Chatsworth supports global push to restore trust to the world’s largest financial market

 

Foreign Exchange is the world’s largest and most liquid market and it has taken a repetitional battering over recent years.

Now the final part of the Bank of International Settlements’ (BIS) FX Global Code has been published, following a two-year, industry-wide effort to rebuild trust in the FX market following a series of scandals and market challenges over the past decade.

The Code sets out a comprehensive set of best practice guidelines which outline how all market participants should behave to uphold the highest standards of transparency and ethics in the wholesale FX market.

Chatsworth is proud to have played our part through our work with CLS and its CEO David Puth – Chairman of the BIS’s Market Participants Group and one of the principal authors of the code. This included an extensive engagement campaign to educate the press and FX market on the Code’s aims and objectives.

More than 1,500 people have had input to the Code and have helped to shape a set of high-level principles that will impact their day-to-day business practices.

The final document has received widespread support across the FX industry. A number of industry participants – banks, platform providers, technology vendors and trade associations – have backed it.

Now it is the time for the FX industry to adopt the Code’s principles and all FX professionals to read, understand and apply it to their everyday trading and transactional activity.

David Puth speaks to Bloomberg TV about the Code

 

Chatsworth client R3 secures record-breaking USD 107 investment in distributed ledger technology

We are delighted to announce that Chatsworth client R3 has secured one of the largest ever Series A investments in the global fintech industry, raising USD 107 million from over 40 institutions across the globe.

R3 is leading a consortium of banks and other financial institutions working together to develop a new operating system for the financial services industry based on distributed ledger technology (DLT), which was borne out of blockchain – the infrastructure that enables the transfer of virtual currencies such as Bitcoin.

Chatsworth has handled global PR for R3 since its launch in September 2015. During the last eighteen months we have worked closely with the financial, business and technology media to raise awareness and understanding of R3’s unique approach and technology as it sought to grow its network of members and investors.

Drawing on R3’s team of expert spokespeople, Chatsworth positioned the company and its members as thought leaders in this revolutionary technological field, securing thousands of pieces of coverage including tier 1 outlets such as the Wall Street Journal, FT, Bloomberg, Reuters and the Economist. R3 is now widely seen as the leading voice on distributed ledger technology, with its spokespeople regularly called upon to provide expert commentary in the press.

The awareness generated by this coverage helped fuel the momentum to drive R3’s growth from a fintech startup with eight finance and technology veterans and nine bank members to a global team of 110 professionals serving over 80 global financial institutions and regulators on six continents.

This massive investment marks the next stage in R3’s evolution. Many of the world’s largest financial firms have come together not just with capital support, but with a robust commitment to work with R3 in developing foundational industry solutions that will be the building blocks of the new financial services infrastructure.

We look forward to continuing our work with R3 as they take distributed ledger technology off the drawing board and onto the trading floor.

Cybersecurity: Is a flaw in human psychology to blame?

A fascinating analysis of cybercrime and cybersecurity this week from Michael Daniel, the president of The Cyber Threat Alliance.

Writing in the Harvard Business Review, Mr Daniel postulates that we have only just begun to comprehend the scale of the issue and that it is our perception of the online world versus the physical which is to blame.

Cyberspace operates according to different rules than the physical world and is more than just a technical problem, but is as much about economics and human psychology.

“The borders in cyberspace don’t follow the same lines we have imposed on the physical world –  they are marked by routers, firewalls, and other gateways. Proximity is a matter of who’s connected along what paths, not their physical location. The same principles of cyberspace that allow businesses to reach their customers directly also allow bad guys to reach businesses directly”

He poses six key framework questions which he argues need answering before we can effectively tackle the problem:

  • What is the right division of responsibility between governments and the private sector in terms of defence?
  • What standard of care should we expect companies to exercise in handling our data?
  • How should regulators approach cybersecurity in their industries?
  • What actions are acceptable for governments, companies, and individuals to take and which actions are not?
  • Who is responsible for software flaws?
  • How do we hold individuals and organisations accountable across international boundaries?

In our experience, financial firms which are typically hyper-competitive are highly adept at solving industry issues when they recognise the group threat and work together.

Co-operation and co-ordination across borders backed by resolve, human capital and investment is key to solve these issues is critical.

The financial systems, both systemically and at the individual firm level, remain at risk and it is clear that any system is only as strong as its weakness link.

Chatsworth is proud to support Clerkenwell Design Week – 23–25 May

This week sees the best of London’s design crowd descend on our hood for Clerkenwell Design Week.

This is a world-class showcase of the leading UK and international designers, brands and companies across showroom events, exhibitions, live talks, workshops and installations.

Chatsworth is showcasing the best of our design for business. We help connect financial technology brands with audiences and users through our digital design and user experience.

Contact us for more information and don’t forget to register for the event.

The potential benefits for corporates in algorithmic trading

Curtis Pfeiffer, Chief Business Officer at Pragma Securities, explains to FX-MM how corporates could stand to benefit from using algorithms for FX execution.

Why should corporates consider using algorithms for FX execution?

Corporations want to maximise profit, and a penny saved is a penny earned. Algorithmic trading can contribute to the bottom line by significantly reducing FX trading costs. Corporations trade on the order of $70 trillion a year – roughly the same as the total global GDP. On such large amounts, basis points matter.

That’s why, to fulfil their mission, corporate treasurers are increasingly focused on ensuring that they get best execution on their FX transactions, which includes using the best available trading tools and practices.

What advantages do algorithms have over other trading techniques?

With the speed at which trading is conducted today, the proliferation of trading venues, and sheer levels of information that is processed, it is simply impossible for a human trader to stay on top of all the data that the market is generating.

There are four core benefits to algo execution:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Algorithms have the ability to provide liquidity as well as to take prices, allowing patient traders to capture part of the bid-offer spread
  • Automation frees treasurers and traders to focus more of their time on those issues where human intelligence and judgement add the most value.
What factors should investors consider when choosing an FX algorithm?

First, corporations should understand the bank’s liquidity model for their algorithmic offering – principal, agency or hybrid.

Bank algos access liquidity differently depending on the model. A pure principal algo accesses just the host bank’s liquidity, which also provides indirect access to other liquidity pools in the marketplace. Agency models do not interact with the host bank’s liquidity, but are able to provide liquidity on ECNs as well as taking prices, potentially capturing part of the bid-offer spread for the customer.

Hybrid models can offer the best of both worlds, though customers should understand how the bank manages its dual role as principal and agent. Corporations should assess the liquidity pool underlying each bank’s algorithms to determine which model will be most effective.

Second, corporations should be satisfied that their bank provider has first class algorithmic trading tools – either through a major investment it has made in algorithmic trading research and development internally, or by partnering with an algorithmic technology specialist. Smart algos have sophisticated order placement logic, change their behaviour based on pair and time-specific liquidity patterns, and make intelligent and dynamic use of the real-time liquidity available across venues – for example based on order fulfilment rates.

Provided liquidity and investment checks out, corporations can consider algorithmic trading as another service their banks provide, and direct flow as part of the overall banking relationship.

Finally, best practice is to use TCA after the fact to track performance across bank providers and make sure all is as expected.

To read more, please visit the FX-MM website here.

Flying the nest – twenty years of independence for The Old Lady

Twenty years ago this month, buoyed by a historic landslide victory in the 1997 general election, Chancellor of the Exchequer Gordon Brown made the surprise announcement: the Bank of England (BoE), affectionately referred to as The Old Lady, would become independent for the first time in its history.

The plans for independence were made in great secrecy. According to Mervyn King, the BoE governor at the time, Eddie George, was only told about it the day before Brown announced the decision. However, the move was hailed by both the BoE and financial markets, strengthening its credibility and creating more stability around monetary policy decisions.

Coping with crisis

However, perhaps the most volatile period over the past twenty years was the 2008 financial crisis and the subsequent fallout. This transformed the Bank’s way of working both internally and in its relationship with the politicians, financial markets and other stakeholders.

Some accused the Bank of being slow to respond to the crisis, and Katie Barker, a member of the BoE’s Monetary Policy Committee for nine years, described a “terrible group think” which prevented it from seeing the crisis emerging.

However, the Old Lady’s response to the crisis proved to be defining. A major quantitative easing (QE) programme and a prolonged period of record low interest rates have been the central pillars of the UK’s post-crisis recovery program. Many have since acknowledged have played in underpinning stability and economic growth.

Although there have been changes in personnel and processes in subsequent years, overall, the Bank emerged from the crisis with its reputation enhanced. Post-crisis reforms have further centralised its power, including returning responsibility for prudential oversight to the bank from the now-disbanded Financial Services Authority.

Looking forward

With the arrival of its new governor, Mark Carney, from Canada, the Bank has also improved its working relationship with government and strengthened internal management practices.

This is good news, as major challenges lie ahead for Mr Carney and the central bank. He has already come under unprecedented criticism from some Parliamentarians for his outspoken warnings in the build-up to the EU referendum in 2016.

