Global FX market remains buoyant

The publication of the Bank for International Settlements’ (BIS) Triennial FX Survey results revealed some fascinating findings.

As always, it continues to be the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria, and is keenly anticipated by the FX market.

So what did the report tell us?

The headline figure was that, as widely expected, average trading volumes fell slightly to USD5.1 trillion per day, down from USD5.3 trillion in 2013.

But this doesn’t tell the full story; the report found that the appreciation of the US dollar between 2013 and 2016 reduced the US dollar value of turnover in currencies other than the US dollar. This means that, when valued at constant exchange rates, turnover increased by about 4% between April 2016 and April 2013.

This a reality check for everyone with skin in the game. It tells us that the market has been reasonably resilient in the face of many challenges; the SNB revaluation, issues around conduct and low interest rates in major economies to name a few.

While spot transactions fell from USD2 trillion to USD1.7 trillion per day, the decline may have been driven by two main factors. Firstly, the unwillingness of major financial institutions to commit to risk taking activity, and a drop in market volatility. This means the alternative investment community and speculative traders, who are quite active in the spot market, are doing fewer transactions.

The geographical breakdown of trading is also interesting. When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes, followed by New York. While London has continued to retain its crown three years on, activity has fallen by 5%, and New York’s share remains flat.

But Asia gained significant ground; Singapore (7.9%), Hong Kong SAR (6.7%) and Japan (6.1%) all increased their market share. The region continues to develop its currency markets and cross border trading continues to increase; it is a positive growth story for the FX market.

In terms of currencies, USD and EUR continue to remain unchallenged as the most actively traded, but the renminbi gained strong ground by moving into 8th place on the list. Emerging market currencies performed well overall, accounting for more than a fifth of trading.

Lastly, the banks have shored up their positions in the industry, in spite of the regulatory and conduct challenges the sector has faced.

Their position as the main FX trading posts was being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s FX survey.

But trading has increased amongst the interdealer community, accounting for 42% of turnover in April 2016, compared with 39% in April 2013. Banks that are not reporting dealers accounted for a further 22% of turnover, while institutional investors were the third largest group of counterparties at 16%.

So overall, the global foreign exchange market continues to remain buoyant. It remains the largest and most liquid market in the world and a critical component of the global financial system.

As confidence in FX is restored through the global code of conduct and other initiatives, we will see a more liquid and stable marketplace emerge.

All FX Eyes on BIS Triennial Survey

The whole FX industry is watching for the Bank for International Settlements’ Triennial FX Survey results, due this afternoon at 2pm GMT.

Why does it matter? Chiefly because it is the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria.

It’s a reality check for everyone with skin in the game. It tells us what currencies are trading the most, where and by what means.

It also gives us a sneak peek at the real market share of the FX market transacted on the electronic platforms and through voice trading.

When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes.

USD and EUR remained unchallenged as the most traded currencies, but the renminbi gained strong ground by moving into 9th place on the list. It will inevitably be higher on this occasion.

Since then, the market has experienced the SNB revaluation, issues around conduct and interest rate divergence among the major central banks.

Some established currency trading venues also lost market share and were hampered by reduced trading volumes. This points to a number of themes. Firstly, internalisation of trades at banks; secondly, a drop in overall volatility and trading opportunities; and third, greater competition from upstart trading venues, who grabbed a piece of the FX pie.

The position of the banks as the main FX trading posts is also being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s survey.

This continues the trend evident in past Triennial Surveys. The counterparty segment that contributed the most to growth in global FX turnover between 2010 and 2013 included smaller banks that do not act as dealers, institutional investors, hedge funds and proprietary trading firms as well as official sector financial institutions, among others.

In the 2010 survey, this segment surpassed other reporting dealers (i.e. banks trading in the interdealer market) as the main counterparty category in the Triennial Survey for the first time.

What this shows is that the funds and HFTs are established as major players and are cleaning up their act to become genuine makers and takers in the market. This is an inevitable evolution and blurring of the buy and sell side.

This afternoon we expect the BIS to report relatively flat volumes, if not a dip on 2013. The gallery of top traded currencies will remain broadly the same but the devil will, however, be in the detail and the percentage movements showing direction.

There is will be many things to look out for. Which currencies were the most traded? Will London retain its FX crown? Which instruments were the most popular?

All will be revealed in the next few hours. The industry awaits…

R3 patent application unveils its vision for future of blockchain technology

R3 executives speak publically for the first time about Project Concord and their vision for the future of blockchain technology.

Distributed ledger and blockchain technology represents a once-in-a-generation opportunity to transform the economics of data management across the financial industry.

However, R3 believes the blockchain and distributed ledger platforms that led to this breakthrough moment were never designed to solve the problems of financial institutions and do not meet all their needs. These include tight linkage to the legal domain, an obligation to prevent client data being shared inappropriately and interoperability with existing financial infrastructure.

As reported in the Wall Street Journal, the R3 blockchain consortium filed a patent for its Corda shared ledger platform.

Corda is the outcome of the analysis R3 undertook on how to achieve as many of the benefits of distributed ledger and blockchain technology as possible but in a way that is sympathetic to, and addresses, the needs of regulated financial institutions.

The platform enables firms to record and process financial agreements using smart contracts, as explained in depth in R3 CTO Richard Gendal Brown’s latest whitepaper.

Corda is part of Project Concord, R3’s overall vision and roadmap for transforming financial services infrastructure. Concord will address challenges such as governance, internal record keeping and regulatory reporting across the financial services marketplace.

With a number of successful prototypes having already been completed on the Corda platform and an alpha launch of Concord scheduled for 2017, the next year looks set to be a turning point in the history of financial technology.

