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Wealth Management

UNDERSTANDING THE RISKS INVOLVED IN TRADING FOREX

The foreign exchange market attracts numerous traders every day because penetrating the market is easy. To venture into trading forex, you only need some capital, a computer, and a reliable internet connection. You will also need a basic understanding of the forex trading industry.

While trading with a forex MetaTrader trading platform is easy, it comes with various risks. As a foreign exchange trader, the risk is interpreted as a loss of money. Read on to understand these risks.

 

The Market Risk

Market risk or systematic risk affects the whole market, unlike the unsystematic risk that influences a certain market, asset, geographical region, or sector. While unsystematic risk can be reduced with the change, systematic risk cannot.

Market risk in the foreign trading market is affiliated with anything that can affect the financial value of your preferred currency pairs. Market risk is the most essential for a trader that is the type of risk that you want to be exposed to.

To make profits in the forex market you want prices to fluctuate so that you can leverage the price difference when selling or buying. This process is called market volatility.

Volatility is the element that allows traders to open profitable trades. It is a risk seeing that you might lose money should the markets go against your expectations. However, volatility can also help you open winning trades. Numerous systematic risks can influence prices. These include:

Growth, inflation, and employment figures, as they can affect Central Bank resolutions regarding monetary policy, such as interest rates.

  • Political events such as elections
  • Economic and financial announcements
  • Changes in legislation, regulations, and tax policy
  • Geopolitical conflicts, strikes, terrorist attacks, wars, and natural disasters

 

Liquidity risk

Liquidity means that a market opens and closes your trading positions fast and easily at your expected price. The reason for this is that there are numerous sellers and buyers in the market today. While the foreign exchange market is among the most liquid financial markets across the globe, there are some low liquidity periods.

Often, these occur outside the European and American trading sessions, or during the weekends or holidays. Every trader should understand the low liquidity risk, especially because it can increase the cost of trading.

·Consider the spreads

Low liquidity often causes an increase in the size of spreads. A spread is the difference between the buying price and the selling price. It is the commission a trader pays to the broker to enjoy his services.

An increase in trading costs is an occurrence that happens if a broker provides variable spreads that change based on the trading and market conditions. Some brokers may offer fixed spreads, especially if you understand the behavior of a particular currency pair.

You may also receive fixed spreads if you plan to use an active and hostile trading method like scalping amid news releases.

 

Counterparty risk

The counterparty in the foreign exchange market is the body with which a trader launches and closes trading positions. That is your broker. The risk you are likely to face here is a situation where the counterparty does not pay you due to:

  • Poor enforcement of regulations
  • Bankruptcy

Measuring the counterparty risk is a difficult task for an individual trader which is why they depend on regulatory entities. You can avoid this risk by choosing a reliable broker that is regulated by a reputable organization.

 

Leverage Risk

Leverage is among the biggest benefits of forex trading. However, it deepens the other forex trading risks as we shall see below:

  • Should you take huge market risk with no stop loss then any big losses triggered by sudden fluctuations will be leveraged upwards
  • To acquire unlimited leverage you may have to find a broker within a poorly controlled jurisdiction. However, doing so increase your counterparty risk.
  • If liquidity crush triggers ballooning of your trading costs you will experience high leverage because the spread is an action of your full position.

It is worth mentioning that even if leverage is readily available you do not have you use it.

 

Finally

While trading comes with various risks, you can counter them by adopting effective risk management strategies.

 

Wealth Management

WHY TRADING FIRMS MAY STILL NEED A LONG-TERM REMOTE WORKING STRATEGY AMID COVID-19 VACCINE NEWS

By Terry Ewin, Vice President EMEA, IPC

 

‘Never let a good crisis go to waste’ is a phrase that has been widely peddled this year by many industry associations, management consultancies, and organisations on how the global pandemic has presented several opportunities for new and meaningful change.

Although the impact of COVID-19 has caused extreme market volatility and led to many companies quickly uphauling their operations and enacting their business continuity plans, the crisis does also offer organisations the time and opportunity to rebuild. This has the potential to influence financial trading firms greatly, as until 2020, it was unheard of for traders to leave highly regulated trading floors and work from home instead. Yet, when faced with no other option in the face of national lockdowns around the world, financial firms had to pivot and interestingly, remote working was a huge success and vital operations were able to continue.

