FX Operations and Credit: Hampering Liquidity, Raising Costs (White Paper)

The FX market currently looks like the ultimate mismatch. Front office processes have been transformed to accommodate the realities of electronic trading – operations and credit haven’t. This is acting as a drag on FX liquidity, as well as imposing an enormous cost burden: ~£20bn per year for the top global investment banks and buy-side institutions. Fortunately, as Anoushka Rayner, Global Head of Sales and Business Development at Cobalt explains, there is a simple and readily achievable remedy: centralised standardisation.

The FX market has a proven track record for acting on its own initiative to ensure that trading is always orderly and unnecessary risks are curtailed, with the creation of CLS an obvious example. There is now a pressing need for it to act in similar fashion to address the issues of post-trade processing and credit management.

Operational Drag

The FX front office has evolved to accommodate the shift from a voice brokered market – resulting in transparency, efficiency, liquidity and consistency – by bringing counterparties together so they can interact more effectively. In doing so, all participants have benefited from lower frictional costs and greater transparency.

Sadly, the same cannot be said of FX post-trade processing, which still uses much of the same basic infrastructure it used to support voice broking. In two decades, it has remained essentially unchanged, resulting in legacy processes/practices that are wholly unsuited to supporting electronic trading as conducted in today’s FX front offices. These processes/practices are also excessively costly, to the extent that post-trade costs can now even exceed the potential profit from the execution of a trade.

At the core of the problem are the fragmentation, replication and complexity of internal processes. This is hardly surprising given that at least 23 services are usually involved in managing current FX post-trade activities, which inflates both costs and operational risks. Multiple vendors are needed, as are multiple copies of the same trade (20+ is not untypical). At the same time, existing legacy processing technology cannot keep up with market evolution and so requires additional outlay to pay for the manual processes needed to cover its shortcomings.

In some cases, extremely costly processes persist. These could be dispensed with altogether in a more efficient processing environment. A case in point are confirmations, the costs of which at some top tier FX banks – just for their EB and PB businesses alone – run to nearly USD5mn per year.

Attempts to respond to changes in the front office by changing post-trade methods have also made the situation worse, as new substandard processes are layered on top of an already fragile and inefficient process stack. Each new process added therefore effectively exacerbates an already suboptimal process flow, in terms of both cost and risk.

These issues apply across all FX-related instruments, which when one considers that volume in uncleared FX derivatives (a market approximately twice the size of spot) totaled ~USD88trn at 2018-year end, illustrates the sheer magnitude of the problem. In fact, for FX derivatives, the risks and costs of these operational limitations are even more acute, as the processes involved are more complex than for spot.

These issues are collectively hampering the FX market’s overall efficiency and growth. This applies across bank to client, bank to bank and prime brokerage segments. In some cases, it is already causing market distortion, such as driving participants to review their position in FX prime brokerage. Given the FX market’s established reputation for resolving structural issues of this nature, it should be possible to find a solution internally, rather than directly involving external bodies, such as regulators.

Credit

A related area that is also creating unnecessary cost and risk – as well as damping liquidity growth – is credit management. Given the large trading volumes now conducted via API and at high frequency, FX is probably the market least tolerant of latency. Yet despite this, antiquated and fragmented credit management processes still persist, causing significant practical problems. Workaround remedies have emerged in an attempt to address these but create different problems instead. Credit kill switches are a case in point, because they can create disputes when clients find themselves having to reduce positions at unfavourable prices and also requiring a manual unwinding process, exposing both clients and banks to further issues.

Credit-related risks, such as over-commitment, still remain stubbornly high, while workaround remedies actually reduce credit efficiency, such as over-allocating to accommodate localised management of credit within venues. Costs are also an issue in credit management, with top tier banks spending considerable amounts unnecessarily on redundant/inefficient credit processes and technology.

The Remedy

The good news is that a solution is already entirely achievable at technical level. The obvious remedy is a single centralised shared ledger platform using standardised data that can handle all the necessary post-trade activities (plus credit) in one solution. It would mean that compliance with many of the principles in the GFXC’s FX Global Code of Conduct could become an achievable and immediate reality rather than merely being aspirational. A case in point is the principle relating to real time monitoring of trading permissions and credit provision

A centralised industry shared ledger platform would deliver multiple practical benefits across the market place. The most obvious would be to eliminate duplication and cost saving. Instead of running multiple versions of inadequate processes, participants could handle trades using a single set of consistent industry-standard processes. In the long term this could deliver cost savings of up to 80%, with ~50% possible in the medium term.

An additional benefit is cost transparency. In the current environment, with the accumulation of multiple layers of legacy operations and credit technology/processes, it is often extremely difficult to determine the post-trade cost of a transaction. A central standardised process would by contrast make the measurement and monitoring of post-trade costs straightforward and potentially deliver the same degree of transparency as already available for FX execution costs.

This shared ledger approach would also deliver various credit management benefits. For instance, the availability of near real time credit data would enable more efficient credit processes, such as:

  • Preventing erroneous credit cut-offs (thus improving client relations)
  • Making more efficient use of available lines
  • Avoiding over-commitment risks
  • Alleviating balance sheet pressure

Centralising credit management using a shared ledger enables more dynamic control across all types of trading relationship (bilateral, tri party and quadri party). This will dispense with the need for over-allocation and rebalancing in order to accommodate localised management of credit within venues. Those issuing credit will also be taking control of it (as is the case in equity markets) and will therefore be able to recycle it back into the market in the most efficient manner (a key consideration for non-CLS currencies and non-CLS members). Ultimately this will result in venues receiving business because they offer the best price, not because there is residual credit left at them.

In operational terms, workloads will also reduce when using this sort of solution, as less remediation will be required. Efficient credit management and automated processing will drive a reduction in failed trades, thereby also reducing the need for manual intervention and repair.