Big data overdrive hurting bank profits

With more and more data available, making sense of vast amounts of content efficiently can boost profits by at least five percent a year.

Sell-side banks operating in the FICC markets are producing more and more data, and it is widely acknowledged that there is tremendous minefield of value often hidden within this data that can be of great use to an institution’s trading, regulatory, audit and compliance functions.

But for many institutions, aggregating and gauging this data to make sense of key trends accurately remains a significant challenge. So far, it is proving to be timely, costly and hurting banks’ profits.

The 2016 global study released by Qlik and Wall Street Journal (WSJ) surveying financial service companies about the usage of data and analytics revealed 57% found data information too complex to process, analyse and disseminate in a timely fashion. Yet nearly 80% of respondents believed that leveraging insights from data could boost revenues by at least five per cent annually.

As Duncan Ash, a Senior Director of Global Financial Services at Qlik, says: “Analytics is still the most prevalent in head-office functions, and the people in the field that need it the most are getting it the least.” He added that “firms struggle with the volume and complexity of data, and with the basics of communications and data management.”

This potential rewards on offer has led to a rise of specialist technology vendors that scrutinise and standardise data and do the hard work for their clients. One such as example is Mosaic’s MSX platform, which aggregates multiple sources of transaction data into a singular resource. This enables banks to meet regulatory requirements by building a more comprehensive view of client’s trading activity while creating better audit trails for regulators.

Steven Hatzakis, a financial services industry consultant and a registered Commodity Trading Advisor, said in a column on Finance Magnates that as analytic tools have evolved, so have visual dashboards. “These include not just numbers but adding colors or other variables that indicate changes as reporting and related gauges become dynamic. This is a common trait seen within trading platforms in capital markets and it is used in order to make it easier for technical data to be comprehended quickly.”

As Diane Castelino of Mosaic Smart Data says, “The next and most advanced stage is breaking into the field of predictive analytics and machine learning, where the ability to predict future client trading behaviour based on historical patterns sets institutions streets ahead of their peers.

“In what has become a challenging trading environment for all, the real winners in the race to harness and utilise big data will be those institutions that partner with the technology specialists that deliver expertise and innovation on a cost effective, modular basis and educate staff to use the technology effectively.

Diane’s whitepaper on big data and going beyond the hype can be read here.

Business as usual for London’s FX industry post-Brexit

No signs of exodus to other financial centres as FX recruitment holds firm.

Following the UK’s vote to leave the EU, European financial centres such as Paris and Frankfurt prepared to roll out the red carpet for London’s financial institutions. But this may be more difficult than initially anticipated.

Red tape regulations, heavier personal tax regimes, governmental issues and different social norms means there is little appetite for London’s foreign exchange (FX) trading institutions to move jobs to Europe en mass, according to recruiters keeping close tabs on London’s financial district.

Despite the Brexit vote, and repeated reports about banks accelerating plans to move jobs from the UK, European cities are struggling to match the pull factors that London offers.

London has long been at the heart of the international currency markets, accounting for more than 40% of FX turnover, according to the Bank for International Settlements. With its advanced infrastructure, access to human capital, a strong legal and regulatory system and a time zone that allows London-based traders to service customers all over the world, it has not only maintained its dominance but also attracted a host of emerging fintech companies to form one of the largest technology and innovation hubs in the world – further strengthening the City’s dominance.

All of this means the number of suitable alternatives to London is limited.

In an article for Euromoney, Andrew Kitchen, internal audit manager at recruitment consultancy Morgan McKinley, says there has been no increase in the number of people from the leading banks looking to leave the UK since the EU referendum vote.

This may be because transferring large numbers of FX staff to France in particular will not be a straightforward process, adds Raoul Ruparel, co-director of Open Europe. “Culturally and socially, France has taken a different approach to the UK in relation to this type of business in recent years,” he says. “It remains to be seen whether they have the appetite to offer tax or regulatory incentives.”

French employment and personal tax regimes are also likely to be a factor that counts against Paris, according to James Coiley, a partner at law firm Ashurst. “Making overtures to FX banks and traders to relocate to Paris may not play well with supporters of the socialist French government.”

However, the uncertainty seems to have stopped some banks from transferring jobs from mainland Europe to London, according to Kitchen. “What we are seeing is that several candidates based in Europe who had hitherto been looking to relocate to London are now staying put. This is in part due to the level of uncertainty around future Brexit implications, but also the current weak value of the pound,” he warns.

So while the outlook for 2017 remains unclear, London’s FX industry continues to remain resilient in the face of uncertainty and there has yet to be any knee-jerk reactions that disrupt the status quo on either side. Although it is still early days, what is clear is that fears over London losing its FX crown remain largely unfounded for now.

The City now looks to politicians with bated breath.

Spotlight turns to clearing houses on stress tests

A report from the Bank for International Settlement (BIS) and International Organisation of Securities Commissions (IOSCO) concluded that some Central Counterparties (CCPs) have not adequately addressed their potential risk exposures and did not include enough “liquidity-specific exposures” in their stress testing framework.

Following the 2008 financial crisis, many clearing houses provided a critical role in providing market stability and matching counterparty trades at a time of unprecedented market uncertainty. Given the increased role in the derivatives markets, as mandated by the G20, the spotlight has fallen on clearing houses once again, as the industry assesses whether these institutions have sufficient resources to operate in the event of sudden market shocks.

With a growing volume of OTC derivatives trading now handled by regulated electronic venues and settled via CCPs – in line with regulatory initiatives to create greater transparency and oversight – some industry participants have become concerned that clearing houses could become a source of weakness during times of market stress.