Managing the markets and the economy as Britain exits the EU will require a careful touch and Mr Carney will no-doubt face high levels of scrutiny from both the press and politicians.

In addition, the Bank is not immune to a growing scepticism in the political class around the whole notion of central bank independence. The response of banks to the financial crisis, particularly QE, has become a political issue in the US, Europe and now the UK Prime Minister Theresa May has argued that it has meant “people with assets have got richer” while “people without them have suffered”.

Given its enhanced role in overseeing banking and monetary policy, some, such as former Strictly Come Dancing star Ed Balls, believe that the blame for the next financial crisis will be placed, fairly or not, squarely at the door of the Bank of England.

Despite the ups and downs, the Bank has helped to successfully steer the UK economy since flying the nest. It is now also transforming itself into a global leader in fintech regulation, setting up a fintech accelerator last year. Recently the bank also launched a plan to de-risk Sterling payments with its blueprint for a new real-time gross settlement system to improve sterling payment.

With careful management and this continued focus on evolving with the rapidly changing financial services market, we look forward to another twenty years of an independent central Bank.

Mark Carney on realising the potential of fintech

Regulatory support for the growth of fintech in London has certainly been evident in recent years.

Democratisation of financial services, greater consumer choice, lower costs and greater resilience of financial infrastructure are just some of the reasons why the Bank of England (BoE) is encouraging financial technology (fintech) development in the UK.

That’s according to Governor Mark Carney, who addressed an audience of fintech entrepreneurs, regulators, politicians and banks at the UK Treasury’s inaugural International Fintech Conference in London.

Regulatory support for the growth of fintech in London has certainly been evident in recent years. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have changed their authorisation processes to support new business models, and the BoE also established a fintech accelerator last year.

To date, it has worked with a number of firms on proofs of concepts relating to cyber security, using artificial intelligence (AI) for regulatory data, and distributed ledger technology.

But what is interesting in this speech is the BoE’s focus on ensuring “the right hard and soft infrastructure are in place” – a central plank of the Governor’s vision of maintaining London’s role as the centre of fintech excellence.

“Over the centuries, we have learned that markets and innovation thrive with the right hard and soft infrastructure”, he said. “Hard infrastructure ranging from transport links to broadband and payments architecture; and soft infrastructure from the rule of law to market practices, codes of conduct, and regulatory frameworks.”

So how does this relate to fintech, one may wonder? Governor Carney continued: “With respect to soft infrastructure, the Bank is assessing how fintech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.”

On developing the right “hard infrastructure”, Carney pointed to how the BoE is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe. In particular, he highlighted how it is widening access to some of its systems to include Payment Service Providers (PSPs) in order to boost both competition and system resilience.

“The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.

“That’s important because the Bank operates the UK’s high-value payment system ‘RTGS’ (Real-Time Gross Settlement) which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.

“Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1,000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.”

Interestingly, the BoE has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks, and is working with the FCA and HM Treasury to make this a reality.

This ties in with Carney’s final example of the “soft and hard infrastructure” – coordinating advances in hard and soft infrastructure ensure the Bank can help the industry realise the true promise of fintech.

“New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.”

A full copy of Mark Carney’s speech is available here.

Regtech is booming, but is the UK missing out?

Regtech (n). Short form for the regulatory technology being created to meet regulatory monitoring, reporting and compliance.

Regtech is booming, with USD 2.99 billion invested globally across over 400 private investment deals in the last five years. 

Yet despite its predominant position in almost all other areas of financial technology, the UK is still lagging behind the US when it comes to regtech investment. 

Just 9% of the almost three billion invested since 2012 went to UK based companies, according to the CB Insights figures. This put it a distant second behind the US, which scooped up 78% of the total investment.
 
Banks are looking to reduce costs to cope with a tougher investment market and find ways to handle the flood of new rules which the January MiFID II deadline will unleash. In this environment, it is little wonder investors see the potential for technologies which promise to make compliance easier, more efficient or more reliable for the financial sector.
 
UK regulators appear to have spotted the opportunity as well, and the Financial Conduct Authority (FCA) is looking to do what it can to help the UK’s regtech sector catch up with its transatlantic counterpart.
 
The regtech industry spans a wide variety of technologies and the industry which promises to make compliance easier, more efficient or more reliable. Some companies are using artificial intelligence to help banks comply with regulation, while the R3 group of over 40 banks is looking at how distributed ledger technology (DLT) can make reporting to regulators simpler.
 
Some regtech firms believe that Brexit could be a big boost to the UK’s regtech industry.  With the UK’s financial sector’s relationship with the EU now in flux, both in terms of regulatory equivalence and cross boarder trade, ““Brexit is a brilliant opportunity”, sais Diana Paredes, CEO of regtech start-up Suade.
 
The UK regulator, the Financial Conduct Authority (FCA) has also been working to encourage the UK regtech sector. The FCA’s executive director of strategy and competition, Chris Woolard, is keen to stress the role regtech companies can play. Talking to Financial News, he said, “It’s something quite positive where firms are taking quite seriously how they apply technology to their own compliance question.”
 
The FCA has also been leading the way when it comes to nurturing innovation. “There are other regulators around the world that have more funds and resources, and other regulators with more powers. But it was really only the UK financial regulator that has built into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection,” Imran Gulamhuseinwala, EY’s global leader for fintech, told the Financial Times.
 
Most notably, in 2015, the FCA launched its ‘sandbox’ to help companies developing new technologies. The sandbox allows banks firms which require regulatory approval before being able to operate their technology to test in a live environment. This allows firms which would otherwise need to develop their full technology and achieve FCA approval before fully testing their product, to develop their technology in a way which is responsive to both the FCA’s requirements and the demands of live operation.
 
So far, the sandbox service has proved popular with 69 companies applying for the first cohort in 2015 and a further 77 applying for the second cohort, according to a recent statement from the FCA. Following the success of the first cohort, the FCA has begun helping regulators across the globe to develop their own sandbox programmes, including in Japan, Canada and China.

It is heartening to see the UK regulator supporting this process and creating an environment where the next generation of firms who using technology to enhance the regulatory environment and reporting/confirmation/validation processes. 

Financial markets have been buffeted by scandal and repetitional damage of late. It is time to programme some trust into the source code.

TRACE and Reg ATS: the changing face of US Treasuries regulation

Nichola Hunter, Chief Operating Officer at LiquidityEdge, explores new regulation coming down the track which will significantly impact broker-dealers in US Treasuries.

Regulatory changes are afoot in the US Treasuries market. While reporting transaction data to regulators has been the norm in the equities market for decades, in October last year the SEC approved FINRA’s new reporting rule requiring UST trades to be reported by the end of the day on which they were executed.

Starting in July this year, all broker-dealers registered with the SEC that are FINRA members must report transactions through the Trade Reporting and Compliance Engine (TRACE) system. This is a major development for the UST market and one that will cause no small number of headaches amongst participants. The cost and resourcing implications of such a major change to regulatory reporting cannot be underestimated.

Broadly speaking there are two camps that argue for and against more transparency. While it would be difficult to find anyone willing to argue that increased transparency shouldn’t be encouraged for the purposes of improved regulatory oversight, less certain is the path to real time public dissemination.

Typically, professional trading firms will argue that transparency is required to enhance liquidity, improve best execution processes while reducing overall transaction costs. However, many of the dealers will argue the exact opposite, citing experiences in other markets that attest to a reduction in overall liquidity, widening of the bid/ask spread and the negative impact of transparency on their hedging strategies.

Trade reporting is not the only regulatory burden on the horizon for UST market participants. While the SEC has traditionally exempted platforms that solely trade government securities from its regulatory regime for alternative trading systems, known as Reg ATS, changes in market structure have recently prompted it to change its stance.

Reg ATS was introduced in 1998 to enhance regulatory oversight of off-exchange equities trading and improve the transparency of operations and protections for investors, with the aim of promoting a fair and competitive market. It requires platform operators to register as a broker-dealer and disclose significant details about operations, as well as committing to providing market participants with fair access to its services and liquidity pool.

UST platforms were excluded from the rules at the time due to the unique regulatory framework for government securities in the US, which involves the SEC, Department of the Treasury and federal banking regulators. However, the SEC now believes that market conditions and the broader regulatory environment have evolved to a point where it is appropriate to extend Reg ATS to the UST market. It remains to be seen if the acting or any new SEC chair will pick up the baton and move forward with this change.

At LiquidityEdge we are well positioned to adapt to a potential extension of Reg ATS to UST venues. Our platform is built on tried and tested technology, widely used in the FX market to ensure robust performance and efficient market access. Thus, the technology need to meet many of the requirements of Reg ATS is already built into the fabric of the platform.

LiquidityEdge was designed to meet the evolving needs of US Treasury market participants and facilitate a more orderly and efficient trading environment. Transparency and fair market access play crucial roles in achieving this end goal, and if regulators consult closely with both platform operators and all types of market participants before putting pen to paper, they will help build an appropriate legislative framework for today’s complex US Treasury Market.