Liquidity and Regulation

The cost and efficiency benefits delivered by a centralised industry shared ledger platform have important implications for liquidity and market participation. Trading volumes in G7 pairs have been declining in recent years for a variety of reasons, but operational/credit inefficiencies are clearly playing some part if they are cutting trade margins to near zero.

If individual ticket processing costs decline significantly, then logically this will boost existing participants’ willingness to trade, both in general, but also potentially in smaller transaction sizes. By the same token, new participants may be encouraged to join the market once they can see that the processing cost burden and operational risks have been alleviated.

Finally, there are also prospective regulatory advantages to the FX market adopting a centralised shared ledger solution. Some regulators are already clearly aware of the issues, as shown by the FCA and BoE’s convening of a ‘Technology Working Group’ to reform post-trade processing so as to reduce complexity, encourage innovation, and improve systemic resilience. A shared ledger platform could support this initiative in various ways, but one of the most obvious is with regulatory filings.

At present, participants (often using manually intensive processes) incur substantial costs collecting trade data and submitting it to regulators. Market-wide adoption of a shared ledger solution would instead make it possible for participants to submit regulatory filings far more easily, plus do so in a consistent format. This would enable better monitoring of any potential systemic risks, plus delivering lower regulatory costs for all concerned (including regulators). Central banks could send a strong message here by adopting a shared ledger solution for their own trading activities, which would also serve as a clear signal to the organisations they regulate.

Conclusion

Adopting a single centralised utility for FX post-trade functions based on a common data standard ticks numerous boxes for all market participants. These include considerable cost savings, reduced credit/operational risks and better use of balance sheet, which in turn also facilitate greater trading activity and more diverse participation, as well as enhanced price discovery and lower regulatory overheads. Finally, it will also reinforce the FX industry’s existing reputation for innovating in the common interests of all market participants.

A new drive has launched to develop multi-trillion dollar trade as an asset class

Fourteen leading global financial institutions have launched a drive to use technology and standardisation for the wider distribution of trade finance assets.

ANZ, Crédit Agricole CIB, Deutsche Bank, HSBC, ING, Lloyds Bank, Rabobank, Standard Bank, Standard Chartered Bank, and Sumitomo Mitsui Banking Corporation are among the banks backing the Trade Finance Distribution Initiative (TFD Initiative).

TFD Initiative is powered by Tradeteq, the global trade finance distribution platform. Tradeteq’s technology allows banks and institutional investors to efficiently connect, interact, and transact.

The International Chamber of Commerce (ICC) United Kingdom and the International Trade and Forfaiting Association (ITFA), the leading international association for banks and financial institutions involved in cross-border trade and forfaiting, have each joined TFD Initiative as an observer.

Trade finance is private financing that helps businesses cover mismatches between payment obligations and payment receipts resulting from the buying and selling of goods and services. It is a vital piece of the financial sector that supports importers and exporters as they conduct their trade activities.

Trade finance presents a compelling multi-trillion dollar investment opportunity for institutional investors seeking sources of attractive risk-adjusted returns with low correlation to stocks or bonds. TFD Initiative will initially focus on creating common data standards and definitions to enhance operational efficiency and improve risk management, creating a blueprint for global trade finance asset distribution.

Surath Sengupta, Global Head of Trade Portfolio Management at HSBC said: “As the world’s number one trade finance bank1 , HSBC is at the forefront of the industry in harnessing the power of new technologies to make trade faster, safer and more competitive. While trade finance is currently an attractive asset class for banks, we believe technology will unlock investment from non-bank investors by removing complexity and making the underlying asset data both more structured and accessible.”

Nicolas Langlois, Managing Director and Global Head of Trade Distribution & Liability and RWA Optimization CSDG & Transaction Banking at Standard Chartered Bank, commented: “Closing the financing gap in trade finance is about providing financing to small and medium sized enterprises. This requires developing new digital solutions to package those portfolios in a standardised format accepted by a broad range of investors and to achieve speed of execution.”

ANZ’s Damian Kwok, Head of Trade Portfolio Management and Head of Trade and Supply Chain, Australia, New Zealand, Pacific, observed: “Trade Finance is the lifeblood that is needed to support businesses and enable them to thrive in our communities. Therefore, it is imperative that the financing community continues to work together to support the growing requirements.”

Anthony van Vliet, Global Head of Trade & Commodity Finance at ING, said: “In Trade & Commodity Finance, it’s all about connecting global supply chains in food, energy and industrial activities. By bundling the expertise of global banks, the TFD Initiative bridges the gap between the US dollardominated commodity trade finance sector, and institutional investors who are not traditionally engaged in this part of the real economy.”

Sumitomo Mitsui Banking Corporation’s Kazuo Yoshimura, General Manager, Global Head of Supply Chain Finance, Global Trade Finance Department added; “Trade growth is vital for continued economic growth and global development. Bringing alternative investors into trade finance will provide additional funding to corporates globally. It is, therefore, that SMBC welcomes the Trade Finance Distribution Initiative as a playing a crucial role in establishing trade finance as an asset class.”

Naeem Khan, Global Head of Trade Finance at Crédit Agricole CIB said: “We anticipate growing needs in terms of automation of the trade finance distribution market which will enhance investors’ reach and bring distribution efficiency. This is a key step in the right direction to facilitate global trade finance market growth.”

Shaahien Mottiar, Head of Trade: Southern & Central Africa and Head of Trade Asset Management at Standard Bank, said: “The application of technology is now enabling the involvement of non-traditional trade participants and investors. The TFD Initiative is a catalyst in driving the growing modernisation of trade and trade finance, and in developing an asset class directly connected to real economy transactions. For developing markets this means bridging the gap between perceived and real risks, and in-turn, creating opportunities for renewed sustainable growth and development.”

