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London maintains its grip on global FX market

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London has become a hub for Chinese yuan trading and continues to solidify its role at the centre of the global FX markets – even with the spectre of Brexit looming on the horizon – according to the latest data from the Foreign Exchange Joint Standing Committee (FXJSC).

Chaired by the Bank of England, the FXJSC’s semi-annual turnover survey is considered a benchmark for the health of the UK’s wholesale FX market. The numbers for the six-month period leading up to October 2018 were published earlier this week and showed a sharp 17% rise in yuan turnover compared to the April 2018 results.

In particular, USD/CNY turnover increased to a staggering $73 billion per day, its highest absolute turnover to date, and overtook EUR/GBP as the seventh most traded currency pair in London. The UK government has made a concerted effort to promote yuan trading since its internationalisation began and the FXJSC numbers indicate that the hard work is now paying off, according to Pragma Securities, an algorithmic trading technology provider.

This marks a notable moment for what is arguably the most important emerging currency to the global economy. By promoting free use of the yuan, the Chinese monetary authority is enabling Chinese corporates and financial institutions to develop their businesses overseas, which in turn is leading to a continued rise in the currency’s market share.

FX – the largest and most interconnected of global markets – is the crowning jewel of London’s financial services industry and the City is a natural hub for the yuan as it continues its path to internationalisation.

More broadly, the FXJSC survey pegged average daily UK FX turnover at USD 2,611 billion in October 2018, the third largest turnover figure on record for the survey. While this represents a fall of 4% from the record high of $2,727 billion reported in April 2018, it still makes for promising reading in the uncertain macroeconomic and political climate.

In particular, FX spot activity rose to $775 billion, its highest level since April 2015 and a year-on-year increase of 11%. This growth in spot activity was also seen in data released by the Fed in New York, and is reflective of the bouts of volatility which spurred higher trading volumes on electronic platforms such as ParFX.

With the March 29th Brexit deadline fast approaching, the UK could find itself in a very different position when the results of the next FXJSC survey are published, but the signs look overwhelmingly positive for the UK maintaining its tight grip on the global FX market.

London FX turnover hits record high

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The results of a new survey released by the Bank of England have revealed record-breaking FX turnover in the UK during April this year.

The survey, compiled with the responses of 28 London-based institutions, shows that daily FX turnover during the month was a staggering $2,727bn – up 15% on October last year and 14% on April last year.

The Bank of England says this represents the highest reported turnover on record, beating the previous peak of $2,711bn set in October 2014.

Turnover in FX swaps accounted for the largest increase, growing by 18% compared with October last year. There was an 18% increase in turnover in the sterling-dollar currency pair, an 11% increase in euro-dollar trading and a 13% increase in dollar-yen. 

In particular, London’s turnover in the British pound rose to a record $351 billion, up 18% from October 2017 and nearly doubling from last year. This was driven largely by traders dumping the pound against the dollar when the Bank of England declined to raise interest rates.

The survey results reflect London’s continued position as the epicentre of the global currency markets, despite ongoing debate about the UK’s future trade arrangements post-Brexit. The UK growth rate in turnover also overtook US data revealed today by the Federal Reserve Bank of New York, which showed a 5.2% increase on a six-month basis and 11.7% year-on-year, with turnover only around one-third of that in London.

As ever, volatility has been the major driver for the increase in turnover. After years of ultra-low interest rates across the globe, central banks are beginning to diverge again in terms of where they set their policy rates. Growing concerns over a global trade war and political turmoil in the Eurozone have also contributed significantly to this volatility.

FX trading remains one of the City’s most profitable industries, and the Bank of England’s survey is a timely reminder of the dominance of the UK’s FX providers in a period of significant political and economic uncertainty for the country.

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

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

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

Coping with crisis

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

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

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

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

Looking forward

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

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

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

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

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

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

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

Mark Carney on realising the potential of fintech

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

President of the ACI, Marshall Bailey responds to FEMR

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Marshall Bailey, President, ACI Financial Markets Association:

 

“We welcome the recommendations set out in the Fair and Effective Markets Review (FEMR), which sets the foundation for positive change in the Fixed Income, Currency and Commodities (FICC) markets – particularly at a time when the issue of individual conduct and ethics in FICC markets is very much in the public eye.

