Following its latest teleconference meeting, the Global Foreign Exchange Committee (GFXC) has reiterated its focus on settlement risk gaps in the FX market and says it will strengthen its guidance on settlement risk as part of its ongoing review of the FX Global Code.
Highlighting recent incidents in the Turkish lira, where borrowing rates of over 1,000% led to several banks not fulfilling their settlement obligations on time, the committee highlighted the importance of market participants making the “maximum effort” to complete their settlements to avoid exacerbating liquidity strains or otherwise disrupting the market.
As part of its efforts to support the assessment of settlement gaps, which was first raised last year by the Bank for International Settlements’ Triennial FX Survey, those regional FX committees that publish semi-annual FX turnover surveys will also collect settlement data to help build understanding of the scale, if any, of the problem.
Guy Debelle, chair of the GFXC, observes that while the focus remains on encouraging PvP settlement, the committee is not promoting one solution only, adding, “We are agnostic as to what mechanism participants use, but we very much encourage them to use a mechanism if it exists.”
CLS, which attended the virtual meeting on Wednesday, is investigating how big the settlement gap in G10 currencies actually is and whether the BIS data overstates it due to issues such as internalisation. “The numbers are what they are,” he says. “But we want to know whether, or how much we should be worrying about the gaps.”
In emerging markets, Debelle noted that in spite of some jurisdictions having onshore systems to support PvP, gaps may still exist and that it is important to discuss potential solutions to that, be it CLS or another solution.
The GFXC also reviewed recent trading conditions in FX markets, noting that many indicators of liquidity were approaching more normal levels, although the depth of market remains noticeably below pre-pandemic levels. Members also observed that volatility was beginning to rise, reflecting uncertainties such as COVID-19, the US elections, and Brexit. The committee also released a paper on how the FX market handled the pandemic conditions.
Buy Side Progress?
The GFXC’s Working Group on Buy-Side Outreach presented its response to feedback from some market participants for a buy side version of the FX Global Code, however, Debelle says the committee concluded that a single Code remains important in ensuring a common market standard on what constitutes good practice.
Work continues on engaging with the buy side community and exploring ways to make the Code and the Statement of Commitment even more accessible to buy side firms and GFXC co-vice chair Neill Penney says the committee wants to provide something of a safety net for firms struggling with the issue of proportionality. “It can be quite intimidating to look at the Code and work out which principles really apply to firms, especially smaller buy side firms,” he says. “And there are lingering concerns that somehow a firm could get it wrong and that they will be questioned on why they didn’t apply a certain principle. In a code that is voluntary, there is always the temptation to say ‘why do I go through this difficult process?’ so we want to help firms overcome these issues.
“We continue to emphasise that all market participants should read and understand the Code – they should understand how the industry in which they operate functions – but pragmatically they need a starting place,” he continues. “I would far rather people recognise, sign up and adhere, for example, to 10 principles and then add to them as and when it becomes appropriate, than the firm steering clear of the Code, so we want to provide a smoother lead in to the Code for those firms who currently believe it is an ‘all or nothing’ proposition.”
Overall, however, Debelle points out that buy side adoption to the Code is improving, citing recent data from the European Central Bank which indicated just that. “We have had more traction on large buy side firms over the past 12-18 months, across all jurisdictions,” he says. “There is more to do, but there has been reasonable progress made.”