Shaahien Mottiar, Head of Trade: Southern & Central Africa and Head of Trade Asset Management at Standard Bank, said: “The application of technology is now enabling the involvement of non-traditional trade participants and investors. The TFD Initiative is a catalyst in driving the growing modernisation of trade and trade finance, and in developing an asset class directly connected to real economy transactions. For developing markets this means bridging the gap between perceived and real risks, and in-turn, creating opportunities for renewed sustainable growth and development.”

“I believe the TFD Initiative offers the opportunity to create a global network for trade originators and liquidity providers to connect, interact and transact efficiently, thereby establishing trade finance as an easily accessible and attractive asset class for non-bank institutional investors,” concluded André Casterman, Board Member at Tradeteq.

To learn more about TFD Initiative and to read the white paper or enquire about membership, please go to www.tradefinancedistribution.com.

ParFX wins top accolade at Central Banking Awards 2019

ParFX, the wholesale electronic spot FX trading platform, has been named the winner of the Financial Market Infrastructure Services Award at the Central Banking Awards 2019.

The Central Banking Awards recognise extraordinary examples of public service, pioneering activities, best practice in policy, governance, economics and management and innovative practice in service provisions by market practitioners.

ParFX was selected as the winner by the Central Banking Awards Committee in recognition of its significant contribution to improving efficiency and reducing risk in the financial system. The committee comprises members of Central Banking’s editorial staff and the Editorial Advisory Board, chaired by Central Banking’s Editor Christopher Jeffery.

Roger Rutherford, Chief Operating Officer at ParFX, comments: “Central banks have played a prominent role in promoting best practice and improving standards in the FX industry. Winning this award is strong validation from this important community of ParFX’s work to increase fairness, equality, and transparency in the FX market.

“Since the platform’s inception five years ago, we have contributed to and brought about the industry-wide dialogue that led to the development of the FX Global Code, which is already making waves across the market. This is a very positive start to 2019 for ParFX, and we are looking forward to continuing our mission to improve trading behaviour in the FX market.”

Chris Jeffery, Editor-in-chief of Central Banking Publishing said: “Central banks have worked hard to instil best practice within the USD 5 trillion-a-day foreign exchange market but there are many areas where it is difficult to mandate a truly global change. ParFX has supported the central banking community by leading an effective market effort that has helped to create a better functioning FX environment.”

ParFX was founded in 2013 and is governed by a group of leading global FX institutions. The company was one of the first trading platforms to commit to the FX Global Code and it continues to attract business from all segments of the FX market.

ParFX’s top 10 most active counterparties are now equally split between the largest banks and non-banks, demonstrating how all market participants are attracted to the platform’s principles and seek to engage in good trading behaviour in a fair and transparent trading environment.

Holiday season slump begins early – November Spot FX Volumes

As investors start to wind down their activities in November to prepare for the fast-approaching holiday season, volumes were down across all platforms with the exception of Fastmatch, which saw volumes rise for the first time in five months.

Volumes

EBS reported a 1% decrease in spot FX trading activity, with volumes dropping from $88.7 billion in October to $81.6 billion in November. On a year on year basis, volumes saw a 0.5% drop.

Refinitiv’s spot FX volumes shrank 4.3% both month on month and year on year, recording an ADV of $90 billion in November.

Fastmatch reported a rise in volumes in November for the first time in five months. Its volumes saw a 5.7% increase from October to $20.3 billion and a 12.8% increase when compared to the same period last year. A promising sign for the firm following public difficulties in 2018.

Cboe FX experienced a drop with spot volumes decreasing by 5.5% from October to $34.6 billion. Year on year growth was 1.8%.

FXSpotStream continued its strong performance, recording a higher ADV than Cboe FX (formerly Hotspot) for the first time in its history. Its ADV in November was $35.5 billion – down marginally from October but up an impressive 61.1% year on year.

CLS reported a spot FX volume of $455 billion, representing a 4.3% decrease from the $471 billion reported in October.

 

Summary of top stories

 

GFXC holds two-day meeting in Paris

As reported in FX Week, the Global Foreign Exchange Committee met at the end of November in Paris to provide an update on progress so far. It plans to publish the findings of the cover-and-deal and disclosures working groups in 2019 – something to keep an eye out for as the Code gathers momentum.

British cartel traders acquitted of rigging currency market

Three British traders were acquitted of using an online chatroom to fix prices in the $5.1 trillion-a-day foreign exchange market. Galen Stops, editor of Profit & Loss pondered whether a jury outside of financial-friendly New York would’ve came to the same conclusion in an opinion column in November.

CME finalises acquisition of Nex

On November 2, 2018, CME Group completed the acquisition of Nex. The company estimates $200 million in run-rate cost synergies annually by the end of 2021 from this buyout.

Trading firm XTX picks Paris for post-Brexit EU hub

As reported in Reuters, leading electronic market-maker XTX Markets said it had chosen Paris as its European Union hub after the UK exits the bloc so it can continue to trade across Europe after Brexit.

 

Tweets of the month

 

Katie Martin on bursting bubbles…

So, the sterling experienced a bit of volatility in November…

Clear evidence incumbents aren’t ready for the fintech revolution…

 

SWIFT and CSD community advance blockchain for post-trade

SWIFT and seven central securities depositories (CSDs) have signed a Memorandum of Understanding (MOU) to work together to demonstrate how distributed ledger technology could be implemented in post-trade scenarios, such as corporate actions processing, including voting and proxy-voting.  The group will investigate the types of new products that can be built using it, and how existing standards such as ISO 20022 can support it.

Abu Dhabi Securities Exchange, Caja de Valores, Depósito Central de Valores, Nasdaq Market Technology AB, National Settlement Depository, SIX Securities Services and Strate Ltd are among the CSDs participating in the DLT project with SWIFT. Additional CSDs are expected to join in the coming weeks.

“To ensure interoperability and smooth migration, it is crucial that new technologies support existing common standards such as ISO 20022,” says Stephen Lindsay, Head of Standards at SWIFT. ““ISO 20022 is a messaging standard but also defines terminology across asset classes and corporate actions. An agreement on using the same set of definitions and concepts is important, as they will be independent of the technology or data format.”