In recent weeks, a light at the end of the tunnel was revealed to the world when news circulated that an effective COVID vaccine is within reach. Although it may take months, perhaps even another year, before any vaccine can be widely administered to the population, banks and brokers alike need to consider what life will look like post-pandemic and how their technology strategies may need to adapt.

 

Terry Ewin

The three stages of a crisis

There are three distinct phases when it comes to a crisis – the emergency phase, the transition period, and the post-crisis period.

In the emergency phase, firms were in critical crisis management mode and plans were activated to ensure business continuity. Banks and brokers perform a critical function to society, and they had to ensure operations could still resume and continue to service their clients. Overall, both large and small European banks and brokers were able to handle this phase relatively well, which is largely because communications technology has now reached the point where productive work from home strategies are in place. Cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders around the world to keep working throughout the lockdown restrictions. At IPC, we know that clients were able to make a relatively smooth transition to remote working operations owing to cloud adoption and through utilising technology solutions.

The transition period is where we all are with the current coronavirus pandemic. This stage is where financial companies can start to work out how best to manage the worst effects of the ongoing crisis, whilst also considering longer-term changes once the crisis comes to an end. Even with a coronavirus vaccine seemingly on the horizon, no one can say how long it will be until we enter the post-crisis period. With European governments advising their countries to prepare for “a hard winter”, there is still a lot of uncertainty as to when businesses can return to pre-pandemic operations.

Even with restrictions across Europe being eased, companies will not necessarily be rushing back towards more on-site trading. For example, many banks are starting to look at hybrid operations where traders come in for one or two days a week and work from home for the rest of the week. This will mean fewer people in offices so social distancing practices can be followed. Along with this, there will of course be a continued reliance on remote working technology solutions.

Finally, there is the post-crisis period. Until a vaccine has been distributed among the masses, this stage is very unlikely to occur in the near future. However, many analysts predict that there will be a strong rebound in the economy once the vaccine does arrive and while it may not exactly be V-shaped, the resiliency that has been displayed by the financial markets this year indicates it will be healthy.

 

The silver lining of this crisis

No one will deny that the coronavirus pandemic has not been catastrophic in many areas, but nonetheless, European trading firms should be seeking to take advantage and emerge from this crisis in a position of strength, which will be the silver lining. In order for this to be achieved, there needs to be increased participation in large, diverse communities that give companies the opportunity to showcase real differentiation from their competitors.

By utilising successful community networks, financial market participants gain access to an established, diverse and global financial ecosystem. This ecosystem includes an array of counterparties for price discovery, liquidity and execution – such as broker/dealers, inter-dealer brokers, exchanges, dark pools, hedge funds, asset managers, institutional investors, trade lifecycle services and market data providers. Essentially, the information that financial firms require to find liquidity, as well as the ability to access it.

To further take advantage of the situation and support a new reality of flexible working, technology infrastructure may need to adapt and advance. An example of this is that we may see a rise in investments for high-speed fibre connectivity in traders’ homes and greater utilisation of soft turrets and cloud delivered solutions.

At IPC, we anticipate that many firms will be looking to reprioritise their IT and business continuity budgets having now witnessed the damage and extreme circumstances that are possible without sufficient planning. It is of course crucial that financial firms are prepared for any crisis, so this refocus on spend may well manifest itself in the form of further investment in cloud migrations, as well as ensuring that legacy trading infrastructure is adequate to handle possible surges in volatility and volumes under exceptional market conditions.

There is a great emphasis being placed on voice trading, and financial firms may consider investing in infrastructure that supports more seamless client and sales experience Chat and Voice channels by leveraging AI/ML-drive technologies. However, considering the cost restraints that many IT departments may be facing at this time, financial firms will need to prioritise certain projects and spending over others to strengthen the business.

Despite the positive news of there being a near-effective coronavirus vaccine, many banks are still predicting and expecting there to be a permanent change to their offices, business operations and infrastructure. Our understanding of ‘normal’ could be completely redefined, so by investing in a long-term remote working strategy and leveraging robust and flexible technology, European trading firms can crucially ensure they maintain their resilience while at the same time taking advantage of the crisis by transforming their operations to be equipped for a post-pandemic world.