For more information, click here for Nichola’s full article.

Sterling reigns over euro amongst central banks

Central banks view the UK as a safer prospect for investing their currency reserves, despite the uncertainty created by the Brexit vote and Article 50.

That was the key revelation from a survey of reserve managers at 80 central banks, conducted by trade publication Central Banking and HSBC.

According to the FT, concerns over political instability, weak growth and negative interest rates mean reserve managers consider sterling as a long-term, stable alternative to the euro.

This is significant for several reasons. Firstly, reserve managers at 80 central banks are responsible for investments worth more than GBP 5.1 trillion and are tasked with ensuring the value of their domestic currency is maintained. Their decisions will be closely followed by currency traders and investment managers around the world. 

Secondly, sterling’s post referendum plunge was widely noted last June. However, it gained against the US dollar during the first quarter of 2017 – the first quarterly gain since June 2015 – and the bullish bets from central banks suggests a further upward correction is on the horizon. 71 per cent of respondents said the attractiveness of the pound was unchanged in the longer term.

The prospect of an imminent resurgence in sterling is backed by analysts at leading investment banks, which predicted an unwinding of near-record bets against sterling if a constructive tone was adopted by the UK and Brussels continued over Brexit negotiations. Japanese bank Nomura in particular, believes the pound is undervalued against the dollar by as much as 25 per cent.

Thirdly, the survey’s findings highlight concerns over the stability of the monetary union, which was identified as the greatest fear for 2017 for reserve managers. Some central banks have reportedly cut their entire exposure to the euro, unprecedented for the world’s second most popular currency, while others have reduced their holdings of investments denominated in euros to the bare minimum.

The survey found that the ECB’s negative interest rate policy was also key factor causing bearishness on the euro. The policy was designed to boost growth across the Eurozone but has impacted profits at banks and financial institutions across the Eurozone.

While these conclusions give reasons for both optimism and trepidation – it’s a matter of perspective, after all – they highlight the fluid and interlinked nature of politics and the currency markets.

More than GBP 3 trillion of currencies are traded every single day around the world, and its impact stretches far beyond the trading floors of the largest international banks. 

Currency movements affect everything from individual pensions to the cost of daily household goods, and with politicians on both sides of The Channel spinning dealing with multiple, complex challenges, currency markets will listen intently to their every word. 

Brace yourself for a period of excitement, nervousness and volatility over the next 24 months.

London’s post-Brexit future as a financial hub

UK Prime Minister Theresa May finally triggered the formal process for Britain leaving the European Union (EU) on March 29.

While the EU referendum and a post-Brexit scenario may have been something of a blow to confidence in the City, it still has plenty going for it as a financial hub. This year’s Global Financial Centres Index, an international ranking of the world’s leading financial centres, placed London top of the pile.

“London’s rating has been influenced by not knowing what will happen after the UK’s departure [from the EU],” Mark Yeandle, associate director of Z/Yen and author of the report, told The Financial Times. Despite this, London remains top of the list and, over the period which the report tracks, has even recovered some ranking points.

London also remains the world’s biggest FX market by a huge margin, according to the latest BIS Triennial report. While Brexit may result in some jobs being relocated, the industry still believes London will remain front and centre and a key financial hub.

One of the key factors which will insulate London’s FX market is its concentration of trading infrastructure and activity. “When trading becomes concentrated in a particular region and is supported by a comprehensive legal and regulatory environment it develops natural strengths that enable that particular market to function well.” says Dan Marcus, CEO of ParFX, talking to Finance Magnates. “By leaving that pool of liquidity, a firm could disadvantage themselves and their clients.”

This means that, far from vacating the city, many businesses are investing further in London’s future.

Algorithmic trading technology provider Pragma is one such company, with the New York-based firm expanding its equities and FX business to London. “Our investment in the data center at Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally,” says Pragma’s Chief Business Officer, Curtis Pfeiffer.

“Despite the uncertainty caused by Brexit, we are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” he explains.

While nothing in the negotiations has been determined at this early stage, the City will also weigh up the potential challenges of Brexit.

Continued access to the European single market through financial passporting and the ability to attract skilled technology professionals from across the EU to work in London top the list for many institutions.

“77% of my staff in London were born outside the UK. We need those people. People are very mobile. I just worry that tough negotiations will send the wrong signal.” Michael Kent, CEO of remittance service Azimo, told Financial News.

In addition, J.P. Morgan has reportedly spent the last nine months weighing up various EU cities as a potential new continental home for their operations, according to The Wall Street Journal.

Looking beyond the headlines, however, the picture is more nuanced. Most of the relocation plans announced over the past few months involve relatively small numbers of staff. For many banks and financial institutions this may be a hedging exercise rather than a wholesale exodus.

Going forward, the UK government is determined to ensure London remains a central part of the international financial landscape, and it’s worth remembering London has a number of strategic advantages which mean it is likely to continue to be the city of choice. It uses the global language of business, English; it is situated in the perfect timezone between Asia and America; and has a legal system that is world-renowned for clarity and reliability.

None of this will change; in fact, it will continue to ensure London remains open and attractive to business.

In search of FX liquidity

Foreign exchange (FX) is one of the world’s most liquid markets, with around USD 5 trillion exchanged across borders every day.

However, there is a perception in the market that liquidity is on the wane.

This is not necessarily true, according to David Puth, CEO of CLS. Speaking to Euromoney, he said “There is a tendency for market participants to believe that liquidity was better in the past. From what we see at CLS, liquidity appears to be very strong. It is, however, different, with liquidity widely dispersed over a number of different trading venues.”

The pessimism may in part be as a result of the increasing difficulty in defining exactly what liquidity means in the modern market, and measuring it accurately.

This was one of the questions which a recent report on liquidity in the Americas from the Bank of International Settlements (BIS) attempted to address.

Traditional liquidity metrics, such as cost metrics, quantity metrics and trade impact, have their uses, but the report finds that none are a perfect way to measure liquidity in the modern market.

This is important because one thing which is clear is that the modern FX market is becoming increasingly complex, making understanding liquidity more difficult.

The market, like many others, is fragmenting as electrification proliferates the number of trading venues and sell side participants put more emphasis on internalising trades.

Whether this fragmentation is having an impact on traders ability to trade, remains an open question.

The BIS report indicates that fragmentation does appear to be having some impact on liquidity measures, particularly when it comes to periods of market stress.

It gives examples such as the 2016 British EU referendum and flash crashes, where traditional liquidity metrics appear to have been impacted across a number of currency pairs, at least over the short term.

Dan Marcus, CEO of ParFX, points out that sometimes individual metrics don’t always give the full picture. “It may be the case that volumes are down from where they were… [However] on ParFX we do not see evidence of a problem with market depth or the ability for traders, who need to trade, fill orders.”

This is in part because, while technology is driving fragmentation, it is also creating opportunities to aggregate liquidity in more efficient ways.

“Buy-side traders have responded [to FX market fragmentation] by turning to algorithms and taking on more execution risk themselves”, says Pragma’s CEO David Mechner.

Liquidity is the lifeblood of the FX market, it is vital that the market can measure it in a way which gives an accurate representation of what it is like to trade. One solution, suggested by Mechner, is a consolidated tape, much like in equities. Until then, the market should think carefully about the metrics used to measure the market and ensure they are fit for purpose.

Mosaic Smart Data named Best Use of Data and Analytics Innovation at the 2017 FStech Awards

Data analytics technology specialist Mosaic Smart Data has won the Best Use of Data and Analytics award at the annual FStech Awards, held in London on Thursday 23rd March.

Regulatory changes and advances in technology are revolutionising fixed income, currencies and commodities (FICC) markets and driving the need for intelligent data analytics and reporting.

MSX delivers a next generation data analytics platform for FICC market participants. By delivering the insights and real-time intelligence they need to harness exponentially increasing data as well as meeting regulatory requirements, it enables trading and sales teams to significantly enhance their workflow productivity.

The platform standardises and aggregates multiple data sets to enhance audit trails and reporting, enabling banks to comply with mounting regulatory requirements.

Mosaic has fully integrated predictive analytics into MSX, enabling financial institutions to more accurately determine future market activity based on sophisticated algorithms and historical data.

After collecting the award, Matthew Hodgson, CEO and Founder of Mosaic Smart Data, said: “In today’s digital world, banks need to have a deep understanding of the business they are handling in real time. The data is there, but it needs to be standardised and have intelligent analytics applied to it. It is an incredibly intensive undertaking which requires both innovative technology and thorough insight into the bank’s business needs.”

Read more about this story at Mosaic Smart Data’s website here.

Adherence to FX Global Code will reform conduct and behaviour

As we near the final stages of the development of the foreign exchange (FX) Global Code, the ACI Financial Markets Association (ACIFMA) is leading efforts to support education and adherence. We will start by making commitment to the Code mandatory for ACIFMA members, and encourage members to prove their adherence in future. This could prove to be a turning point in reforming conduct and behaviour in foreign exchange, writes Brigid Taylor in FX Week.

