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

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

* 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 inJanuary 1999, the Bank of England issued a 110-page plan -everything from settlement timetables to roadworks on the bigday - to ensure a smooth introduction of the common currency inthe world's largest financial centre.

The plan was among quarterly reports, complete witheuro-themed cartoons by the BoE's resident artist, issued by thebank from 1996 to 2002 to iron out bumps as euro zone membersabandoned their old currencies. Britain stayed out.

Fast forward to 2012 and banks and brokerages in London arequietly preparing for a more unpredictable but potentially moredestabilising event - the possible break-up of the euro. This time they do not have the luxury of such detailed andleisurely preparations as they seek to minimise the volatilityand disruption to their business that could follow if a countryleft the euro zone or the whole bloc broke up.

Such moves would not only trigger deep economic and creditrisks, the unprepared could face the nightmare of having toquote and trade euro-replacement currencies in the $4 trillion aday FX market. Many of the industry's big FX banks, clearing houses andtrading platforms say they are looking at ways to ensure theirsystems can quickly deal with any change in the composition inthe euro, the world's most traded currency after the dollar.

Some institutions say they have been preparing for apossible break-up since mid-2010, when Greek default fearsflared. In a recent interview, HSBC said it had analysed its abilityto trade new currencies as soon as possible after they wereannounced, but added it was not yet in full contingency mode.

"It's not that we are expecting a break-up of the euro, butwe need a plan to deal with adding new currencies and how tosettle them," said Vincent Craignou, global head of FX andprecious metals derivatives at the bank, ranked No. 6 by marketshare in Euromoney's closely watched FX survey.

Banks had years - and more money - to prepare for the euro'slaunch, but the 2007-2008 credit crisis has left many in aweaker position to deal with a break-up, which could happensuddenly to minimise damage to the value of assets issued by anexiting country. "It took many years for the euro to come together," DavidRutter, chief executive of ICAP Electronic Broking, whichoperates the electronic trading platform EBS, recently toldReuters. "A large number of people in the industry believes that, ifthe euro comes apart, it will come apart more quickly."

FX participants acknowledge the difficulty of preparing foran event which could be kept secret until the last minute.
Industry experts say smaller institutions are underequippedto deal with the initial disruptions to trade that could resultshould a country leave the euro, while adding that most bigbanks' FX desks are expected to weather the transition.

If Greece, for example, left the euro, banks would need toupdate dealing systems to trade a "new drachma" against othercurrencies - from the dollar to the Swiss franc - on a spot andforward basis. The process may be more complicated thanreviving dormant trading pairs, such asdrachma/dollar, as the old trading software might beincompatible with modern systems.

MITIGATING TRADE RISK While it remains unclear what a euro dissolution would looklike, the event would unleash market volatility and fluctuationsin volumes if investors sought a rapid exit from the newcurrencies that would follow.

A spike up in euro volumes in May 2010, when the singlecurrency sold off on growing speculation about a Greek debtdefault, was an eye-opener for Barclays Capital, as ithighlighted the need to constantly improve its trading systems.

"The volumes we saw then were manageable but it gave us anindication 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 thosevolumes. So it was worthwhile to start to prepare."

To ensure it can handle potentially volatile and unusuallyactive trading, ICAP says it has conducted tests to see if itsEBS system - the largest currency platform in the world -- caneffectively quote and trade all 17 legacy euro zone currencies. "Because we've tested the currencies, we are ahead of themarket, and the pairs we have tested, we can turn them onovernight," ICAP's Rutter said.

Many in the industry say a currency exit would likely takeplace over a two- or three-day weekend, which would be enoughtime for trading systems to prepare. "(Our) currency dealing systems are specifically designed sothat we can add or remove currencies very easily and quickly,"Thomson Reuters, which also operates an FX trading system, saidin a statement.

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

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