The report is likely to renew the debate over the mandated use of clearing houses for a growing portfolio of derivatives instruments and whether these utility providers are becoming huge warehouses of concentrated market risk. Some are already drawing parallels with the infamous ‘too big to fail’ analogy that characterised the plight of some banks during the financial crisis eight years ago.

There are a many ways clearing houses could get into trouble; investment losses, liquidity shortfalls, member defaults or settlement bank failures all pose possible issues – but the industry is already recognising the value of proper contingency planning. For example, LCH.Clearnet recently addressed a number of pitfalls in a recent white paper, entitled ‘‘CCP Risk Management Recovery & Resolution’.

Moreover, a number of initiatives have already been proposed by IOSCO to dilute the potential market impact in the event of a clearing house failing to deliver its funding obligations. These include providing CCPs with the tools to allocate any uncovered losses and liquidity shortfalls to third parties, and the ability for firms to replenish funds quickly following a ’stress event’.

However, with a deadline of the 31 December 2016 set by the BIS Committee on Payments and Market Infrastructures (CPMI) for clearing houses to demonstrate improvement, the market will certainly be watching the results with bated breath.

Voice brokerage is entering a digital age

In a guest post for Fintech Focus, Daniel Marcus, Global Head of Strategy and Business Development at Tradition, highlights why naysayers predicting the decline of voice trading are failing to see the crucial role it plays in the new digital age of hybrid trading.

The argument that voice brokering has diminished and that the choice between voice trading and electronic trading is binary, and one must compete with the other in the modern trading ecosystem, is inaccurate. Whilst it is true that liquidity available on electronic trading platforms has continued to rise significantly over the past few years, the continued claim that voice brokerage is dying as a result is exaggerated.

If we consider the OTC derivatives market as an example, transactions are generally designed to hedge exposure and are therefore risk reducing. Accordingly, they often involve high-value (therefore notional amounts that are on average significantly larger than those traded on electronic venues) multi-leg transactions with varying degrees of liquidity and participation which require specific tailoring to meet the needs of individual participants. Using a purely electronic market to facilitate such trades would be challenging and potentially significantly increase the market impact for participants.

Tradition believes that in relevant non-commoditised OTC markets the choice is not a simple case of using one or the other, but rather, a hybrid model that combines voice and electronic liquidity/trading. This allows participants to benefit from the best of both worlds – taking the transparency, high quality market data and efficiency of electronic platforms and combining it with the customisability of voice arrangement through interaction with screen-based liquidity. By way of example the success of our OTC derivatives platform, Trad-X, and similar competitive platforms, particularly in the US, is testament to the fact that this model not only works, but also demonstrates, through their performance in terms of market share, the growing demand for flexible execution methods amongst market participants.

Another major advantage of hybrid markets is that the electronification of orders creates an audit trail. This allows for the capture of order and trade data that can then be utilised to address market issues. Take the example of the swap rate benchmark. This was previously based on indicative pricing, and was deemed vulnerable to manipulation. However, ICE Benchmark Administration now calculates the swap rate using irrefutable reference data based on actual firm bids/ offers and trades- something which was previously unheard of.

The fact is, voice broking and electronic trading complement each other well and necessarily so. There is no doubt that in non-commoditised OTC market products execution ecosystem, the fact that both have for the last few years, currently and will continue to exist symbiotically in most areas (Rates, Credit and FX Derivatives being prime examples) is the reason these markets have been able to function so well during the on-going development of global regulatory reform. Despite the potential negative implications on liquidity driven by huge change in market structure, brokers, in combination with our highly efficient and effective hybrid marketplaces have ensured liquidity continues to be of the highest quality available to our market participants.

It’s about time the industry as a whole realised the benefits of this perfect combination.

Blockchain technology receives vote of confidence from the World Economic Forum

A report from the World Economic Forum (WEF) highlights the central place distributed ledger technology such as blockchain will occupy in the future of the financial services industry.

The report focused on the impact of implementing blockchain technology across nine sectors: trade finance, automated compliance, global payments and asset rehypothecation, proxy voting, equity-post trade, syndicated loans, property casualty claims processing and contingency convertible bonds.

The aim of the report is to complement existing distributed ledger technology research and provide a clear view on how financial services functions can interpret and integrate the new technology.

Amongst the experts, who contributed to the report are Todd McDonald and Jo Lang of R3, and David Puth and Tom Zschach of currency settlement system CLS.

Recently, R3, a leading consortium with over 55 of the world’s largest financial institutions, successfully completed two prototypes that demonstrate how distributed ledger technology can address the key challenges of trade finance. It found that distributed and shared ledger technology as a digital alternative for trade financing is significantly faster, more reliable and cost-effective.

Key findings of the report include:

  • DLT has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes
  • Applications of DLT will differ by use case, each leveraging the technology in different ways for a diverse range of benefits
  • The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation
  • DLT is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next- generation financial services infrastructure
  • Digital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat (legal tender), along with other emerging capabilities, has the ability to amplify benefits
  • New financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business models.

The report stressed that blockchain technology has the potential to significantly improve the financial services ecosystem, with 80 percent of banks currently in the process of working on blockchain projects in collaboration with incumbents and regulators.

How much is too much for market data?

The cost of market data and a lack of transparency around fees has become a topic of growing concern.

The FCA-hosted ‘MiFID Implementation Roundtable for trade associations’ event highlighted these concerns, as a number of trading associations called for the European Commission to review rules on market data pricing for trading venues under MiFID II.

According to The Trade, The Association for Financial Markets in Europe (AFME), the Futures Industry Association (FIA), and FIX were among the trade bodies that attended the event.

