Sibos Update

Forces for change in Foreign Exchange?

On Monday 23 September, Sibos, SWIFT’s annual conference, will for the first time include a day dedicated to the foreign exchange industry. 

With the help of ACI UK, the trade association representing the interests of the foreign exchange community, SWIFT has put together a programme of expert speakers and panels to debate FX industry challenges and opportunities.  

ACI UK represents professional market practitioners, from front end broking and trading through to regulatory and compliance functions. The association is actively engaged with market regulators, member firms and industry commentators to influence and promote the highest standards of conduct, across the board, for all market participants. 

“ACI UK is delighted to have worked with SWIFT to develop the programme for the inaugural Sibos FX Day. The topics under discussion reflect the changing shape of the FX industry and current forces for change with respect to regulatory pressure, new technology, liquidity, the management of ‘big data’ and potential impact of ‘challenger’ currencies like the renminbi,” says Alan Clarke, vice president of ACI UK.

Conduct, standards and practice; one Code to rule them all?

The most significant of these forces is the campaign by central banks – through the Global Foreign Exchange Committee and new Global Code of Conduct – to establish universal standards of conduct and best practice in the FX industry. While subject to broader regional and national financial markets regulation covering market abuse and transparency, foreign exchange is not itself a regulated industry. However, recent documented misconduct, by individuals and institutions, has led to swingeing financial penalties but reputational damage is harder to fix.  

With the Global Code, regulators aim to establish firm principles and best practice guidelines that apply across the board to inform the behaviour of all FX market participants at all points in the FX transaction lifecycle.

Launched in 2017 and reviewed continuously, the principles-based FX Global Code has already been adopted comprehensively by the sell-side, but the buy-side has been less enthusiastic in its adoption.

The UK’s Financial Conduct Authority (FCA) has recognised the FX Global Code formally, saying that its adoption satisfies Senior Manager and Certification Regime regulatory obligations in the UK. Industry associations like ACI – itself a pioneer of global industry standards (it authored the original FX Model Code on which foundations the Global Code is built) – are committed to encouraging industry support and take up of the Global Code.

In London over 40 firms are part of the Fixed Income, Currencies and Commodities Markets Standards Board (FMSB), set up specifically to improve standards of behaviour. Mark Yallop, chairman of the FMSB, is one of a distinguished panel of industry experts who will debate conduct, the Code, and industry’s response, in the opening session of FX Day.

The promise and reality of new technology

The application of new technologies in financial markets, including FX, is a huge driver of change. Fintech companies are targeting the FX market particularly with faster, better, cheaper alternatives to execution and post-trade processing. Buy-side participants are increasing pressure on sell-side counterparts to cut costs. Non-bank liquidity providers are using algorithmic trading technologies to challenge traditional players and banks are struggling to align obligatory and massive investment in regulatory compliance with the need to upgrade creaking infrastructure and declining profit margins.

However, is there a gap between the perception and reality of new ‘disruptor’ technologies and companies? “We have heard many promises from fintechs in FX but have yet to see any tangible deliveries to our $5 trillion a day market”, says Gavin Wells, who is moderating a session where a number of companies will ‘pitch’ their transformative technologies to a panel of industry experts. “The fintechs attending our session are focused on faster and digitised payments, on digitised assets, on enhancing post-trade through reduced reconciliations and on delivering peer-to-peer netting to reduce execution costs. We are going to ask them to explain what they will really deliver and when, whether they intend to disrupt or support existing market participants, and how their offerings will get sufficient traction to make a difference to the world’s largest market.”

One area of the industry where insiders are concerned it might actually take regulatory intervention to change behaviour is post-trade processing. “The FX Global Code is clear about the need for timely, efficient and robust confirmation and settlement,” says Alan Clarke, ACI UK.  “The foreign exchange post-trade process isn’t a mess; but it is true to say that settlement processes today are definitely fragmented”. In the last few years a string of technology vendors have promised to deliver a better solution. PwC partner Sebastian di Paolo will ask panellists drawn from banking, the corporate sector and the world of technology whether they believe the hype.

The shifting shape of FX market liquidity

One group of market participants that has made an impact on the FX industry already is non-bank liquidity providers (NBLPs). Yet, while NBLPs garner headlines, banks remain the engine of liquidity in the FX markets, allocating hundreds of billions of dollars in credit to clients, including NBLPs, prime brokers and other liquidity providers – and assuming the associated risk. However, the pattern of trading has changed.  

Veterans talk wistfully of the days when market-makers were hungry for risk and US$1 billion trades could be shunted through with relative ease. “In the 80s and 90s, any number of banks would make a price in a currency. They were all risk-takers and would hold positions for more than five seconds. Nowadays, it’s all small tickets and they pass it on quickly,” says the ACI’s Clarke. Technology has clearly influenced this shift in behaviour and in turn has, arguably, exacerbated recent ‘flash crashes’.

James Sinclair, founder and executive chairman of Market Factory, which provides FX traders with connectivity to more than 80 trading venues, will be asking panellists drawn from banks and trading platforms whether today’s market is more difficult to read and true liquidity harder to find.  

What the FX industry could do with more and better data

Every day FX market participants generate and consume huge amounts of data, derived from multiple sources and reported back (and onwards) in myriad ways. Regulators collect enormous amounts of data to gauge the ‘health’ of currency markets, monitor exposure and risk, and guide monetary policy.  Better and more comprehensive data matters deeply to traders, hedgers, regulators and customers, yet accurate and timely data on the size of the FX market itself is more difficult to obtain because it is fragmented across multiple platforms, providers and participants. At the highest level, the Bank for International Settlements (BIS) representing the world’s central banks produces its Triennial Survey, the benchmark by which the size, dimensions and growth of the FX market is measured, but is it sufficiently accurate or timely to represent the real state of the industry?

With all these changes, the 2019 version of the BIS survey is more eagerly awaited than ever. Andreas Schrimpf of the BIS will be presenting the early findings when he joins a panel discussion with three industry data experts to debate the difficulty of obtaining a comprehensive, continuously available and reliable source of FX data.

London – the hub for offshore renminbi trading

One particular development in the FX market is inarguable: the drive by the Chinese central bank to position the renminbi (RMB) as an important international trading, investment and reserve currency by opening it up to international traders and investors.

With London as the top RMB trading centre outside of China, Sibos 2019 provides an ideal opportunity to ask whether the City can sustain this lead and grow its share of this powerful new entrant to the global FX market.