 

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Technology

PRIVATE EQUITY – ARE YOUR NDAS INTACT AGAINST A CYBER SECURITY BREACH?

Owen Morris, Operations Director at Doherty Associates

 

Even prior to the pandemic, research revealed how over a quarter of private equity professionals felt their firms’ due diligence to protect against cyber security was poor. Prior to Covid-19, some Private Equity firms wanting to maintain secrecy used their office buildings as physical firewalls and some even used sound-proof meeting rooms to avoid sensitive data leaking out. Now, fast forward to today’s virtual workplace borne out of the crisis, where a greater number of PE professionals are benefiting from the flexibility of working between home and the office.

Home working can result in greater productivity, but a rush to fully remote working and inadequate remote security systems can suddenly make a PE firm’s dispersed workforce an ideal target for cyber attackers seeking lucrative, highly confidential financial data.

It’s therefore no surprise that PE firms are frequently asked to sign nondisclosure agreements (NDAs) by prospective portfolio companies, protecting against a breach of confidential information including cyberattacks. This demand by clients for tightly worded NDAs will only rise as remote access to information becomes ever more commonplace.

Not every company may want to sign an NDA due to the associated constraint on operating within an industry sector and possibly with competitor companies.  Implementing appropriate information security controls can both avoid the need for an NDA by satisfying partners of appropriate levels of safety, or, if one is in place, ensure that the obligation for confidentiality can be met.

 

Starting Out

Start with defining a location where any data under NDA is stored and where controls are enforced.  This means that policies can be applied that allow the data to be controlled to meet the requirements of the agreement.  When choosing a platform, it’s important to ensure that it offers features to label the data as being protected and either prevent data leaving the protected location or to protect it even if downloaded.

 

Securing in place

Once a location is created and data is stored within it, it’s important to understand where the data will be physically located and whether it’s properly protected.  Encryption is one of the main risk mitigation tools that should be in place across the board.  Where companies might previously have looked at this for mobile or laptop devices only, the pandemic has meant that devices are now dispersed much more widely, or conversely, might be in largely unattended locations.  Theft is probably a bigger risk than ever.  Encrypt all devices across the board, and ensure that a remote wipe facility is in place.

Where data can be shared with third parties or could be stored on home machines in a ‘bring your own device’ scenario, encryption remains an option. Some next generation products offer encryption within documents that can be used to allow features such as ensuring that documents can only be read by the person that they are sent to and cannot then be forwarded.  These features can also be used to allow documents to be ‘timebombed’ – for example, documents could be made inaccessible after an NDA expires.

 

Knowing the right people have access

A successful information control ensures that the right people have access to the data and people that shouldn’t, don’t.  Being sure of the identity of the people accessing the data therefore is paramount.  Unfortunately, passwords are no longer sufficient as a way of identifying users and multi-factor authentication (where you have a combination of something you know – the password, and something you have – a phone or biometric like a fingerprint) proves it is you.  Locking down sharing of documents to specific people or organisations is a key way of ensuring this.

 

Keeping your data close

The flip side of the coin to sharing with other parties is ensuring that data doesn’t leak out to other people that shouldn’t be able to access it.  Some next generation platforms come with Data Leak Prevention features that can identify documents as having been marked as protected and prevent them being sent by email or shared through the platform to untrusted parties.

 

Getting rid of the data when you’re done

The best way of reducing data protection risk is not to have the data at all!  This is where using technology can help.  By marking the data as being under the NDA it allows organisations to trace where that data is (potentially even outside the organisation) and automatically remove it when it no-longer needs to be kept using features such as retention policies.

 

What do we do in a breach?

The job of responding to a breach is made much easier by having a defined, rehearsed breach response process.  Once this is in place, implementing the technological controls above puts companies in a good position to confidently respond to a breach.  By knowing where the data is stored, forensic investigations are made much easier.  Device management, wiping and encryption reduces risk of data loss and strong access controls plus data leak prevention can reduce the likelihood of data being accessed and exfiltrated.

 

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