Fund managers have long criticized the high costs of market data for European exchanges when compared to the US and routinely challenged the current rules under MiFID which allows market data providers to “include a reasonable margin”. Critics point to a lack of clarity over what may or may not be deemed ‘reasonable’.

A report by the Tabb Fourm show that trading volumes, market-making profits, equity brokerage revenues and institutional trading commissions have all declined, but exchange data, access, and technology revenues are up 62%.

The minutes from the meeting also showed that “questions were asked what reasonable and excessive margin looks like if trading venues are not obligated to disclose costs of producing market data”, according to Trader Magazine.

There had been hopes that the European Securities and Markets Authority (ESMA) would cap market data fees or require more cost transparency in MiFID II. However, authorities decided not to require publication of data costs because members states were concerned the “information was commercially sensitive and not a public matter.”

Preview to the BIS Triennial FX Survey 2016

With the Bank of International Settlements due to release its 2016 Triennial Survey results next month, many market participants are reflecting on how the foreign exchange market (FX) has evolved over the past three years and considering how it has impacted volumes.

A number of high profile black swan events have rocked currency markets of late – injecting significant spikes in volatility and overall market turbulence. The shock decision by the Swiss National Bank to remove the cap on the Swiss Franc in January 2015 was a case in point. The event saw trading activity jump, whilst the recent UK referendum result caused Sterling to plummet to a 31-year low. However, there have also been several phases of low volatility, which has had a significant impact on volumes, as had increasing capital and regulatory pressures on banks.

The unprecedented rise of the Chinese renminbi has also been a significant trend, breaking into the top five most-used payment currencies according to SWIFT last year. The renminbi has also been designated as one of the IMF’s reserve currencies and  is expected to be added to the Special Drawing Rights basket in October 2016 – marking  an important milestone in the currency’s internationalisation.

The market landscape has continued to shift with several new players emerging in the traditionally bank-dominated FX market. The 2016 Euromoney FX survey highlighted the surprisingly rapid growth of non-bank liquidity provision, with new firms such as XTX Markets acquiring a significant portion of market share for the first time.


Japan’s Daiwa Securities Group joins CLS

Daiwa joins 65 other financial institutions in becoming a direct participant in CLS’s settlement and risk mitigation system.

The Japanese financial institution is one of the largest securities companies in Japan and has a significant global presence. It joins 65 other financial institutions in becoming a direct participant in CLS’s settlement and risk mitigation system – which settles approximately USD5 trillion a day on behalf of its clients.

The Japanese currency market is the largest international hub for currency trading in Asia. Recent data from the Tokyo FX Market Committee’s semi-annual FX turnover survey found that a daily average of USD407 billion was traded in April 2016 – an increase of 5% from October 2015.

Furthermore, one of the effects of Abenomics – a collection of policies designed to reinvigorate the Japanese economy – has been greater international diversification of Japan’s financial assets. As cross-border currency trade increases, the emphasis on reducing counterparty risk is becoming even more crucial.

As a CLS settlement member, Daiwa Securities Group and its clients across the globe will benefit from significant liquidity, operational and IT efficiencies to support their currency trading operations.

R3 welcomes Thomson Reuters to distributed ledger consortium

Thomson Reuters has joined financial innovation firm R3 to design and apply distributed and shared ledger-inspired technologies.

As the first market data provider to join the consortium, Thomson Reuters will contribute insights from its work with customers to drive product innovation and transformation in the financial sector using distributed ledger technologies. The firm joins the global network of R3 partners united in its lab environment, the R3 Lab and Research Centre, which has quickly become a key centre for research and testing.

The R3 team of financial industry veterans, technologists and blockchain and cryptocurrency experts are already working with consortium members on research, experimentation, design and engineering to help advance this technology to meet banking requirements for identity, privacy, security, scalability, interoperability and integration with legacy systems.

R3 recently unveiled Corda™, its shared ledger platform specifically designed to record, manage and synchronise financial agreements between regulated financial institutions. It is heavily inspired by and captures the benefits of blockchain systems, without the design choices that make blockchains inappropriate for many banking scenarios.

Financial lobby group release blueprint For UK post Brexit

TheCityUK’s report sets out its vision for the UK’s financial and professional services industry following the Brexit vote.

The outcome of the Brexit vote left the UK’s financial and professional services sectors evaluating their future relationship with the European Union (EU) and how these crucial industries could navigate any short-term uncertainty to continue their historic and longstanding relationships with key trading partners.

Unsurprisingly, the importance of maintaining access to the European single market through passporting mechanisms topped the list as a key requirement. But it also stressed the need to be aware of, and explore, opportunities beyond Europe, with Chinese and Indian markets representing strong growth opportunities.

London is already well placed to cement trading relationships with developing economies around the world. The UK remains the global leader in fixed income, currencies and commodities (FICC) and demonstrated its position of strength in the global foreign exchange market by executing around $2.15 trillion in the six month to April. Moreover, it remains the second largest centre for debt financing globally after the US and recently surpassed Singapore to become the second largest offshore RMB clearing centre.

Overall, the report identifies five broad goals for London to work towards:

1. Connect globally by maintaining an effective UK-EU relationship and sustain market access, while also strengthening ties with developed economies and emerging markets (China and Indian).

2. Drive national growth by building on its strong national footprint and create more connected regional centres with specialist skills and expertise in areas such as emerging technology, middle and back-office.

3. Expand its services and retain its position as the global leader in areas such as capital markets, legal services and infrastructure financing.

4. Innovate, disrupt and scale: continue to harness the momentum gained in London’s burgeoning FinTech sector to see the UK become a centre of excellence and a natural home for the next generation of financial and professional services.