As a member of the MPG, ACIFMA has both contributed and witnessed the extent to which market participants and policymakers have engaged, discussed, debated and worked together in the best interests of the wider market. This is an industry that transacts more than USD5 trillion of currencies across borders every single day. Its ability to operate smoothly is crucial to the international economy.

There was of course a broad range of views on how best to address a series of topics, such as governance, information sharing, last look and pre-hedging. An array of views is expected in any large consultation, but consensus has been achieved with the best interests of the market in mind.

The final Code will, in my view, outline principles and guidance that is effective, appropriate and strike the right balance. I expect it to act as an essential reference for market participants when conducting business in the wholesale FX markets and when developing and reviewing internal procedures.

Hardwiring adherence – the third objective

This brings us to the final objective set out at the beginning of the process: develop proposals to promote and incentivise adherence to the Code.

For this to happen, it is essential that individuals (i) commit to adhering to the Code; (ii) receive the appropriate training and education so they are clear on what is expected and understand how to comply; and (iii) sign up to a solution where senior managers are able to observe and address any training and educational gaps amongst their subordinates.

This is where the ACI Financial Markets Association (ACIFMA) can play a central role. With a track record in delivering training, education, attestation and best practice principles that stretches back more than half a century, we represent more than 9000 individuals in 60+ countries.

There are several ways we intend to achieve this. Firstly, we will make it a prerequisite for individuals to commit to adhering to the FX Global Code as part of their membership. This means a meaningful proportion of the market – over 9,000 FX professionals around the world – will sign up immediately after the code is launched and commit to understanding, implementing and abiding by the new principles.

There is an urgent need to restore ethics in financial markets and the FX market is aware of its responsibilities to its clients and stakeholders. The significance of the enormous effort undertaken over the past three years should not be underestimated; to date, the level of leadership and engagement has been exemplary. I expect the FX Global Code to be a turning point in reforming conduct and behaviour in foreign exchange and develop a renewed sense of trust in this important sector of any economy.

To read the full article by Brigid, please visit the FX Week website here.

London in the grip of normality

For all our friends and colleagues outside of the capital, beyond the square mile of the city and over the seas, London feels absolutely, completely, normal today.

People staring grimly at their phones, no conversation on the tube. That’s actually London on a regular work day.

Yesterday, the Prime Minister said: ‘Tomorrow morning, parliament will meet as normal. We will come together as normal. And Londoners and others around the world will get up and go about their day as normal.’

Mrs May was right.

This city has seen countless, tragic and pathetic attempts to derail our way of life. They will never succeed.

Our thanks, love and gratitude to the people who work for and with us, to keep us safe. Our thoughts are with those who were hurt or who lost someone yesterday.

Now we go back to work.

Can we hardwire trust into our financial systems? SxSW Tech Briefing

This year there were no big headline tech launches to speak of which is unusual for an event which in years gone by saw the launch of Twitter and Foursquare, to take but two.

But this year, the tone and content was quite different. The changing political landscape loomed large, chiefly with the ‘tech under Trump’ work stream but also with keynote speeches from Joe Biden and Corey Booker.

For 2017, the recurring theme was on a pervasive lack of trust and transparency between individuals and organisations, as well as between society and its governments.

Various barometers of sentiment reveal that we are at a historical low for trust in institutions such as banks and the media.

Four panels and presentations focused on the technology variously known as Blockchain or Distributed Ledger and how it can be applied to hardwire and build trust into our systems and interactions.

Discussions ranged from how this tech enables individual contribution, makes it easy to collaborate, decentralises power and creates hope for increasing equality.

There were hands-on workshops and introductions to some of the protocols, coding and design challenges in creating distributed data structures.

As a recap on ‘Blockchain’, it is effectively a record of assets, or any other kind of content, that is shared, replicated and encrypted so it becomes a verified and immutable source of truth. The blocks can’t be modified, but can be viewed, meaning a huge benefit lies in the added trust and transparency that provides.

Dr Tomicah Tillemann, of New America’s Bretton Woods II program is working with his team to apply the principles of blockchain to the US land registry system.

Speaking at SxSW he commented: “Institutions right now provide the facts at the foundation of our reality. I know there’s a land registry somewhere that says I own my house. I swipe my card because I know the bank will transfer the right money for me. As soon as people lose confidence, those systems start to break down really quickly.

“The exciting thing about blockchain is that it has the potential to create a layer of authentication and validation that can’t be tampered with. It’s a layer of reality locked in mathematically, and it’s locked in permanently, which is something we’ve never had before.”

IBM was also in attendance, focusing on the wider potential application of blockchain, announcing a blockchain solution with shipping container giant Maersk to track shipping containers across the world

With over 90% of goods in global trade carried by the ocean shipping industry each year, there are clear benefits to enhancing transparency and sharing information.

From the exchange of money between two parties, to documenting how goods move through a supply chain, and the making of contractual agreements, there are significant savings to be had in terms of cost and time as well as the potential to reduce risk and increase trust.

We Explore or We Expire: SxSW Tech Briefing

“We explore, or we expire,” said astronaut Buzz Aldrin, of the Apollo 11 mission and one of the first two humans to land on the moon.

This simple sentence won over SXSW this year, the event in Austin, Texas which brings together some of the brightest minds in technology and innovation to collaborate.

In his keynote speech, Aldrin was talking about the push to Mars, but his speech and sentiment went wider – exploring how people and organisations are thinking and learning new ways to communicate, adapt, survive and flourish.

Virtual reality (VR) was everywhere, but there is still real debate about its real world application. In our view, VR is still looking like fun toys to promote films and event experiences. Smells a little like 3D TVs to us, and we know how that fad ended.

Does anyone really want to wear those headsets?

AI, however, is another matter. This was hot for the second year running and is being positioned as the next big disruptor.

Harley Davidson, for example, is using an AI tool to match audiences to its current database – finding customers who might be interested in purchasing a motorbike through machine learning. It attributes 40% of its sales in New York to this tool.

Disney’s R&D studio is using AI as a tool for storytelling across multiple digital platforms.

One speaker estimated that a 30-year grace period before AI completely takes over the workplace, calling for a push to design AI to augment rather than replace people.

This requires a clear distinction between AI (artificial intelligence) and IA, or intelligent augmentation.

AI is about reproducing human cognition and functioning autonomously, while IA is about supplementing and supporting it, leaving the intentionality of human operators at the heart of the process.

For brands, this is going to continue to be about making sense of complex data through machine learning, enhance and augment, rather than merely removing human roles.

Back to Mr Aldrin’s alma mater, NASA, which is working with Google to explore the application of quantum computing to artificial intelligence.

The space agency’s Quantum Artificial Intelligence Laboratory (QuAIL) is using quantum computers to perform calculations that are difficult or impossible using conventional supercomputers, effectively becoming a quasi-AI.

The team aims to demonstrate that quantum computing and quantum algorithms may someday dramatically improve the agency’s ability to solve difficult problems for space missions but also back on earth.

Algo trading on the rise as Pragma establishes European presence

The decision by Pragma to set up a base in London shows how the UK’s capital remains the natural hub for algorithmic currency trading despite the UK’s looming exit from the European Union.

While the debate about the future of London in a post-Brexit environment continues to rage on, there are many who continue to recognise the role of London at the centre of the USD5 trillion currency market.

Algorithmic trading in particular continues to rise in popularity. A report from Greenwich Associates found that the proportion of volume-weighted FX trading executed algorithmically has increased two and a half times in the past three years.

This trend was further highlighted by Pragma Securities, the multi-asset class provider of algorithmic solutions, which established a new connectivity presence in London to service its growing international client base.

London currently accounts for more than a third of all currency trading activity globally, according to the BIS. In a news article in FX Week, David Mechner, CEO of Pragma, expressed confidence in London and its role at the centre of European and international financial markets.

“Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally.

“The banks we service need state-of-the-art trading capabilities for their traders, and buy-side and corporate clients, making LD6 a natural fit.”

Pragma is not alone in its bullishness on London’s future, and it is clear that maintaining a data centre presence remains crucial to an institution’s trading operations, particularly for FX trading. The Financial Times recently reported on Dutch data centre operator Interxion’s £30m investment in its site in London’s Brick Lane.

Curtis Pfeiffer, Chief Business Officer at Pragma, also highlighted the benefits of proximity to London and risks of leaving London’s FX ecosystem.

“We are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” said Curtis.

“Institutions will be reluctant to leave the data centre ecosystem in London, which has increased in size significantly over the last 10 years as a result of a network effect – everyone wants their trading servers to be where everyone else’s are. By leaving that ecosystem, a firm could disadvantage themselves and their clients.”