R3 distributed ledger consortium strengthens presence in Asia

The consortium, which launched twelve months ago with 9 members, continues its rapid expansion with the newest addition of China Foreign Exchange Trade System (CFETS).

In recent months, R3 has seen continuous growth in Asia, with Asia-based firms Ping An and AIA announcing their membership with the R3 consortium earlier this year.

The recent 2016 Fintech Innovators Report, which evaluates and ranks the world’s top 100 fintech companies, showed that firms based in the Asia-Pacfic region claimed 5 of  the top 10 positions, so it’s no surprise that start-ups are flocking to the continent.

CFETS will join neighbouring Asia-based firms at the R3’s Lab and Research Centre, to develop Corda™, its shared ledger platform specifically designed to record, manage and synchronise financial agreements between regulated financial institutions.

David Rutter, CEO of R3 comments: “Acknowledging the Chinese renminbi’s growing prominence in trading and the crucial role China holds in the global financial markets, we are delighted to welcome CFETS to the R3 consortium. Their expertise will be an enormous asset as we develop universal applications for distributed ledger technology across increasingly globalised financial markets.”

Zaiyue Xu, Executive Vice President of CFETS, comments: “CFETS is committed to establishing technical standards and improving the ecosystem of China interbank market, and we have noticed that blockchain is an emerging technology with great promise to reshape the market.  Through cooperation with R3, we hope to build the infrastructures and platforms for blockchain application in the financial market together with international counterparts.

 

Standardised netting of FX payments moves closer to reality

In a guest post for Fintech Focus, David Puth, CEO of CLS, explains how standardised netting of payments can deliver greater efficiencies for the foreign exchange market.

Leaders from the financial services and technology industries are descending on the Sibos conference in Geneva this week. This annual gathering of the buy-side and sell-side, fintechs and transaction banking specialists showcases the very best in technology, innovation and ideas that ensure financial technology continues to shape the way business, finance and commerce operates.

While some areas of financial markets and technology have undergone significant development over a number of years, there is clearly an opportunity for post-trade partners to do more – including in foreign exchange (FX). CLS sits at the heart of this market and sees approximately USD5 trillion of payment instructions settle through our core service every day.

In the search for ever more ways to improve liquidity and efficiency, we are focused on innovation centering on the payment efficiency of our clients’ underlying supporting infrastructure. For traders in a market of such size and scale, efficient netting of payments can have a significant impact on intra-day liquidity demands and an institution’s overall ability to effectively manage risk.

The inception of CLS in 2002 addressed many of these issues for institutions that use our services. Our role is to protect our settlement members, 66 of the world’s leading financial institutions, and 21,000 of their clients, from the most significant risk in the FX market – settlement risk.

Time for innovation

However, not all currencies or market participants access our core settlement service. And while some participants are currently capable of bilateral payment netting for trades not settled in CLS, this practice is not universally adopted. Various bespoke approaches to payment netting lack standardisation, scalability, and efficiency, which in turn increase operational risk. Therefore, many institutions limit their payment netting activities to their larger counterparties.

In addition, many FX market participants across the buy-side and sell-side do not use bilateral payment netting and instead settle a significant portion of their non-CLS trades on a gross basis. Gross settlement without netting requires access to deep liquidity, which requires institutions to allocate more collateral and capital.

To address this gap in the market, we are working closely with the global FX market community to develop CLS Netting, a standardised, bilateral payment netting solution for all market participants, regardless of whether or not they currently have access to CLS.

Netting already forms a crucial part of our settlement offering and the facilitation of standardised netting for a wider group of institutions will significantly improve the way currency payments are netted across the globe, with tangible benefits for clients.

Participants will be able to submit FX instructions for six products and 24 currencies. In addition to the 18 currencies CLS currently settles, we will offer payment netting for the Chinese renminbi (offshore), Czech koruna, Polish zloty, Russian rubble, Thai baht and Turkish lira.

CLS Netting will standardise bilateral matching and payment netting in these currencies, manage payment netting positions through a single interface and enable automated reconciliation. This will decrease the volume of payments manually initiated, resulting in fewer late or failed payments.*

The strong appetite for a globally standardised netting service is demonstrated by the desire of leading international financial institutions to become early adopters. So far, 14 have committed to work with CLS, including: Banco Actinver, Bank of America, Bank of China – Hong Kong, Bank of Tokyo-Mitsubishi UFJ, Citibank, FirstRand, Goldman Sachs, Goldman Sachs Asset Management, HSBC, Intesa Sanpaolo, JPMorgan Chase, Morgan Stanley, Neuberger Berman, Northern Trust – with others joining this group in due course.

Use of distributed ledger technology

The speed at which technological innovations are developing leads us to focus our efforts on those post-trade processes where change is possible. Our goal is to continue to expand and develop the service with new currencies, products, and technologies, and the adoption of distributed ledger technology (DLT) will be central to this.

In addition to submitting FX instructions over existing SWIFT-based channels, participants will have the option of connecting directly to CLS Netting via a highly secure, permissioned distributed ledger, administered by CLS.

As a founding member of the Linux Foundation’s Hyperledger Project, we have long acknowledged the benefits of distributed ledger technology and have worked diligently over the past 12 months to explore how DLT can be used to improve efficiencies, security, and resilience in the global FX community.

It is crucial that the basic fabric of any distributed ledger technology we use for the CLS Netting platform adheres to high standards and resilience. We will incorporate DLT capabilities in a way that is meaningful to our members and participants, and we believe it has enormous potential.

To facilitate broad adoption amongst industry participants, we will collaborate with IBM to develop the underlying technology, which will be based on the Hyperledger fabric rather than a proprietary solution. IBM is a key member of the Hyperledger Project and has been a partner of CLS since our inception. Our partnership creates the foundation for new technology that can be applied not only to CLS, but more broadly across the financial industry.

