage in the foreign-exchange markets. Scott Helfman, a spokesman at the bank, declined to comment.

Trading Drachma

If Greece leaves the euro and begins using its old currency, the drachma, it could take months before the asset becomes widely traded, according to Dmitri Galinov, the chief executive officer of FastMatch Inc., an electronic-trading platform.

‘‘In terms of the trading, the HFT guys, it’s not going to take time at all, it’s going to be really quick,” he said. “Now the support for the credit and how’s it’s getting appropriate margin, that will take a little time.”

It would take longer still before the drachma becomes eligible to join the 17 currencies that CLS settles.

“There are certain criteria that any new currency has to meet in order to become eligible for CLS settlement,” said David Puth, CEO at CLS. “This includes market interest, adequate liquidity provision and appropriate regulatory and central-bank approval, amongst other things, in order to become eligible.”

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