Make the Wall Street fearless girl statue permanent

Chatsworth salutes State Street for a beautiful, intelligent, witty artistic response to the woeful lack of meaningful female representation at board levels across Wall Street.

The statue of the defiant girl facing off the charging bull is a beautiful piece of art, but also appropriate symbolism in a form which fits its place and the influence and potential of that famous street.

With more than a passing nod to Degas’ famous bronzes, which you can see in London’s Tate Modern, the new Wall Street bronze brings the lack of representation issue into sharp relief, not with victimhood but with bold, assertive defiance.

On an aesthetic basis alone, the juxtaposition of the raging bull and the defiant girl improves both pieces. They complement and improve each other. There is a basic, elemental motif which anyone can recognise. Anyone reminded of a recent Disney remake?

It is due to remain in place for a week.

Chatsworth supports the petition for it to remain as a permanent fixture. It must stay as a reminder to the workers, employers and influencers in that great city that one element of the job is not done.

You can join us by signing the up at Change.org.

Algo trading and interest in emerging market currencies will grow in 2017 driven by hunt for FX liquidity

Traders at across both buy and sell side are reporting that they plan to make more use of computer algorithms to trade FX in 2017 and are also setting their sights on traditionally less-traded currencies.

This matters. Foreign exchange – or FX – is the world’s largest and most liquid market, with around USD 5 trillion exchanged every day across borders.

FX underpins global trade and commerce, allowing countries, companies and institutions to trade, hedge and transfer risk.

Now a survey of over 200 FX trading institutions reveals that while 12% currently use algorithms, 38% plan to increase their use of algos in 2017.

JPMorgan believes 2017 is going to be “a watershed year for algo usage”.

In terms of currency mix, traders currently spend 70% of their time trading the major G10 currencies – including EUR, USD, GBP and JPY – and 26% in emerging markets.

This looks set to change in 2017 with 15% planning to increase their use of G10 currencies this year, with 32% planning to trade more emerging market* currencies as their liquidity continue to improve and they therefore become increasingly more attractive to trade.

So it’s no longer just about speed and a race to the bottom to be first in and out of the market – so called ‘bad algos’ beating everyone to the punchbowl.

The unifying theme of both the rise of the machines and the renewed interest in traditionally ‘less traded’ currencies is the search for liquidity in an increasingly fragmented and competitive market.

Algos can monitor and act across multiple venues, markets and currency pairs to flag opportunity or alert to risk.

Likewise, an uncertain macro-economic outlook plus improving liquidity makes trading in less-traded pairs much more attractive.

As the first signs of Donald Trump’s victory in U.S. presidential elections emerged the largest increase in currency pair activity was the U.S. dollar traded against the Mexican peso (USD/MXN), 63 times normal levels in the hour following the result.,

By way of comparison, spikes were also registered across the major currency pairs with input volumes ten times normal levels for EUR/USD for that hour, followed by USD/JPY and GBP/USD.

Turning to FX instrument type,40% of FX traders report that they plan to use more options in 2017, with a corresponding increase in cash, swaps and NDFs as hedging tools in an uncertain political and economic environment.

*On the whole at Chatsworth we’re not so keen on the term ‘emerging markets’ which is largely subjective and frequently inaccurate as many ‘emerged’ long ago.

The FX market’s six-month health check is due this week

The Bank of England releases FX trading data from the market for the six months to October last year. That covers a bouncy few months to say the least.

This data set will cover the Brexit vote and the not-entirely-event-free run up to the US election so we’ll be interesting to see what happened with dollar-peso volumes and Sterling which continues to be buffeted by the winds or Brexit and a significant degree of political and economic uncertainty.

These are unprecedented times for the flow and trade of global currencies and the structure of one of the world’s largest and most liquid markets.

The public face of the market has focussed on the conduct of some traders remains in the spotlight following a series of high profile legal cases over alleged malfeasance.

Much of this is being addressed through the Global Foreign Exchange Code of Conduct, led by the Bank for International Settlements.

But it is the changing role of the banks and the funds as makers and takers – the shape-shifting of the formerly API prop traders towards market maker status that, in our view, has delivered the most significant structural change.

Once dominated by the largest global banks, the growth of electronic trading has made it easier for relatively smaller financial firms to become directly involved in currency trading. Access to the market and competing trading venues have exacerbated this process.

Concurrently, regulation has limited the risk these banks can carry on their books, making them more selective about how and with whom they trade.

Currency trading continues to be dominated by what are euphemistically described as “other financial institutions”

This category includes smaller commercial and investment banks, as well as buy-side firms like pension funds, mutual funds and hedge funds. In other words, not the banks.

Broadly, volumes of late have been lower with overall daily turnover declining to around USD 5.1 trillion in April 2016, from USD 5.3 trillion three years ago.

But the there has been a significant uptick in currency market volatility has increased over the past few years.

All eyes on Tuesday to see how the market fared through the events of the latter part of 2016. Expect a few surprises.

David Rutter: 2017 the year of blockchain delivery

In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed, says David Rutter, CEO of R3.

Darwin’s point holds true. Critical mass, momentum and co-operation are absolutely essential if we are to transform financial services and the communications and transactional framework we rely on.

This was our rationale for bringing banks together to jointly develop distributed ledger technology for the financial services industry from day one.

In R3 we have created a fast moving financial technology product company with an ownership structure which provides a balanced governance, combined with the leadership and stewardship of the best technologists in their respective fields.

The spaghetti junction of shared legacy infrastructure as well as individual front, middle and back office systems is testament to the resulting mess when banks disappear into development silos.

The overall cost of maintaining this legacy infrastructure is incalculable and there is risk around every corner, embedded into the old Cobol and Fortran code under the layers of many of those systems.

That is why we came together with an initial group of nine banks in September 2015 to create R3. A highly experienced and effective technology team was assembled and ready for action two months later.

Fast forward a year and there are now over 75 members of the R3 group – with two additions in the last week alone – working together on a diverse array of projects and developing technology to address some of the most serious pain points affecting the industry.

There is no secret. We hired the best, assembled and activated a powerful and engaged membership base and connected them together to leverage the network effect distributed ledger technology delivers.

Together, we have designed, built and launched Corda, the open-source release distributed ledger platform which will set the standard for this technology in global financial markets.

This is the only platform designed by and for its users and represents the world’s largest collaborative distributed ledger effort in financial services. It is unique and it is a landmark moment for the market.

Distributed ledger technology will have such phenomenally powerful network effects that it is hard to imagine serious institutions deploying base-layer ledger software that is anything other than fully and wholeheartedly open.

The response and engagement with Corda has been exceptional and only a few weeks after open sourcing the platform we have already had a vast number of contributions from the public developer community.

Amidst the excitement of the Corda roll-out, it’s hard to ignore the running commentary on the progress of our fundraising programme.

The motivation and accuracy behind some of the noise has sometimes been questionable, but such is the nature of working on such high-profile projects. It’s a complement to be discussed and we are very happy with constructive criticism, but better when the discussion is informed and accurate.

We have always expected the make-up of the consortium to change over time – our member base is so large and so diverse, it would be unrealistic not to expect some institutions’ priorities, resources and focus to travel in different directions.

We have new members joining the project all the time and some banks may choose to change the way in which they engage with us as we move forward, but the critical mass we have built over the last year means members can be confident they are investing in developing industry standard solutions that will be the building blocks of the new financial services infrastructure.

The financial institutions that have shown the vision to join R3 are by that very action ensuring the technology we adopt is built using common code and protocols, ensuring seamless interoperability and integration.

This is a direct hedge against the risk of replicating the disjointed infrastructure financial markets are forced to operate on today.

We remain focused on perfecting Corda and looking ahead to our objectives and deliverables for 2017 working together with our members.

We are on the cusp of a new era in financial technology, and over the next year banks will begin to reap the benefits that have been promised to them since the financial services industry recognized this technology’s potential to deliver efficiency, lower risk, security and cost reductions.

Let’s be clear: the power of distributed ledger technology lies in its network effect – and that goes for the build as much as the usage. The past few years were characterized by blockchain hype. Leveraging the combined power and expertise of our diverse and growing group of members, R3 will make 2017 the year of blockchain delivery.

Post-result: input volumes submitted to CLS

Input volumes1 submitted to CLS

CLS witnessed increased levels of FX trading activity during the announcement of US election results, with particular spikes in activity between 02:00 – 03:00 GMT when the results for key swing states were announced (input volumes were 7 times normal levels for that hour). This heightened activity continued following the confirmation of Republican candidate Donald Trump as president between 08:00 – 09:00 GMT, when input volumes were more than double normal levels for that hour. 

Significant spikes were registered across currency pairs between 02:00 and 03:00 GMT, with input volumes ten times normal levels for EUR/USD for that hour, followed by USD/JPY and GBP/USD (nine times and five times respectively).

The largest increase in currency pair activity was the US dollar traded against the Mexican peso (USD/MXN), 63 times normal levels for that hour.

A full breakdown can be found below.