 

Cybersecurity: could a global standard be the answer?

A committee of central bankers are working with the Bank for International Settlement (BIS) to explore ways of tackling the threat cybersecurity poses for the financial services industry – in the first initiative designed to set a global common standard.

With cyber attacks against financial services firms continuing to escalate, the need to standardise best practice across the industry has becoming a pressing issue for many.

According to a PWC report, in 2015, 38% more security incidents were detected than the previous year, while theft of hard intellectual property increased 56% in 2015.

As the volume and severity of security breaches increases, regulatory organisations and governments are also voicing concern. The FCA recently reported a huge spike in the number of reported incidents, from just five in 2014 to 75 in 2015. While these numbers are likely to only touch the tip of the iceberg when compared to those attacks that go unreported – the statistics still present a worrying trend.

New York Gov. Andrew Cuomo has also proposed cyber security regulations for banks, which would increase the onus on technology departments to invest in cyber protections. The prospect of mandated investment in cyber security comes at a difficult time for the banks, as they grapple with compliance issues and growth in competition from non-bank firms.

Yet, many institutions are already taking proactive measures. A 24% rise in security budgets split across a number of initiatives designed to mitigate the risk of cybersecurity breaches, such as employee awareness programmes and enhanced monitoring tools, appears to be paying dividends. PWC noted a 5% decline in financial losses associated with cyber attacks in a year-on-year comparison.

However, the absence of a common standard has led to discrepancies in the ability for some financial institutions to handle online attacks, something that has become particularly apparent in developing economies across Asia.

With up to 90% of Asia-Pacific companies targeted by cyber-attacks this year, a 76% rise from the year before, many firms are playing a high price for breaches online.  $81.3bn out of a global total of $315bn was lost to cyber-attacks in the region exceeding those in North America and the EU by about $20bn.

Yet, the consequences of a security breach are also reputational. With many financial services firms acting as custodian for sensitive  information – the need to stop data from entering the wrong hands is a critical issue.

But there is now growing recognition that a proactive, cross border response is required. Recent attacks affecting Bangladesh, the Philippines, Taiwan, Thailand, Vietnam, and Japan, have prompted officials to gather in Singapore next month to discuss how these economies can mitigate the impact of cyberattacks.

Already this year, Japan has made proactive moves to introduce reforms that will allow the country’s banks to invest directly in technology to defend against cyber-attacks.

While national programmes designed to increase cybersecurity is certainly a step in the right direction, the need for a common global standard should not be underestimated.

Much like the global Code of Conduct for the foreign exchange market, also spearheaded by the BIS, a solution must be universal in its application to instigate comprehensive, rather than siloed progress.

BIS FX Code of Conduct Offers Reasons For Optimism

Chris Salmon, Executive Director of Markets at The Bank of England, highlights the reasons to be optimistic about the new FX Code of Conduct, which will launch in London next May.

The BIS Code of Conduct is arguably one of the largest, most ambitious and comprehensive efforts to introduce globally-accepted standards and guidelines to govern conduct and behaviour in the foreign exchange market.

Initiated in 2015 by the Bank for International Settlements (BIS), it is designed to establish a single, global code of conduct for the wholesale FX market and promote greater adherence.

The process is well advanced and remains on track to launch in May 2017, according to Chris Salmon, Executive Director, Markets, Bank of England. As a senior official at the UK’s Central Bank, he is actively involved in the development of the Code. His speech at the ACI Financial Markets Association in London provided great insight into why global regulators and market participants remain positive about the final Code.

Chris Salmon highlighted four reasons for optimism. The first is the substance of the Code itself. It will directly address the complexity of the FX market and provide guidance where it is necessary, he says.

Secondly, he reiterated the importance of keeping the Code up to date. Its completion in just two years means it should be relevant for today’s market when published. Importantly, he adds, the new Code will not be allowed to stagnate; the BIS is committed to developing an appropriate review mechanism so that the Code stays up to date and evolves as the market evolves.

Third, the process for developing the Code is inclusive and unprecedented in many ways. The Code will apply to the buy-side, sell-side, non-bank participants, trading platforms and other market infrastructure providers. Therefore, there is engagement from all types of key market participants, including 40 members of the Market Participants Group (MPG), chaired by CLS CEO David Puth, and regional FX Committees. This ensures the final Code will get buy-in from a wide range of diverse market participants.

Lastly, he highlighted how the Code is one of a suite of important initiatives that have launched in recent years to improve conduct in FICC markets. Initiatives such as the FICC Market Standards Board, created as a direct consequence of the Fair and Effective Markets Review, and UK Senior Managers and Certification Regime, soon to be extended beyond banks to all FCA authorised firms, will aim to raise standards of market conduct by strengthening the accountabilities of senior management. These initiatives, combined with a greater focus on conduct, create a supportive environment for the objectives of the Code.

While this will be received well by the FX market, he also cautions that the Code will only rebuild trust if it is actively used by market participants and drives a market-wide shift in culture and attitudes – one that embeds behavioural norms that are consistent with both the letter and spirit of the Code.

This type of cultural shift is not something that can be mandated; ultimately, that change must come from the industry. Firms that assimilate the Code fully are likely to benefit, over time, from greater trust in the marketplace, a stronger reputation, and a higher long term franchise value.

Individually, firms and senior personnel should start considering the steps they will take to support the Code. In a world where competition for market share remains fierce, winning the trust of clients matters financially.

To this end, Mr Salmon recommends three elements be put in place to realise the benefits of the Code.

First, the Code needs to be embedded in firms’ practices, training and education; second, firms should have the right policies and procedures in place to ensure that they are able to monitor how successfully they have embedded the Code; and third, firms should be able to demonstrate publicly that their behaviour and practices in the FX market are in line with the Code’s principles.

The first phase of the Code was well received by the FX industry, and there is no doubt that the widespread use of a common public attestation could be a powerful tool. It would provide a strong signal of a firm’s commitment to following good practices and rules that are applied internationally across borders.