5. Build skills and attract talent through developing local talent, whilst retaining access to a diverse and global workforce with next-generation skills.

The full  CityUK report can be viewed here.


Cost of trading the biggest factor for buy-side when selecting an FX broker

Over 50% of US and a third of EU respondents identified the cost of trading as the most important factor.

The cost of trading topped the list of priorities for the buy-side when selecting a currency broker. In a poll of over 100 buy-side FX market participants, over 50% of the US and a third of EU respondents identified the cost of trading as the critical factor when selecting a broker.

However, there were differing views on the importance of research from brokers; a quarter of European market participants identified quality of research as the second most important factor. In contrast, only 2% of the US respondents agreed, rendering quality of research the least popular choice amongst US traders.

Looking forward, both EU and US traders stressed the implementation of new regulatory guidelines as their greatest priority for the next 12 months. 60% of market participants in Europe highlighted this as their biggest concern, with implementation of guidelines relating to conduct, behaviour and research for new market opportunities considered crucial.

For US buy-side participants, reporting and transparency, closely followed by regulation and risk analysis, were the primary challenges.

The full results of the TradeTech survey can be accessed here.

Executable orders taking priority over last look in FX, says BoE

Market participants may finally be changing their attitudes towards the controversial practice of last look.

The Fair and Effective Markets Review (FEMR) was published approximately 12 months ago to conduct a comprehensive and forward-looking assessment of the way the wholesale Fixed Income, Currency and Commodities (FICC) markets operate and help to restore trust in those markets. The report included guidance on market practices where there could be scope for misconduct, such as last look.

According to Bloomberg News, which reported on the findings, last look gives a market maker time to back out of a trade. That means a bank or proprietary trading firm could unfairly learn a counterparty’s intentions without having to complete the trade.

One year on, the Bank of England reports that some currency trading platforms have changed their matching rules to prioritise executable orders over last look liquidity.

While this development will undoubtedly be welcomed by market participants, trading platforms such as ParFX banned last look long before the FEMR’s recommendations was published.

According to Dan Marcus, chief executive officer, last look may not be appropriate in a market of natural interest and price discovery. “While last look isn’t bad per se, it is contrary to the principle of stable and firm pricing, and potentially leaves the door open for disruptive trading practices, such as the creation of a liquidity mirage or an unclear picture of market depth, to occur,” he says

However, the platform does not believe banning last look is the way forward. “Flexibility in execution is key in differing market conditions with different participants and last look still has a role to play in today’s currency markets, albeit increasingly limited. Ultimately, the market will evolve and decide what practices to carry forward – subject to any regulatory requirements – over the next decade and what to discard,” he adds.

The FEMR Implementation Report is available on the Bank of England’s website and can be read here.


Oliver Wyman and JP Morgan urge asset managers to engage with blockchain

Asset management is just one of the many areas of financial services investigating how blockchain can be used to streamline operations and reduce costs.

It’s clear from the report from consultancy firm Oliver Wyman and American investment bank JP Morgan that there are significant benefits on offer if the asset management community adopted blockchain technology.

More robust and consistent data sharing, seamless transfer of assets and settlement flexibility are just a few of the possible advantages that blockchain could bring to the asset management industry, allowing them to offer improved product solutions and data management.

However, the technology is still very much in its infancy so it may be some time before these benefits are truly realised. The report suggests that elements of blockchain are likely to be applied within four waves, with 2030 suggested as the year when the full benefits will ultimately be realised.

The report also suggests that asset managers must move away from their traditionally passive approach to new technology and actively engage with blockchain if they are to reap these benefits in a timely manner, recommending research and collaboration with regulators and developers take place at an early stage.

The full Oliver Wyman and JP Morgan report can be found here.

Loonie increases share of international payments as renminbi slips

The Chinese renminbi dropped to sixth in the international payment ranking in June, according to SWIFT’s RMB Tracker.

The renminbi was overtaken by the Canadian dollar (CAD), commonly referred to as the ‘loonie’, which accounted for 1.96% of international payments to enter the top five most traded currencies. The RMB was marginally behind with a 1.72% share of international payments.

Despite this small hiccup, RMB internationalization remains on track. Over the past three years it has overtaken six currencies – including HKD, CHF and AUD – to increase its share of international payments exponentially.

SWIFT’s RMB Tracker also found that more than 1,200 banks used RMB for payments with China and Hong Kong in June 2016 – up by a fifth in just 12 months. Asia Pacific leads the way with 43% adoption, followed by the Americas at 42% adoption rate. Europe falls behind at 37% and the Middle East and Africa is at 34%.

There was also good news for the United Kingdom, which regained its status as the number one clearing centre after Hong Kong by processing a quarter of all RMB payments (excluding China and Hong Kong).

Overall, SWIFT remains optimistic about the RMB’s journey towards a more international currency. Alain Raes, Chief Executive, APAC & EMEA at SWIFT, explains that the journey towards full internationalisation is a long one, but “the creation of new offshore centres around the world combined with the progress of China’s new Cross Border inter-Bank Payments System (CIPS) will help move the RMB along its path towards internationalisation.”

For more insight and to download SWIFT’s latest RMB Tracker, please click here.

CLS’s aggregated FX trade data now available

CLS announced it has begun making its FX trade and volume data available via Quandl, an economic and financial data platform.

Subscribers to Quandl will now have access to CLS’s data, which will be delivered on an hourly, daily or monthly basis and aggregated by trade instrument (spot, swap and outright forward) and currency pair.

The currency settlement system, which settles 18 of the world’s most actively-traded currencies, receives an average submission of almost USD 5 trillion every day from banks, asset managers, corporations and hedge funds.

