The Global Foreign Exchange Committee (GFXC) held a teleconference meeting on June 22 to discuss conditions in FX markets, part of which saw the committee focus in on activity around the London WM/R 4pm Fix and issues highlighted by last year’s Bank for International Settlements (BIS) Triennial Survey which revealed an increase in the proportion of the FX market not settling vis payment vs payment (PvP) methods.

On a media call following the meeting, senior members of the GFXC observed that while market conditions following the outbreak of Covid-19 were qualitatively similar to what occurred in previous severe market crises – in particular 2008 – in that spreads widened, volatility increased sharply, liquidity deteriorated for both spot and swap markets and funding costs surged in many currencies, the recovery from heightened conditions was much quicker. The actions of central banks and governments to alleviate some pressures, most notably in dollar funding markets were credited with helping this recovery, however it was stressed that, though generally much improved, conditions were yet to fully normalise in all markets, including many emerging market currencies. Even here, however, conditions varied greatly across regions and jurisdictions.

Noting that the 4pm Fix had been discussed previously by the GFXC, Guy Debelle, chair of the GFXC, revealed that he had had a few conversations with Refinitiv Benchmarks, the managers of the WM/R Fix, over the past couple of weeks and that it was generally agreed that the company could be more proactive in terms of explaining how it managed fixes and what type of discussions it was having internally and with market participants. “In March in particular there was heightened volatility generally and so it wasn’t surprising there was volatility around the Fix given the huge order flow, but there has been subsequent volatility, including at the April month end, and the feeling around several regional FX committee meetings has been how they would like a bit more visibility into what Refinitiv is thinking around the WM/R Fix.

“At the same, however, we want to make it clear that there is a responsibility on the part of users of the Fix to ensure that it remains fit for purpose,” he adds. “A couple of buy side firms on our call said they consciously make the decision not to execute during the Fix because they don’t think it suits their execution requirements. So it’s very much on the users themselves to make sure this is appropriate, but at the same time it would be helpful if Refinitiv engaged a bit more publicly on the issue.”

The GFXC also highlights, in addition to Principle 9 of the Code which addresses the need to regularly assess execution requirements and channels, the importance of Principle 10 of the Code, which says that that charges set by market participants for handling fixing orders should be transparent and consistent with the risk borne in accepting these transactions.

In the 2019 Triennial Survey, the BIS expanded its reach to collect data FX settlement and, after taking account of the number of payments for each instrument, found that in April 2019 daily global FX trading of $6.6 trillion translated into gross payment obligations worth $18.7 trillion. Bilateral netting reduced the payment obligations to $15.2 trillion and about $6.3 trillion was settled on a PvP basis using CLS or a similar settlement system, but this still left an estimated $8.9 trillion worth of FX payments at risk on any given day. It also noted that the proportion of trades with PvP protection appears to have fallen from 50% in 2013 to 40% in 2019, although available data are not fully comparable across time.

When asked if this attention, indeed the greater attention from global regulators on this issue that he acknowledged, Debelle said that the GFXC may consider strengthening  the appropriate principles in the FX Global Code and added, “When you look at the BIS data it’s clear there is a gap and the CPMI (Committee for Payments and Market Infrastructure) has identified this as an issue, but it’s as much about understanding whether there is an issue rather than concluding that more needs to be done.

“There are two elements to this,” he continued. “One is, within G10 currencies is there a sufficient amount of dollars being settled in the appropriate way? That is a bit more of an open question and it would be interesting to observe if internalisation is playing a role here, which would mean that the risk here isn’t as large as it would at first appear. The second issue, which has been known for a while, is emerging market currencies, which as a group is growing in terms of its share of global turnover but who aren’t in CLS, although it needs to be noted, as someone did on the call yesterday, that there are settlement mechanisms in a number of those currencies, which address settlement risk.

“So in the first instance I think it’s about working with CPMI, CLS and the BIS Markets Committee to get a better understanding of what the issue actually is,” he added. “And from there work out where they want to go – the GFXC is happy to work with them on it – and this could include strengthening the language in the Code and reminding everyone that settlement risk still exists that needs to be monitored.

The GFXC also discussed the operational challenges posed to industry participants by recent changes to working arrangements in many centres. Overall, participants felt that the transition had been smooth, with no major operational issues arising. The positive contribution of the FX Global Code was noted in several areas. Firstly, it helped in advocating for the adoption of robust operational and risk management practices by market participants. Secondly, the Code’s focus on increased transparency between market participants and improved disclosures helped participants better understand market conditions as those conditions deteriorated. Thirdly, the GFXC statement of 26 March highlighting market conditions ahead of quarter-end was a good illustration of the alignment of the industry at a global level that had been made possible by the Code.

Looking forward, participants noted that they are actively planning within their organisations to ensure they can operate some elements of the current working arrangements on a longer-term basis. Considerations noted included the need to continue making progress on workplace flexibility, the importance of ensuring that new staff, and particularly new junior staff, are effectively trained outside of the traditional trading floor environment, and the need to ensure continued focus on strategic planning and medium-term change initiatives.

Finally, the GFXC’s Three-Year Review of the FX Global Code was paused following the outbreak of Covid-19, but Debelle said that in the coming months, the committee will resume this work, with the aim of completing the review in the first half of 2021.

Colin Lambert

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