The launch of the second phase will be an important milestone in the industry’s efforts to reaffirm trust in the FX market. It is no secret that all has not been well in FX or FICC markets more generally; the completion of the Code of Conduct, and its application amongst individual firms, will send the right signal to clients, regulators and employees.

The full speech by Chris Salmon can be found here.

Blockchain set to streamline reference data market

Blockchain consortium R3 CEV have announced a collaboration with capital markets technology provider Axoni, to test how blockchain technology can be used to enhance the reference data market. The project, which also involves Alliance Bernstein, Citi, Credit Suisse and HSBC is the latest example of how the financial services industry is finding new applications for the technology.

Reference data has become a real issue in financial markets of late as it accounts for up to 70% of the data used in transactions, but continues to be supported by legacy technology that often requires manual processing and constant upkeep. With reference data adding significantly to operational costs and ultimately affecting the bottom line for cost conscious institutions; it is a market ripe for innovation. 

Moreover, as the market continues to grapple with regulatory measures designed to ensure firms manage and maintain the quality and accuracy of their reference data, many are now exploring the possibility of streamlining the process via a distributed ledger. 

In partnership with Axoni, R3 CEV recently completed a multi-month proof of concept (PoC) exercise, coordinated by Credit Suisse. The prototype was created using Axoni Core to simulate the management of reference data on the blockchain, and also inform corporate bond issuance. The technology enabled participants to interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, unchangeable record of all data related to the bond.

David Rutter, CEO of R3, comments: “Quality of data has become a crucial issue for financial institutions in today’s markets. Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data. Distributed ledger technology – which allows financial institutions to push these functions to a cloud environment – removes the need to reconcile multiple copies of data, providing a sophisticated and agile solution to the headaches currently caused by these legacy systems and processes.”

Whilst the study of distributed ledger technology’s application to reference data is still in its early stages, this project marks the first step in testing its potential.  

What to expect at SIBOS 2016

With over 8,000 business leaders set to descend on Geneva for the annual SIBOS conference next week, this year’s event comes at a poignant time for the industry.

More than 200 exhibitions and hundreds of conference sessions will take place over four days, bringing together decision makers from banks, market infrastructure providers, multinational corporations and technology vendors.

With the industry continuing to grapple with a number of developing issues, from the emergence of disruptive technology and the ongoing impact of regulation and cyber crime to the potential implication of a Brexit, there is plenty to talk about.

The theme of this year’s event, ‘Transforming the Landscape,’ will explore issues surrounding the future of payments, securities, cash management, trade and financial crime compliance.

To help you keep track of what to look out for, we’ve picked out some key highlights from the programme agenda:

  • Cyber resilience in a changing world, Monday 26 September, 09.00 – 10.00
  • Patterns of disruption in wholesale banking, Monday 26 September 09.30 – 11.15
  • Insights on Blockchain: a panel discussion of early adopters hosted by IBM, 26 September, 11.30 – 12.00
  • When RegTech meets FinTech: the day after tomorrow – How technology disruption intersects with regulation in securities, 27 September 10.15 – 11.15
  • Fintech hubs – EMEA, 27 September, 12.45 – 13.45
  • After the Brexit, what’s next: A BRICS-it towards a multilateral financial system?, 27 September, 15.30 – 16.30
  • Machine learning – The future of compliance, 28 September, 09.00 – 10.00
  • Open API’s and the transformation of banking, 28 September, 16.30 – 17.15
  • Capital markets: Big data, big deal, 29 September, 09.00 – 10.00
  • Financial centres outside of the EU – What can the UK learn from Switzerland, 29 September, 10.15 – 11.15

Details of the full programme can be found on www.sibos.com

Derivatives industry gathers to discuss market reform, opportunities and challenges

The great and the good from London’s derivatives industry descend to FOW Regulation to discuss G20 reform, Brexit, Basel III and all things MiFID II.

More than 200 banks, brokers, vendors and buy-side participants gathered at the Grange City Hotel to find out how MiFID II and other European and international regulations will impact trading, risk management and regulatory operations in the global derivatives market.

Attendees at the 4th annual FOW Regulation conference participated in presentations, panel discussions and Q&As on the implementation of MiFID II, MAR and Basel III, the impact of Brexit, algorithmic trading, compliance and trade reporting. With representatives from regulatory bodies, banks, buy-side institutions, legal firms, technology vendors and trade bodies all offering their views, the audience was offered a broad range of views from different perspectives. MiFID II was undoubtedly the topic on everyone’s mind.

Although it remains the centrepiece of European regulatory reform, and still looks certain to be introduced in the UK, fundamental questions remain over London’s capital markets and the competitive advantage or disadvantage that Brexit will bring. The early morning panel discussed what Brexit meant for the implementation of EU regulatory reform in the UK and its interaction with Europe and the rest of the world. This was followed by a panel discussing the plethora of reforms across the world seeking to bring greater oversight, transparency and accountability to algorithmic trading.

With differing approaches and definitions in place, new rules are increasing complexity for firms in the market. The debate focused on how will Reg AT in the US impacts Europe, how to manage obligations across a global trading book, how MiFID II will transform algorithmic trading and what trading institutions should do to meet regulatory requirements. The final panel of the morning discussed the complexities of trade reporting in an increasingly automated trading environment.

The EMIR reporting requirements were introduced amid confusion from the market and reports of miss-reporting and over-reporting were rife. But this has not dampened the appetite of regulators to enforce new rules, and many expect a tougher stance to be taken with MiFID II reporting. There were also fruitful discussions around the Market Abuse Regulation regime, which came into force in July with unprecedented scope and ambition, Organised Trading Facilities (OTFs) and the increased requirements for commodity derivatives. But another prominent challenge for the derivatives industry that became clear throughout the day was the management of capital rules.