According to David Puth, CEO of CLS, this is the first time CLS has made this level of aggregate data readily available to the market. “It is a key source of trade information that will allow a broad range of users to get a clear picture of FX market activity across major currency pairs and products,” he says.

This view was backed up by Quandl’s co-founder and chief data officer Abraham Thomas, who spoke to trade publication Inside Market Data: “CLS had been aware for some time that it was sitting on a valuable data asset, but didn’t have the distribution infrastructure… or background in monetizing data. They reached out to us a few months ago when they became aware of our data marketplace… especially because our audience includes a bunch of hedge funds and asset managers.”

CLS has historically made aggregated and anonymized data available to the market, but the data made available through Quandl is available in a format more conducive to analysis and with greater frequency.

Customers interested in the data is expected to include large financial institutions, small financial services companies, software companies, academic institutions and research organizations.

Read the news story here.

R3 blockchain consortium leaders rise up technology rankings

Two top R3 executives featured on industry rankings in technology this week.

David Rutter, CEO of R3, and Richard Gendal Brown, CTO, appeared on the Institutional Investor Tech 50 and the Financial News Fintech 40 respectively.

David ranked at number 18 on this year’s Institutional Investor Tech 50 list, recognising the financial market acumen and technological sagacity that led him to launch R3 in 2014. The consortium now boasts over 55 institutions working with R3 to develop applications for distributed ledger technology in the financial services market which could change financial services as profoundly as the Internet changed media and entertainment.

Richard was named one the most influential people in the European financial technology sector for his work with R3, which includes overseeing the team of developers responsible for Corda, R3’s distributed ledger platform for financial services.

R3 Investigates Smart Contract Templates For Blockchain Inspired Platforms

R3 is spearheading efforts to understand and address the challenges of developing master templates for smart contracts, the self-executing contractual agreements used to trade, record and manage assets on distributed and shared ledger platforms. The firm is also exploring how these features could be implemented within existing legal and regulatory frameworks.

Following the R3 Smart Contract Templates Summit in London and New York in late June, R3 has agreed to collaborate with a diverse working group of its consortium members, standards bodies, law firms, academic institutions, exchanges and market infrastructure providers, including Barclays, the International Swaps and Derivatives Association (ISDA), Norton Rose Fulbright and University College London (UCL). The group will begin exploring the development of repositories of smart contract templates for banks to download and use on blockchain-inspired platforms, such as R3’s Corda.

At the summit the group discussed potential roadmaps for development, with a short-term focus on understanding the challenges of connecting existing real-world legal contracts for products such as interest rate swaps, to smart contracts – enabling the simplification of legal documentation and mutualisation of costs for banks.

The R3 Smart Contract Templates Summit’s presentation is now publicly available here:

Currently each bank stores its own instance of contracts, which can introduce inconsistencies and reconciliation challenges. Smart contracts operating on distributed and shared ledgers enable each of the parties to see the same agreed set of legal documents.

The group’s longer term goals include working with the legal community and academics to investigate how to take smart contracts to a point where they can be admissible in court and used for entry into dispute resolution. An update will be given at the second R3 Smart Contract Templates Summit later this year.

Pragma launches TradeBase to enhance order routing transparency

Multi-asset algorithmic trading provider, Pragma Securities, has launched TradeBase, a relational database that provides clients real-time access to their parent and child FIX order messages for greater transparency to facilitate client risk management, compliance, and monitoring of their algorithmic orders.

TradeBase is populated in real-time, and enables Pragma360 clients to feed their trading, risk management and compliance systems child order level trade data in a manner usually available only to firms who build their own algorithmic trading platform. The database provides a granular level of data including entries of all new child orders, amendments and cancellations, as well as child order fills.

David Mechner, CEO of Pragma Securities, summarises the need for technology providers to deliver clients with tools designed to increase trading transparency throughout the trading lifecycle. “Transparency is at the heart of our value proposition, and TradeBase is the next step in delivering on that value. It provides our clients convenient, real-time access to their trading data so they can incorporate it into their own processes and tools with minimal friction, and can conveniently track their order in detail from their OMS to the street.”

The launch of TradeBase follows the publication of a recent white paper by Pragma Securities exploring a buy-side blind spot in best execution due diligence. The paper, published in Tabb Forum analyses the order routing practices of high-touch trading desks and calls for brokers to demonstrate greater levels of transparency to clients.





Foreign Exchange Trading Volumes Surge Following Brexit Vote

The release of settlement data from CLS, the post-trade settlement service for the global foreign exchange (FX) market, marked a significant increase in trading activity in June. As markets reacted to considerable volatility in GBP and other major currencies following the Brexit vote, trading volumes spiked as banks and funds looked to reposition portfolios and offset risk.

As a result, daily average value submitted to the CLS settlement system hit USD 5.19 trillion, up 12.6% from the previous month and the highest since March 2015. Average daily volumes were also up, increasing by 20% compared to May 2016.

This was a trend observed across the FX market, with foreign exchange trading venue EBS reporting comparatively higher FX trading volumes for June at USD 97.4 billion, a rise of 28.7% from May 2016. ReutersFXAll also matched this trend, recording Spot FX volumes of USD 116 billion, up from USD 94 billion in May.

R3 Develop Solution To Prevent Blockchain Front Running

According to R3, the blockchain model as it stands will not be suitable for financial services, as it would allow everyone to see exactly what was being traded, when it was being traded and who by – potentially allowing competitors the opportunity to front-run each other.

CEO, David Rutter and Managing Director, Charley Cooper, explain how R3 is trying to strike the balance between the original purpose of the blockchain – to have a public record of transactions that must be verified by the majority of involved parties – and maintaining an appropriate level of transparency and anonymity as required by banks, financial institutions and regulatory authorities.