Between 02:00-03:00 (GMT), CLS total input volumes increased significantly to 199,030 compared to a YTD average for that hour of 28,829 i.e. volumes were 6.9 times normal levels.

For the same period, the input volumes for the top five most traded currency pairs and the USD/MXN were as follows:

Currency pair

input volume for 02:00-03:00 (GMT)

YTD average input for 02:00-03:00 (GMT)

input as multiple of average

EUR/USD

33,675

3,226

10.4

USD/JPY

75,575

8,598

8.8

GBP/USD

6,732

1,436

4.7

AUD/USD

18,220

4,461

4.1

USD/CAD

8,177

1,049

7.8

USD/MXN

8,803

139

63.3

Between 08:00-09:00 (GMT), CLS total input volumes increased significantly to 150,487 compared to a YTD average for that hour of 66,983 i.e. volumes were 2.2 times normal levels.

For the same period, the input volumes for the top five most traded currency pairs and the USD/MXN were as follows:

 Currency pair

input volume for 08:00-09:00 (GMT)

YTD average input volume for 08:00-09:00 (GMT)

input as multiple of average

EUR/USD

36,867

14,985

2.5

USD/JPY

38,946

10,991

3.5

GBP/USD

8,797

6,233

1.4

AUD/USD

11,347

6,024

1.9

USD/CAD

6,578

3,054

2.2

USD/MXN

4,458

651

6.8

 

1 Input volumes are the number of instructions received by CLS for future settlement combining the settlement and aggregation services. 

CLS Data: CLS makes aggregated FX trade data available to subscribers through Quandl, a data platform for economic and financial data. Data is available for subscription in the form of three separate reports, showing activity by hour, day or month. The data reports contain trade volume in terms of both the number of trades and the total value in USD. The data is aggregated by trade instrument (spot, swap and outright forward) and currency pair. Visit the Quandl website to find out more.

 

 

Disruptive HFT: Legislation, taxation or industry solution?

High-frequency traders are in the news again…

In financial markets, it’s not uncommon to hear whispers about high-frequency traders (HFT), and their so-called ‘bad behavior’. Amongst the chatter, officials are busy pounding their gavel as they race to govern HFTs.

The HFT community has, rightly or wrongly, developed somewhat of a reputation problem and is firmly in the crosshairs of international regulators seeking to crack down on what they see as nefarious behaviour.

However, with no international body coordinating efforts, there is a divergence appearing in different international regions, with a variety of different measures being proposed.

Presidential candidate Hillary Clinton has long called for a tax on high frequency trading transactions during her campaign. In recent weeks, however, the Japanese Financial Services Agency (FSA) reignited the debate over how officials should handle the growing presence of HFT in public markets. With the practice accounting for about 70% of all order flow on the Tokyo Stock Exchange in 2016, the regulator has proposed plans that would require HFT to register their risk management measures.

More recently, a report from Bundesbank analysed HFT patterns in Germany’s stock and bond markets and suggested, amongst other recommendations, a trading delay or ‘speed bump’ that could reduce the incentive for some market participants to engage in a technological arms race.

But in a twist of events, the European Central Bank’s report on Tuesday arrived at a different conclusion, suggesting the best way to monitor HFT was to use existing tools provided by the industry instead of rigorous rules.

Both reports agree that HFTs boost liquidity, making it easier for investors to buy or sell an asset. Contrary to the ‘Flash Boys’ image, academics have produced research reiterating this view and highlighting how HFTs reduce trading costs, improve market depth and stability. Jonathan Brogaard, a professor at the University of Washington, told Bloomberg: “as a whole, the literature strongly supports HFTs being a net positive.”

Despite this, the debate rages on: should there be greater regulation? Is that really the best approach, or can market-led solutions provide the answer?

In recent years, industry-led solutions have certainly become increasingly prominent. In spot foreign exchange, for example, an electronic spot FX platform called ParFX has employed a number of tools, including a randomised pause on all order submissions, amendments and cancellations, to prevent disruptive trading.

Dan Marcus, CEO of ParFX, shares the view that the market can create its own solutions. “Rather than an ineffective and expensive cure in the form of legislation or taxation on trades, which will take years to implement and almost certainly result in regulatory arbitrage, a proactive preventative, market-led solution is required.”

With other trading venues such as IEX and Chicago Stock Exchange adopting “speed bumps”, this idea certainly seems to be gaining momentum.

So what’s the right answer? Should we increase regulation? Implement a “speed bump”? Impose a tax on transactions, as suggested by Hillary Clinton? Looks like the jury is still out for now.

Regulators seek further transparency for the US Treasuries market

As the Fed marks its second annual conference on the evolving structure of the US Treasury market, there has been much debate over the future of the $13tn bond market.

The conference was established following the now infamous flash crash in US Treasuries on October 15 2014, which saw enormous swings in the 10-year benchmark – causing a major upset and soul-searching about the structure of the market.

A particular topic that caught the interest of market participants during this year’s conference was trade reporting. At present, there is no requirement to report trades involving US Treasuries, unlike corporate bonds or equity markets. However, in a bid to bring further transparency to the market, Antonio Weiss, counsellor to the secretary of the US Treasury, has now called for trades to be publicly reported.

Mary Jo White, Chair of the Securities and Exchange Commission (SEC) echoed the sentiment, arguing that regulators needed “full access” to trading data, and firms buying and selling Treasuries for proprietary reasons should register as dealers.

Understandably, this has stirred up significant debate amongst market participants. As the world’s largest debt market, the US Treasury plays a major role in the cost of government finance, so any changes to how the market is governed will likely cause concern about unintended consequences.

Whilst many market participants appear to be in agreement about providing further information to regulators and increasing transparency, several banks have warned that, depending on how quickly trades are reported, it may disrupt the effective functioning of the market.

One specific concern relates to competitors potentially using this information to gain an advantage and move markets against them. Such behaviour could have a particularly hard impact when trading in large block sizes.

Reforming a market as critical as US Treasuries is no small task and it is clear that regulators are still in the early stages of this process. Perhaps by next year’s conference there will be further clarity as to the road ahead.

A milestone for electronic trading – but what’s next?

Monday, 26 October 1986 marked a momentous day for London’s financial markets. 30 years ago brokers abandoned physical trading floors in favour of computer-based stock trading, which heralded a new dawn in trading and financial markets. This programme of deregulation later became known as ‘The Big Bang’.

Led by a major Government initiative and supported by many of the biggest banks, which recognised the opportunities this presented, the industry experienced unprecedented growth in stocks, bonds, currencies and other financial products over the next two decades.

While few could have predicted how influential technology would play at the very heart of financial markets, the perennial question remains; how will it influence the markets over the next 30 years?

Electronic trading fuelled the expansion of the global financial services industry, connecting new and existing markets with a wider range of financial institutions and reducing barriers and the cost of trading for all.

Regrettably it also helped create the very conditions that would lead to a global systemic financial crisis in 2007/08 – a major turning point for the industry.

But every cloud has a silver lining and the difficult events of that period paved the way for the wholesale reform of financial markets; greater regulation and innovation surrounding electronic markets shaped the way in which counterparties interact, clear, settle and report transactions.

Dodd Frank, Volcker Rule and MiFID II, amongst others, sought to introduce greater transparency, risk mitigation and accountability. Central clearing, trade reporting and more stringent Know Your Customer (KYC) requirements have been among the central planks of the new trading architecture, allowing regulators to better monitor behaviour and risk.

This instigated significant advances in state-of-the-art trading technology such as distributed ledger technology, big data, AI and algorithmic trading. The latter enabled financial institutions to automate a number of trading processes that previously required manual intervention – from price discovery and trade execution to payment netting, post-trade processing and reporting.

So what does the future hold?

Any response to a question exploring the future of trading technology day is likely to involve the word ‘blockchain’. The nascent technology is already on the verge of transforming the way in which the financial services industry operates.

The technology has been touted as transformative in a number of areas, from capital markets trading to trade finance. To this end, R3, a global consortium behind the development and application of distributed ledger technology in financial markets, is making the source code platform for Corda publicly available, paving the way for it to become the industry standard.

But beyond the integration of emerging technology, trading systems and processes are also adapting to evolving regulatory conditions and market structure.

The growth of all-to-all trading is a reflection of changing market conditions, as non-banks play an increasingly important role as providers, rather than simply consumers of liquidity.

Elixium, a new all-to-all marketplace for the repo market, recently hit the headlines after developing a pioneering model that facilitates direct access to a much wider base of market participants.

While it is difficult to paint a comprehensive picture of electronic trading in five or even 10 years’ time, it is likely that emerging technologies such as blockchain and evolving market structures will have a big part to play.

The foundations are being put in place for technology to be at the heart of the next Big Bang.

Open sourcing blockchain – setting the industry standard

As of November 2016, any institution that wants to develop applications using distributed ledger technology, will be able to do so on R3’s distributed ledger platform, Corda.