Already, a number of large FCMs have pulled out of the market and more rules, including MiFID II, CRD IV and the new IOSCO requirements, are coming down the line. Panel members and the audience discussed how this will impact liquidity and trading activity and how banks and buy-side firms can adapt. Overall, the reform of financial markets continues to gather pace and it remains the case that regulation remains at the forefront in the post-2008 regulatory environment.

The complexity of compliance in an electronic, automated environment remains a concern, but participants were also given insight into the innovation taking place amongst technology vendors and trading institutions to stay ahead of the regulatory curve. 12 months is a long time in financial services and we could be looking at a very different market in a year’s time.

FCA sets out fertile ground for fintech innovation

The fintech sector continues to grow at a rapid rate. According to a PWC report, which explored how the sector is shaping financial services around the world, over USD 50 billion has already been invested in roughly 2,500 fintech companies since 2010.  And investment is expected to accelerate to over USD 150 billion over the next three to five years.

But while the value delivered by innovative technology companies in financial services has become abundantly clear, particularly in areas such as blockchain, data analytics, machine learning and peer-to-peer trading, the industry also requires a flexible regulatory framework that facilitates growth and innovation – rather than stifling it.

As Caroline Binham notes in the Financial Times, it is an issue that the FCA appears to be handling well. In a separate EY report, the UK is singled out for its friendly regulatory stance — topping the global survey as the most fintech-friendly jurisdiction — closely followed by California and New York. The EY report recognised the progress the UK has made in securing a competitive advantage against its rivals, stating; “The UK benefits from a world leading fintech policy environment, which stems from supportive regulatory initiatives, tax incentives and government programmes.”

Clearly, a number of FCA led initiatives designed to promote innovation and market competition appear to be paying dividends. One of the most prominent examples, the ‘regulatory sandbox’ outlined in 2015 as part of Project Innovate’, enables firms to test products for compliance purposes at an early stage in order to fast track the adoption of financial technology by the market.

All this is encouraging a dynamic sector to grow further. As Matthew Hodgson, CEO of Mosaic Smart Data, noted in an article on fintech investment earlier this year, “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”.

But amidst competition from tech hubs in Silicon Valley, Berlin, Hong Kong and Singapore for fintech investment and top talent, the need to provide an attractive ecosystem for new and rapidly evolving companies is not just optional, but obligatory.

As Fintech Focus noted in a piece exploring fintech investment in Asia Pacific, the region has benefited from a massive jump in financial technology investment, rising from USD 880 to nearly USD 3.5 billion in the first nine months of 2015. All this represent a serious challenge for London’s fintech scene.

While London remains ahead of its peers in the race to provide fertile conditions for innovation and growth, the threat of global competition means the capital must continue to maintain its creativity in order to retain its crown.

FinTech PR – Account Managers – London/New York

Chatsworth has over a decade of financial technology PR expertise – delivering the best and leading the debate for our clients in one of the world’s fastest growing sectors.

We’re expanding and looking for brilliant PR people to join the team in our London and New York offices.

The role is as diverse as the team and our clients and includes media relations, digital marketing, campaign development, client reporting and team management.

If you think you have what it takes and the ideas and initiative to deliver for our clients, get in touch and let’s talk.

We value energy, intelligence, enthusiasm and a pinpoint focus on delivering excellence and return on investment for our clients.

About you:

  • Excellent strategic thinker, writer and communicator
  • Good on detail but able to assess and communicate the bigger picture
  • Proven ability to manage clients, team members and the press with skill, judgement and flair
  • Solid background in PR and financial services/technology, or be able to demonstrate a clear aptitude to understand and learn about the sector
  • Commercial acumen, managing budgets and account planning

Apply with your CV and a covering letter, telling us what what skills and value you can bring to our team. talent@chatsworthcommunications.com

Bridging the divide: finance and technology

The annual P2P Financial Systems workshops (P2PFISY) for 2016 hosted by University College London (UCL) brought together academics, technologists, policy makers, regulators and fintech providers to analyse how technology is changing financial services.

The event was attended by The Bank of England (BoE) and a diverse range of experts to address questions of practical importance on: digital currencies and Blockchain technologies, P2P lending and Crowdfunding, digital money transfer,  mobile banking and mobile payments.

Victoria Cleland, Chief Cashier at BoE, outlined the latest wave of fintech activity with a particular focus on distributed ledger technologies (DLT) and the central bank digital currency (CBDC) as part of her speech ‘Fintech: Opportunities for all?

“We are undertaking more fundamental long-term research on the wide range of questions posed by the potential of a central bank-issued digital currency (CBDC). Whether a CBDC would be feasible and whether it would benefit the economy and the financial sector, over the medium term are big issues, and the answers remain far from clear. We have embarked on a multi-year research programme so that any future decision is informed with a full understanding of the implications”, Cleland said.

Cleland also noted that since 2010, more than $50bn has been invested in roughly 2,500 fintech companies’ and over 24 countries are currently investing in DLT with $1.4bn in investments over the past three years. In addition, over 90 central banks are engaged in DLT discussions and more than 60 have joined blockchain consortiums like R3CEV.

Cleland further emphasised the need to explore and understand how we define fintech and the impact it is having. “We need to understand what fintech means for the entities we regulate, how it might impact the overall safety and soundness of the financial system, and how it could alter the transmission mechanism for monetary policy.”

The pace of fintech innovation and investment has rapidly increased in recent years. PWC estimates that within the next three to five years, investments in fintech will exceed over $150bn. However, the firm also highlighted how the lines are being blurred between technology firms and traditional financial institutions in a report entitled, ‘How fintech is shaping financial services’. Accordingly to the research, 83% of the financial institutions who took part in the report believe their business are at risk of being lost to stand-alone fintech companies.

Nonetheless, there is a growing understanding that traditional financial services firms and new fintech providers can collaborate and learn from each other, rather than competing for market share.

CIPS and RMB payments: where are we now?