To read the full article in Fortune, please click here.

UK Bank Strains Intensify As Key Sterling Spread Hits Four-Year High

Stress in the UK banking system has intensified since Britain’s vote to leave the European Union, with the premium banks charge to lend each other short-term sterling funds doubling to its highest level in four years.

The Libor-OIS spread is a gauge of banks’ willingness to lend to each other and is perhaps the most fundamental barometer of the banking system’s health. Its widening comes amid a sudden darkening of the outlook for Britain’s economy. Christopher Vecchio, Currency Strategist at DailyFX, highlights how the widening of spreads could spell warnings of broader financial stress in Reuters.

“We’re not right at the edge yet but recession odds are creeping up and the flattening yield curve speaks to that. It’s still early in the game, but a flattening yield curve for banks is bad as it erodes their net interest margins. An environment of falling long-term yields is going to put a lot of pressure on financials,”

To read the full article, please click here

FXCM Reveals Sentiment Data From Brexit Vote

FXCM’s Sentiment Index has tracked the trading activity of 180,000 retail FX traders and shows how traders positioned themselves in GBP/JPY, EUR/USD and GBP/USD currency pairs in the run-up to the UK referendum.

In the past few weeks, traders became more inclined to buy the pound against the yen and the dollar. Around the week of the 6th June the index showed a big jump across all three currency pairs and there’s been significant volatility in each pair.

FXCM anticipates a lot more volatility as voting gets underway and is raising margin requirements again, so the data from the Sentiment Index provides a good insight into how traders could potentially position themselves.

Back in April, Chatsworth’s research team polled over 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Two-thirds (65%) of respondents believed a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believed a Brexit would have a positive impact.





Currency Market Volatility Prepares For Significant Volatility

Dan Marcus, CEO of ParFX, an institutional foreign exchange trading platform, comments on how uncertainty around the result of the UK referendum is leading to investor trepidation and increased market volatility:

The outcome of the EU Referendum vote on June 23 is the largest risk event for international currency markets so far this year. With the polls too close to call, no clear direction as to the outcome and currency market reacting in a volatile fashion to any indicators, increasing uncertainty is leading to a reduction in liquidity. All this has triggered a flight to safety and investor trepidation about how the outcome of the vote might affect trading positions and portfolios.

This period will also act as a test for brokers, trading platforms and infrastructure operators. Following last year’s surprise decision by the Swiss National Bank to remove its currency peg against the Euro, some market participants recognised they were unprepared for the unexpected move in EUR/CHF that followed. However, the lessons have been learned and technology and risk protocols have been upgraded and adapted. Market participants are now better prepared for an explosion of volatility and are likely to err on the side of caution in the face of significantly higher trading activity following the EU Referendum vote.

What continues to largely remain unaddressed from last year is the ability for traders to execute trades effectively during times of extreme volatility, and limiting instances of disruptive trading behaviour. This will be crucial if some participants seek to gain a latency advantage for nefarious purposes while others seek exit or adjust their positions, realise hedges or seek to identify profitable strategies.

This is where ParFX has a unique advantage. Our platform was developed in conjunction with some of the largest market participants, and the stability and firmness of prices that participants see on ParFX and the ability to execute on these prices is one of the platform’s primary principles. We have protocols and mechanisms in place to enable this to happen, such as randomised order entry, full trading transparency and the distribution of market data in parallel. This ensures participants in our trading environment operate on an equal playing field, while instances of latency-led disruptive behavior occurring is reduced significantly.

Sterling’s Biggest Jump In Six Years

What a manic Monday. We’re looking at the Pound’s biggest single-day jump in nearly six years.

Sterling rallied following as opinion polls suggesting a swing in favour of voters opting to remain in the European Union at this week’s referendum.The pound climbed 1.4pc to USD 1.4560 after rising as high as USD 1.4625 earlier, sending the perceived safe-haven yen down.

The implied probability of a Remain vote in Thursday’s referendum rose to 72 percent after falling as low as 60 percent last Thursday, according to odds from gambling website Betfair. The 23 June referendum is still wide open, however, but the leave no longer seems the overwhelmingly likely scenario.

To read further insight from the DailyFX team on the market impact of a potential Brexit and other currencies movements, visit the website.

A Buy-Side Blind Spot Is Vanishing: High-Touch Desks See Best-Ex Scrutiny

The buy side is closing a major gap in its best-execution due diligence: The order routing practices of high-touch trading desks are falling under intense scrutiny previously reserved for self-directed trading tools. This increased attention presents a major challenge for brokers that use a variety of low-cost algorithms from multiple providers, since they have limited knowledge of how those algorithms route orders, let alone control over their behaviour

David Mechner, CEO of Pragma Securities, a multi-asset algorithmic trading provider, analyses growing demand among buy-side institutions for greater transparency around order routing practices and best execution.

Read the article

Big Data – Going Beyond The Hype

It can be difficult at times to separate the hype that surrounds big data from the reality. Nevertheless, big data will continue to transform how companies operate. Whereas in the past data was often the by-product of an operational process, it is now the primary asset that drives business decisions. What specifically will it mean for investment banks?

Diane Castelino PH.D, Data Science and Research Lead At Mosaic Smart Data takes a look at how this technology can be applied to the financial services industry in the second of her series on the practical application of new and emerging technologies.

Read the article

Will a Brexit damage the City?

With less than two weeks to go, the debate on whether the UK should remain or leave the European Union is heating up.

Back in April, Chatsworth’s research team polled over 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Two-thirds (65%) of respondents believed a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believed a Brexit would have a positive impact.