 

“From our perspective, the most important takeaway from this is that the FEMR will lead to an increased emphasis on financial education on ethics and industry-wide training as well as the adoption of a single code of conduct for Foreign Exchange to raise standards and accountability. Regulators are rightly stepping up efforts to tackle trader misbehaviour and place conduct at the heart of their reforms. The importance of this cannot be over-emphasised. The financial services industry employs millions of people globally, and the sector has been tarnished by the actions of a small minority acting in an unethical manner. Where they are guilty of misbehaviour, we need to make individuals accountable, but let’s also assist and support those seeking to improve the industry to do so.

 

“Today’s report also makes clear that measuring and monitoring progress is central to behavioural change. It is clear that in some situations individuals receive little or no training or practical guidance, leading to uncertainty about what is and isn’t acceptable. Positive progress has already been made on the enforcement front, but to achieve sustainable change, we must go further and embed high standards of conduct and practices within organisations. This can be done through education, and by monitoring individual behaviour to ensure individuals at all levels – from the most junior ranks up to senior management at board level – acknowledge and abide by an enforceable code of conduct.

 

“Initiatives like the ACI’s Code of Conduct and e-learning and certification (ELAC) Portal provide this critical service to organisations and individuals alike. The Model Code articulates in great detail how ethical conduct should be taught and monitored, and together with our ELAC portal, can help to reduce conduct risk, monitor behaviour and ensure any knowledge gaps are swiftly addressed by supervisors. This proactive approach to self-regulation is exactly the type of cultural shift regulators are seeking to achieve with these reforms. We are working closely with the many entities focused on ethical conduct and codes, and believe that a common solution can be found and most easily adhered to.

 

“In addition, ensuring the universal application of a code of conduct across borders will be vital to changing behaviour and ensuring all participants and institutions are clear on what is and isn’t acceptable behaviour. If necessary, it must be backed up by law and embedded within national financial regulations to guarantee strong enforcement. I believe we need to look to bodies likes the Financial Stability Board, chaired by Bank of England Governor Mark Carney, or the Bank for International Settlements in Basel, which has already begun excellent work to harmonise international codes, to drive this further.

 

“Levelling the playing field internationally in this way will provide much needed clarity and reduce opportunities for ethical arbitrage. It is also beneficial for regulators, as they can measure the behaviour, ethics and conduct of all participants by the same criteria – regardless of geographical location – and any misdemeanours can be immediately identified and addressed.”

 

Comments on last look

 

“The reality is that customer preferences vary – and ‘last look’ can, at times, be an acceptable and effective form of execution. For example, some might prefer as tight a price as possible, accepting a potentially higher rejection rate through ‘last look,’ whilst others might prefer certainty of execution at a different price.

 

“However, participants should take steps to ensure that provision of ‘last look’ liquidity does not create a false impression of market levels or depth. Under no circumstances should orders with ‘last look’ be placed for the purpose of price discovery and with no intention to trade, and use of electronic algorithms solely to accept trades that are favourable, and reject non-favourable deals when the criteria for assessing are equal, should be avoided completely.

 

“The onus is on dealers employing ‘last look’ to be fully transparent and ensure customers are made aware that the practice is in use, the subsequent consequences are explained and that accurate records are kept on fill-and-reject ratios to demonstrate compliance. Having been fully apprised of the pros and cons of ‘last look’, customers should be in a position to decide to trade or not using “last look” pricing, in line with their own requirements and execution style.

 

“The ACI’s Model Code provides clear guidance on how ’last look’ practices should be used by liquidity providers and the information that must be provided to customers in order to maintain a transparent and fair operation.”

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About ACI – Financial Markets Association

 

ACI – Financial Markets Association is a leading non-profit, non-political association of wholesale financial market professionals. Members of ACI are in a large part engaged in professional trading, broking, operations, regulatory and compliance activities in foreign exchange, money fixed income and derivatives markets.

 

ACI was founded in Paris in 1955 as Association Cambiste Internationale and has a proud and illustrious history of involvement in helping its membership through various market iterations/interactions.

 

ACI currently counts some 13,000 international members from more than 60 countries, with growing interest globally.