The global consortium behind the development and application of distributed ledger technology in financial markets is making the source code platform for Corda publicly available, potentially paving the way for it to become the industry standard.

R3’s goal from the beginning was to deliver a distributed ledger solution that was open source, so as to allow the entire financial services industry to benefit and learn from its work. As the programme develops, it is evident that applications ought to be built on a common, unified platform to avoid any issues that may result from a fragmented approach.

The power of this technology lies in its network effect; therefore the consortium model, as utilised by R3, is the ideal method to get it off the drawing board and into the wholesale financial markets. By making Corda open source at a time when many participants are still at nascent stages of developing proof-of-concepts and use-cases, R3 provides a standardised environment in which to ensure these applications are scalable, interoperable and secure.

The consortium approach has repeatedly proved successful in financial markets. One of the best examples is CLS, built with a single technology provider with the backing of a consortium of banks and regulators. It was set up to mitigate a very real issue in the FX market – namely settlement risk. 15 years later it still performs a critical role in maintaining trust and stability in the currency market.

Will R3 become the next market infrastructure? The seeds are certainly being sown for this to occur as the consortium continues to strengthen its diverse membership and move ever closer to introducing practical applications for distributed ledgers.

BBC Newsnight review: Antony Jenkins on banks and the fintech sector

Antony Jenkins, former CEO of Barclays, appeared on BBC Newsnight this week to share his views on the current state of the banking sector and provide an interesting appraisal of the fintech industry and its threat to the status quo.

His short feature piece outlined the structural issues in the banking sector and why advances in technology could render these institutions redundant over the next 20 years.

Central to his argument was the potential for distributed ledger technology to reform the way in which transactions are handled and recorded by financial institutions, making the process faster, cheaper and more transparent for all.

The technology has been touted as transformative for a number of areas from capital markets trading to trade finance. But while Jenkins positioned distributed ledger technology as a direct threat to the banking sector – the reality is a little more nuanced – with a number of banks working to find new practical applications for the technology.

For example, R3, a fintech firm developing distributed ledger technology for financial markets, has already signed up over 70 banks to its consortium.

But Jenkins also covered peer-to-peer lending as an example of how banks are facing the increasing risk of disintermediation by fintech firms, which directly match borrowers with lenders to secure a better deal for both parties.

The model has become particularly prominent in the retail foreign exchange market, where providers such as Transferwise connect investors directly, thus avoiding bank fees and the risk of unfavourable exchange rates on smaller value transactions.

 The feature was first broadcast on the 19th October and can be viewed on BBC iPlayer

 

 

Regtech: tapping into the compliance goldrush

Regtech has emerged as the golden child of the fintech age. The sector has already proved pivotal to aiding regulatory compliance and is increasingly focusing on artificial intelligence (AI) to alleviate what has become a notoriously resource-intensive activity for banks and the buy-side.

With huge fines levied on banks and other institutions that fail to meet regulatory standards hitting the headlines on a regular basis – the issue of compliance is now very much front and centre of the agenda.

Perhaps unsurprisingly, compliance budgets have spiralled. According to the Financial Times, big banks such as HSBC, Deutsche Bank and JPMorgan spend well over $1bn a year each on regulatory compliance and controls, with BBVA estimating that, on average, institutions have 10 to 15 per cent of their staff dedicated to this area.

Thomson Reuters’ seventh annual Cost of Compliance Survey served to confirm the issue. “More than two-thirds of firms (69 percent) are expecting an increase in their compliance budget this year with 15 percent expecting significantly more.  Systemically important financial market utilities (G-SIFIs) are expecting a similar increase in compliance team budgets with 17 percent expecting a significantly higher budget.”

And this is only expected to increase, with major pieces of legislation such as MiFID II set to come into force in 2018. Reporting, internal controls and governance and derivatives reforms are all on the agenda posing challenges for cost-conscious institutions already focusing on keeping up-to-date with the latest technology.

A report from the Institute of International Finance (IFF) identified seven key areas where regtech should be utilised to solve compliance problems.

  1. Risk data aggregation
  2. Modelling scenario analysis
  3. A bottleneck in monitoring payments transactions
  4. Identification of clients and legal persons
  5. Monitoring a financial institutions’ internal culture and behaviour
  6. Trading in financial markets
  7. Identifying new regulations

This fledgling industry has responded proactively – innovating around a number of key areas such as cloud computing, blockchain, machine learning, APIs and cryptography.

Real-time automated trade monitoring, driven by AI, has also become a key tool for banks and the buy-side to evaluate trading behaviour and quickly identify abnormalities. And the principal is increasingly being applied to automated trading strategies as well.

But as the Financial Times note in a recent piece on the regtech sector, the real value delivered by providers is in “modelling, scenario analysis and forecasting”. But sometimes, this is easier said than done with the UK’s imminent exit from the European Union is set to complicate compliance matters further.

With a myriad of upcoming regulatory measures under MiFID II, Basel III and AIFMID likely to translate into growing demand for regtech solutions that will enable financial institutions to focus on their core business – it is certainly a sector worth watching closely.

 

 

 

 

 

 

 

 

Russian institutions flock to join R3 consortium

Payment processor QIWI becomes the first Russian company to join the consortium’s global network.

R3, the global blockchain consortium behind the development and application of distributed ledger technology in financial markets, has expanded its membership with the addition of its first Russian member.

QiWi’s online payment system is one of the most widely used payment systems in Russia. It is used to make online purchases and pay for loans, mobile bills, and even home utilities, and offers terminals where users can make payments as they would on their mobile device.

QIWI is a payment services provider and the first Russian institution to collaborate with R3. It has long recognized the benefits of blockchain technology; earlier in July, the firm expressed interest in joining the blockchain consortium created by the Central Bank of Russia.

“Our goal with R3 is to explore this emerging technology space as we shape the future of payments and transactions throughout collaborative research with other members of the consortium,” says Sergey Solonin, QIWI’s chief executive officer. “We believe that blockchain projects that we are currently working on can be applied on one of the R3 platforms and have great potential to be favorably perceived by regulated financial institutions.”

The firm joins over 60 leading financial institutions, who collaborate in R3’s lab environment, R3’s Lab and Research Centre.

David Rutter, CEO of R3, said “The addition of QIWI is a further milestone for R3 … as we expand our network of consortium members and continue to develop truly global applications for this groundbreaking technology.”

Illuminating Markets – a vision for cash and collateral management

Roberto Verrillo, Head of Strategy and Markets at Elixium, outlines his view on the key issues in the repo and collateral market.

Changes to the regulatory environment that have already taken place, and those that will occur over the next few years, have put us on a path that will change the industry forever. The impact on how the industry executes its business has been fundamentally changed.

The result of these changes has been an almost uniform decline in profitability for investment banks. Many operations have already begun efforts to re-structure large areas of their business to maintain return on equity (ROE) levels that are acceptable to their shareholders. This process will continue for several years yet.

I suggest reading ICMA’s excellent report written by Andy Hill “Perspectives from the eye of the storm” for more information about the current and future evolution of the repo market.

Basel III significantly increases the cost of doing business, taxing risk and market-making via increased capital requirements and increasing the cost to certain activities by requiring higher quality and amounts of capital. (See leverage ratio and liquidity coverage/net stable funding ratio -Basel III[1]). The more balance sheet intensive a particular business area is, the higher the “hurdle rate” for returns should be. In this regard market making (via capital costs for holding positions) and repo stand out.

Many firms have not yet implemented an exhaustive study of what these hurdle rates ought to be. These are not standard across the industry but are firm specific and are calculated using varying inputs particular to each individual institution and their relevant regulatory requirements. Ultimately these metrics will decide what each institution’s balance sheet will be and the required ROE.

We believe that as this process of re-pricing and charging business areas for the regulatory cost of partaking in certain businesses (and transactions) progresses, the market will find many more institutions cutting back and re-structuring their current business models, or simply pulling out of certain markets or product lines altogether.

NSFR (Net Stable Funding Requirement) rules under Basel III are calibrated such that longer-term liabilities are assumed to be more stable than short term liabilities. This will lead to greater demand for longer dated deposits, particularly corporate deposits which are treated favourably for banks under the rules.

NSFR provides for different, Available Stable Funding (ASF) and Required Stable Funding (RSF), weightings depending on the type of counterparty and the residual maturity of the transaction. This will make many financing transactions that are still viable under current regulatory capital treatment extremely onerous. Fifty percent RSF weightings will be applied to all loans (including reverse-repos) to non-banks, regardless of the residual maturity of the transaction, and independent of the underlying asset. In other words, this would mean that all reverse-repos with non-banks under one-year maturity would require the provision of stable funding against 50% of the value of the reverse-repo. For example, a bank transacting a $100 million overnight reverse in AAA government bonds with an insurance company or hedge fund would carry a requirement for $50 million of (long term) stable funding, even if this reverse was match-funded by repo.