Now with the Financial Times Brexit poll tracker indicating a slim lead for the leave camp, it’s hard to tell which way the referendum will go. However, a growing number of bankers are warning of the possible damage a Brexit could cause to the City of London and the financial services sector. According to an article published on the Financial Times website, the City employs 2.2 million people across the UK. If the UK were to leave the EU, then it would no longer be possible for non-EU firms to headquarter European operations in London and continue to trade across the union without barriers. A Leave vote would likely see offices opened in Paris or Frankfurt whilst non-EU firm UK offices would be downsized, potentially putting jobs at risk.

Fintech Innovation In The Capital

A Q&A with Matthew Hodgson, CEO of Mosaic Smart Data

Why is FinTech innovation in London gaining traction compared to other areas of the world?

London is almost perfectly positioned at the intersection of finance and technology. In the last 24 months, the Capital has acted as a hotbed for venture capital investment for a variety of FinTech firms pioneering new technologies designed to disrupt traditional business models, but also to enhance existing ones through collaborative partnerships with established financial services providers.

 Which areas of financial services have been most impacted by FinTech development? 

Within the fintech sector, the field of data analytics has quickly become the new opportunity in financial markets. The ability for financial institutions to move beyond the realm of ‘big data’ by applying real-time analytics on multiple sources of electronic trade data is already providing the most technologically astute banks, hedge funds and asset managers with significant competitive advantage.

However it is the ability to harness predictive analytics that remains at the cutting edge. Much of this capability already exists and is being used to considerable effect, especially by technology giants such as Google and Facebook.

The technology will allow financial institutions such as banks to gain deeper insight into client trading behaviour, ensure higher levels of client retention and shape product and services offering to maximise future revenue opportunities. Gartner, a Harvard research institute has predicted that by 2017, firms with predictive analytics in place will be 20% more profitable than those without.

For some traditional companies is it purely a case of ‘adoption’ rather than ‘disruption’ behind rise of the fintech sector?

The financial technology market has exploded in recent years. Innovation is driving major improvements in the level of service experienced by the end user, however when it comes to financial services, businesses are naturally more wary of the type of ’disruptive’ technology that has transformed other areas of our day-to-day lives such as calling a cab or booking holiday accommodation – after all, we can always call another cab if our Uber doesn’t turn up, but if a billion dollar payment doesn’t reach its intended recipient we have a much more complicated issue on our hands.

The institutional financial services space is much more about collaboration between fintech firms and established players – it is this combined firepower that delivers truly sustainable technological innovation.

Should investment banks or lenders move to disrupt their own business model to avoid losing market share?

Many traditional service providers such as global investment banks are coming to the realization that they need to partner with emerging innovators. 

As such, finance and technology has become synonymous, and data analytics, in particular, is moving to the forefront of efforts to provide new solutions to on-going market challenges.

However, for large players such as global investment banks, the integration of new and specialist fintech solutions should be implemented on a modular basis to work in collaboration with existing systems. In many cases, the reality of effective integration is one of evolution, rather than revolution.

The Currency Ethicist: One Man’s Push to Fix a Tarnished Market

Last week, the Bank for International Settlements launched a code of conduct for market professionals operating in the world’s largest and most liquid financial market – foreign exchange – and in doing so, laid out its vision of how banks, asset managers, hedge funds, corporates and infrastructure providers should behave and operate when exchanging an estimated USD5.3 trillion a day.

At the heart of this initiative was David Puth, Chairman of the BIS Market Participants Group. A former JPMorgan Chase & Co. and State Street Corp. executive, David led the initiative alongside his role as chief executive officer of New York-based CLS Group, a utility that settles trillions of dollars of currency transactions a day and is considered by the U.S. Treasury to be a systemically important piece of the financial system.

He spoke to to Bloomberg about the importance of developing industry-led guidance around trading behaviour and best practice requirement, and how the code of conduct aims to provide a common set of guidelines to promote the integrity and effective functioning of the market.

Read the article, or watch the Bloomberg interview

Euromoney FX Rankings 2016: Shuffling The Deck

The constitution of the FX market is changing – it is no longer the exclusive preserve of banks, with a non-bank prop fund breaking into the top 10 for the first time, despite solid continuing performances from City, JP Morgan and UBS.

The release of Euromoney’s annual FX rankings for 2016 showed some significant changes in the performance of global banks at the top flight of the table, but also the rise of non-bank challengers such as XTX Markets, which secured 9th position ahead of Morgan Stanley, with a 3.87% market share on debut.

Relative to competition from other major banks, Citi strengthened its position with a 4% lead at the top of the table, despite an overall year-on-year decline in comparison to its 2015 figures. This decline in volume was mirrored across the top 5 global banks, as FX trading divisions struggle to tackle growing compliance and cost challenges. Over a 7-year period, combined market share among this group has fallen almost 17% from a high of 61.5% in 2009.

Deutsche Bank continues to undergo restructuring and cost cutting and suffered heavy falls across FX Spot and FX Forward markets, while retaining its crown in the FX Options market. Overall, the bank fell from second to fourth, losing almost half if its 2015 market share.

As many banks continue to face balance sheet pressures and the constraints of capital requirement rules, non-bank liquidity providers have in many cases flourished. Beside major gains by XTX Markets, Tower Research Capital, Jump Trading, Virtu Financial, Lucid Markets and Citadel Securities all secured a top 50 ranking.

According to Euromoney, total volumes taken into account for the 2016 rankings amounted to almost USD 95 trillion. Foreign exchange settlement volume from Chatsworth Client, CLS, hit USD 4.96 trillion in April, up 5.7% from the previous month, and up 6.9% from the USD 4.64 trillion in April 2015.