On 8th October 2015, the first phase of the Cross-Border Inter-Bank Payment System (CIPS), a major piece of financial market infrastructure for RMB payments, went live. Now, almost one year on, the market is analysing the impact of the changes.

CIPS is a government-launched payments system, which is to be developed in two phases. The system allows banks to clear cross-border payments without using an offshore RMB centre by sending payment orders which are subsequently received and settled by correspondent accounts at the counterparty bank.

The first batch of direct participants joining CIPS comprised of 19 Chinese and foreign banks and 176 indirect participants from 47 countries across six different continents. By March 2016, the number of indirect participants had reached 253 and CIPS signed an MoU with the financial services messaging provider, SWIFT.

According to CIPS executive director Li Wei, the aim of the memorandum was to provide an inclusive platform to capture cross-border RMB flows to all types of participants. While Ersin Dalkali, market development manager for FX Asia Pacific at Thomson Reuters expressed optimism about the ongoing rate of adoption in a recent Euromoney article, stating that:”Following the agreement with SWIFT, the adoption of CIPS should accelerate as the number of direct participants will increase by utilising the SWIFT network to connect directly. This will help CIPS become a mainstream platform for clearing and settling cross-border RMB payments.”

Moreover, following the approval of the second batch of participating banks, PBoC deputy governor, Chen Yulu said the central bank is looking forward to moving on to the second phase of CIPS in order to boost international monetary and financial policy cooperation, without however specifying a release date.

With programmes such as CIPS enabling financial institutions to process and settle RMB payments across borders and with the IMF preparing to introduce the currency to its special drawing board rights later this year, its is clear China is continuing to broaden market access.

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.

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.

 

London remains centre of currency trading as volumes inch higher

Average daily volumes increase by 5% in six months to reach $2.213 trillion.

London continues to maintain its position as the centre for currency trading, according to data released by a group of leading central banks.

According to the Bank of England, the UK traded an average daily FX turnover of $2.213 billion in April 2016 – an increase of 5% from October 2015. This was driven by a 7% increase in GBP/USD, while emerging markets currencies such as USD/TRY and USD/MXN also fared strongly.

In contrast, $893.2 billion was traded across North America – 1% higher than in the corresponding period of 2015. On a six-month basis, however, it was a more positive story, with average daily volumes increasing by 10%.

In Asia, Tokyo secured second place internationally, with $1.217 billion traded on average every day – an increase of 5%. Singapore also increased daily volumes by a quarter to $506 billion, while Australian turnover also inched higher.

Each central bank published the data on their respective websites. The full data from the Bank of England 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.

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.

CLS and TriOptima Win Best Post-Trade Services Provider Award

Less than a year after its launch, the triReduce CLS Forward FX Compression Service – the first of its kind in the FX market – scooped Best Post-Trade Services Provider at the FX Week Awards 2016 after saving banks more than $66 billion in notional exposure.

Trade compression is a vital tool in portfolio and capital management. CLS and TriOptima partnered together to address a critical gap in the market, which has now been acknowledged by the judges of one of the FX industry’s most coveted awards.

The triReduce CLS FX Forward Compression Service combines CLS’s infrastructure and market connectivity with TriOptima’s triReduce compression product, and enables participants to reduce the gross notionals of their outstanding portfolios without fundamentally changing their market positions.

Launched at a time when international regulators encouraged compression services for non-centrally cleared OTC derivatives, the new service reduces operational, credit and counterparty risk for institutions and enhance capital efficiency. It is consistent with the goals of EMIR, Basel III and Dodd-Frank, all of which seek a more robust and transparent post-trade environment.

To read the full story, 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

Retail FX Traders Head For The Sideline During Brexit Volatility 

As the polls closed on the UK’s EU referendum, the market was heavily positioned for a Remain victory. As news came in the result had gone the other way, traders scrambled to reverse their positions, triggering heightened volumes and volatility. On a day – and especially a night – of frenetic trading on the currency markets, retail traders largely sat on the sidelines, according to brokers and liquidity providers.

Chris Vecchio, currency strategist at DailyFX, says: “Retail definitely saw a decline in volume, with open interest on GBP/USD 40% below its 12-month average, and that is why there were no problems with liquidity. The Bank of England’s (BoE) £250 billion backstop was also a release.”

Lower-than-average participation among retail was observed by other brokers, too, but was more than offset by heightened volumes among ECNs and banks. This meant overall volumes were elevated, particularly from around 11pm on June 23 in the UK, when the first signs started to emerge that confidence in a Remain vote had been misplaced and traders scrambled to reverse their exposures.

To read the full article in Euromoney, please click here

Markets Rally Following Shock of Brexit Result

The UK’s equity markets mounted a recovery of sorts this week, following a period of significant volatility and market uncertainty. While sterling remains weak against the US dollar, the FTSE 100 has recovered from a low of 5,980 on Monday to open at 6,504 on Friday morning.

However, although many had priced in the risk of a potential Brexit, the extraordinary swings in GBP reflected currency traders’ worst fears.

In a poll conducted by Chatsworth earlier this year, 80% of currency market professionals expected the UK to vote to remain in the EU. But when the first indications emerged that the UK would be leaving, we saw a negative contagion effect spread swiftly through the market as investors struggled to come to terms with the outcome.

There is no doubt that London’s leading position as a USD 2.2 trillion hub for FX trading is now under threat. Two-thirds (65%) of respondents told Chatsworth that they feared that a Brexit would negatively affect London’s position as the world’s largest FX trading centre. Many will now stand by with bated breath as politicians begin the onerous process from untangling itself from a 40 year trading relationship, and wondering what the future holds.

As a global financial capital where the vast majority of currency trading is transacted, London will be bracing itself as the rest of the EU takes stock of the result. Traders, investors and money managers can now expect a prolonged period of uncertainty – the number one bugbear for financial markets – as the UK takes a step into the unknown.

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.

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

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.