The FRTB (Fundamental Review of the Trading Book) due to be implemented in local regulation by 2019, is a supervisory framework for the next generation of market risk regulatory capital rules for international banks. It will add further granularity to this process by identifying how profitable each business is within an institution at a “desk Level”.

It will also overhaul the standardised approach to market risk, forcing big banks to calculate and report it for the first time, radically altering the way that modelling approval is granted and policed, Value-at-risk (VAR) will be replaced with expected shortfall (ES) as the standard risk measure, redefining the boundary between banking and trading books. Approval by the regulator will be required, at a desk level, for banks to operate using their own internal models.

An ISDA study of 21 sample Banks concluded that, as a result of FRTB implementation, the overall increase in market risk capital, would be between 1.5x and 2.4x compared to current levels.

Current implication for repo

The cost of providing balance sheet to customers that may simply require a home for their cash has become increasingly prohibitive, leaving some banks having to turn away short term deposits/repo’s and/or charge what might look like unreasonable costs for either accepting said deposits or only offering the facility to clients from whom they generate revenue on other products as part of a wider relationship.

Because of this lack of willingness to, or difficulty in, pricing collateral transactions, many of these transactions have become economically unviable. Backward-dated pricing and resulting dysfunctional collateral markets are in evidence not only during reporting periods such as month, quarter, half and year end, but increasingly over a “normal” date run – volumes and liquidity are both showing signs of drying up.

“Previously, business lines might have been kept as part of the core business strategy, even if they did not meet the hurdle rate for returns. But in time banks will become more ruthless and cost aware about whether these activities can be a valid part of a long-term business model.

“Repo, as a standalone product, is no longer profitable. Repo desks have gone from being profit centres to cost centres. This has already happened; whether yet realised or not” – Andy Hill -ICMA.

“The provision of repo pricing and liquidity by banks has become more of a value-added service for clients, largely subsidised by other, more profitable businesses. “ ICMA quarterly report Q4 2015 – pages 25-28.”

Improving efficiency

There has been an exodus of banks from non-core businesses, but even in areas where they remain active, banks can make significant cost savings by accessing liquidity pool providers (such as Elixium) for distribution.

Harmonisation of settlement

Basel rules are implemented as the Capital Requirements Directive in Europe and the specific capital requirements for EU firms are based on their MiFID permissions.

There is increasing interest secured financing transactions, with the market moving from unsecured to secured financing and impending enactment of regulation surrounding the margining of OTC products. There is a stream of regulation that will have a significant impact on collateralised markets which involves harmonisation of settlement discipline regimes across Europe. The industry will have to identify an efficient operating model to manage these changes.

“4.6 Market access and interoperability

Activity description

The activity covers market practices or legislation that obligate or restrict the settlement of (stock exchange and/or central counterparty-cleared) transactions in a specific issuer CSD. The consequence for foreign investors, custodians and/or investor CSDs in such (issuer) markets is that access to settlement flows is restricted owing to the unfair competitive advantages established in those issuer markets. The restriction implies that entities wishing to offer settlement services on these securities need to become participants in the issuer CSD or central counterparty.”

Page 46 ECB Harmonisation Progress Report 13/04/15

http://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/fifth_harmonisation_progress_report_2015_04.pdf?986629e468a824c5d0069151574ead5c

In an environment of litigation and lawsuits is it reasonable to suggest to pension funds, hedge funds, sovereign wealth funds asset managers, CCPs, corporate treasurers, local authorities and other government entities such as public utilities should be precluded from access to a transparent trading facility for the re-investment of their short end cash and or securities or for sourcing collateral/margin?

http://www.reuters.com/article/2015/11/26/interestrateswaps-lawsuit-idUSL1N13K2IE20151126

In Europe, EMIR sets out a legislative framework for Central Counterparties (CCPs), trade repositories and OTC derivatives. This framework includes new requirements covering capital requirements, risk managements and organisation.

MiFID2 will be introduced with a view to de-restricting market access on a non-discriminatory basis. There is a requirement for Multilateral Trading Facilities to implement non-discriminatory rules regarding access to its facility.

MiFID2 introduces additional pre and post-trade transparency requirements for a number of financial instruments, these proposals aim to create a level playing field for the regulation of all organised trading. The trading obligation in Europe will be introduced in the Markets in Financial Instruments Regulation (MiFIR).

Mandatory Swaps Margining and the effect of Mandatory Swaps clearing on collateral markets;

Initial Margin (IM) and Variation Margin (VM) for uncleared OTC derivatives will be phased in from September 2016 through to June 2021. The US will start IM from September 2016 for the largest of counterparties but the EU has delayed the start of IM until June next year.

Clearing banks that traditionally put up money to support default funds within CCP’s are increasingly reluctant to do so as they have to hold a significant amount of capital on their balance sheet to support this business.

Variation margin to CCPs must be in the form of cash – there is a need for collateral to cash transformation and the size of the potential problem cannot be underestimated as banks step away from providing balance sheet to support short dated, low margin repo activity.

CCPs are working to engage buyside counterparties via differing initiatives be they sponsored or direct CCP membership.

It is envisaged that mandatory swaps clearing in Europe could create unprecedented demand for high quality liquid assets (HQLA) and its transformation, for use in initial and variation margining of swaps.

Eventually CCPs may offer cross-netting capabilities across a range of products.

Elixium – re-engineering collateral markets.

Elixium is an all to all collateral trading platform that addresses the current fragmentary nature of the market.

Standardised processes and protocols facilitate a transparent, efficient marketplace that simplifies the process of ‎rapid counterparty diversification amongst all institutions seeking to raise cash or collateral.

Connecting traditional players with new entrants and addressing the growing demand and supply of cash and collateral presents an exciting opportunity for Elixium.

The repo and collateral market is a critical source of funding for many institutions but remains balance sheet intensive. As institutions come under pressure as a result of regulatory changes such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, a reduction in balance sheets has impacted the depth and cost of liquidity available.

It is broadly accepted that the market will see more buy-side entrants, and all-to-all trading. The Elixium all-to-all marketplace has been developed specifically to facilitate access to a much wider counterparty base, which previously, have been restricted from direct participation by overly complicated legal and restrictive trading structures.

Legacy trading models are no longer as relevant in today’s market as they once were. As regulation creates new challenges and reshapes the traditional repo market-making model, stakeholders are trying to adapt and innovate both to meet those challenges and to exploit potential new opportunities.

Roberto Verrillo is head of strategy and markets at Elixium.

[1] Basel III is the global framework of principals that are agreed internationally which local regulators are consequently expected to implement into local law. It is worth noting that the US and EU are not 100% aligned on leverage ratio. (See CRD IV for the EU rules)

Currency trading volumes bounce back in September

After August’s annual slowdown, currency trading activity bounced back to almost USD5 trillion in September.

Currency trading activity rose strongly in September, according to the largest provider of settlement services in the global foreign exchange market.

Data from CLS showed a 17.5% month-on-month increase in the number of trade instructions submitted in September, reaching 1,038,025. The value of these trades equated to just shy of USD5 trillion, an increase of 6.6%.

September’s data indicated it was also the second busiest month for CLS in 2016, second only to June’s peak of USD5.19 trillion. The data also showed a 3.7% increase from September 2015, when trading activity totaled USD4.81 trillion.

While the increase mirrors a similar trend observed across many of the major trading platforms last month, CLS’s data provides the most accurate and comprehensive snapshot of activity in a given month – encompassing data from 18 global currencies and approximately 21,000 trading entities around the world.

screen-shot-2016-10-14-at-13-02-09

British Pound Remains on the Defensive After Flash Crash

Sterling remained under pressure at the start of the trading week following last week’s so-called “flash crash”. Sterling faces a potentially tumultuous week ahead as Prime Minister Theresa May heads to Denmark and the Netherlands for bilateral talks with Prime Ministers Rasmussen and Rutte ahead of this month’s EU leaders’ summit. Increasingly fiery rhetoric on both sides of the English Channel has already exploded in epic fashion and may do so again.

The economic calendar is in quiet in European and US hours, leaving the markets to digest recent price action ahead of this week’s headline event risk. Knee-jerk volatility remains a risk however. Bild reported that Deutsche Bank failed to secure a penalty reduction deal with US regulators, which may rekindle insolvency fears and bleed into broader market sentiment. S&P 500 futures are pointing upward however, hinting investors’ mood is relatively chipper for the time being.

The anti-risk Yen traded higher as US-listed Nikkei 225 futures declined in overnight trade. Japanese markets are closed for a holiday. The move may have followed comments from BOJ Governor Kuroda over the weekend, who said the central bank may delay hitting the inflation target until 2018. The remarks may have stoked recent skepticism about the efficacy of the central bank’s stimulus efforts.

The Canadian Dollar recovered in a move that appeared to be corrective after Friday’s broad-based selloff. The Loonie fell against all of its major counterparts alongside crude oil prices in a move that seemed linked to Russia signaling it would not reach a deal with OPEC to cut back output at a meeting in Istanbul this week.