Minutes of the London FXJSC Main Committee Meeting - 23 November 2021

Minutes

Minute 1 – Welcome and Apologies

Andrew Hauser (Chair, Bank of England) welcomed guest presenters Victoria Hampson (Goldman Sachs), James Pearson, Andrew Batchelor, Loic Moreau (ForexClear, LCH), Keith Tippell (CLS) and Paul Bedford (Bank of England).

Minute 2 - Minutes of the 22 September meeting

The minutes of the 22 September meeting were agreed, with no comments raised by members.

Minute 3 – Market Conditions

Rajesh Venkataramani and Victoria Hampson (Goldman Sachs) presented on recent developments in FX markets and rates markets. After a quiet summer, volatility in interest rate markets had picked up in late October, reflecting quickly changing perceptions amongst market participants about the global growth and inflation outlook, and the likely policy response of central banks. The pace of the market adjustment had catalysed some reduction of risk positions across markets.  There had been a number of central bank policy announcements into early November, including the Federal Reserve announcing it would begin to taper the rate of its asset purchases.  

Members noted that traded volumes had held up in most FX pairs, rising around October month end during the period of high volatility in interest rate markets, but normalising soon thereafter. Consistent with that picture, FX volatility had remained low relative to other asset classes such as rates, equities and commodities. That said, levels had been rising, from that low base, in the context of cross-asset volatility. There had been more material risk reduction of positions in some emerging market currency pairs, where interest rate carry had become less of a driver of long positions. Rising rates in developed countries reduces the appeal for holding carry positions in emerging markets. With equity market indices at record highs, and the cost of hedging long positions expensive given the level of implied volatility relative to FX, some members had observed demand in FX options as a proxy hedge, leading to some correlation in currency and equity behaviour at certain times.

Minute 4 – Developments in FX Clearing

James Pearson, Andrew Batchelor and Loic Moreau (LCH ForexClear) presented on the FX clearing landscape and its scope for development in the future. Although a number of products had established themselves in the market, particularly for the major FX players, there remained considerable scope for further growth, not least as the range of FX products available for clearing increased into 2022 and beyond, including through increasing cleared options volumes, and FX forwards.

The clearing of non-deliverable forwards (NDFs) was by far the most developed product so far, with approximately a third of the market now cleared. It was noted that further growth in this area would largely be driven by non-banks, with a significant portion of the inter-dealer NDF market already cleared. The implementation of Un-cleared Margin Rules (UMR)^{footnote [1]} phase 6 in 2022 was highlighted as a potential driver for future client clearing, though UMR did not compel FX clearing, and phase 5 had seen limited impact on client clearing volumes to date.

Deliverable forwards clearing was yet to take off in any size, and had, to date, presented a challenge in the clearing space in the form of significant spikes in margin requirements offsetting benefits on capital requirements.

Members noted that there were a number of incentives for market participants to increase their use of FX clearing. Some were regulatory: eg the roll-out of UMR phase 6 and introduction of ‘Standardised Approach for Counterparty Credit Risk’ (SA-CCR) , which granted capital relief on cleared trades, other incentives reflected non-regulatory factors. For example, clearing could provide clients greater access to the market, through credit risk mitigation.

Against that backdrop, members discussed why FX clearing had not so far grown more rapidly. It was noted that the costs to clients still appeared relatively high when compared to OTC trading, especially when there was no price differential at execution. Alternative methods existed for clients to reduce credit risk outside of FX clearing. And some clients cited operational constraints.

It was observed that clearing aligned well to the principles and aims of the FX Global Code^{footnote [2]} by supporting the efficient and resilient operation of the FX market. Market participants had held back from doing so in the most recent three year review, given low volumes. The nature of the Code as a live document that is periodically reviewed was highlighted.

Minute 5 – Mitigating Settlement Risk

Keith Tippell (CLS) presented on CLS’s development of a service to allow members to settle non-eligible CLS currencies with ‘Payment vs Payment’ (PvP) protection). Following the 2019 triennial survey, CLS had undertaken additional analysis to understand how FX trades were settled, and why FX transactions may be settled without PvP protection. Initial analysis indicated that the majority of CLS-eligible transactions were settled via CLSSettlement, but material gross notional exposures remained in currencies not currently supported by CLSSettlement and not settled via an alternative PvP mechanism

CLS had nearly completed a pilot exercise to test this new service, and would turn next to verification and refinement before publishing a final service description CLS had developed the proposal with input from a range of market participants; and had also engaged with the CPMI’s work on increasing PvP settlement as part of the FSB roadmap for enhancing cross-border payments (building block 9). Members noted that there was general market support for the initiative, despite there being some operational challenges. With industry wide collaboration to develop this initiative, establishing an alternative PvP solution in non-CLS currencies has scope to reduce risk and deliver industry-wide benefits. Members also discussed settlement risks relating to certain non CLS currencies, such as CNH.

Paul Bedford (Bank of England) presented an update on the G20 roadmap for enhancing cross border payments. Following publication of the roadmap^{footnote [3]} in 2020, the FSB had published a Global Targets Report^{footnote [4]} and a first annual Progress Report^{footnote [5]}. A key theme in both reports was the importance of collaboration between the public and private sector to shape policy and develop new systems, processes and technologies.

Building block 9 of the roadmap related to facilitating the increased adoption of PvP, supporting cheaper and faster cross-border payments through the mitigation of FX settlement risk. A key part of this worked involved liaison with industry to identify credible options for introducing new or expanded PvP mechanisms, and views from industry participants were welcomed on the key areas being considered. Committee members welcomed this work, noting that it was also relevant to central bank digital currencies through building block 19 (which referred to factoring in an international dimension into CBDC designs).

Minute 6 – Legal Sub Committee Update

The Legal Sub-committee had met on 16 November 2021. Agenda items had included: a discussion on SA-CCR (Cleary Gottlieb Steen & Hamilton LLP) and an update on Operational Resilience (Allen & Overy LLP).

Minute 7 – Operations Sub Committee Update

The Operations Sub-committee had met on 17 November 2021. Agenda items had included: Operational Resilience, Outsourcing and Third Party Risk Management (Bank of England); Clearing in FX (LCH and CME); FX Global Code: Adoption and Adherence (The Investment Association); and Developments in PvP (CLS).

Minute 8 – Update from the FCA

The FCA noted that it had recognised the FX Global Code and highlighted its statement confirming last look and pre-hedging practices that were not consistent with the Code^{footnote [6]}. An accompanying statement had also been published by the Bank of England^{footnote [7]} in support of the Code’s recognition and the FCA’s statement. The FCA noted that it may engage with market participants if it became aware that their practices were not being updated to be consistent with the Code.

Separately, the FCA also noted that it had published a statement on its expectations on firms’ remote or hybrid arrangements so firms could plan and continue to meet their regulatory obligations^{footnote [8]}.

Minute 9 – Update from the FICC Markets Standards Board (FMSB)

The FMSB updated on its Statement of Good Practice for Platform Disclosures paper, which covered a number of issues including consistency of disclosures, how trades are handled (e.g. price validity, rejections) and various operational issues. The paper was at the transparency draft phase for comments.

Minute 10 – Any Other Business

It was noted that 2022 meeting dates would be shared with the Committee once confirmed.

Attendees

Alan Barnes – Financial Conduct Authority

Andrew Hauser (Chair for items 1 - 4) – Bank of England

David Clark – Refinitiv Benchmark Services Ltd

Giles Page – Citigroup

James Kemp – FICC Markets Standards Board

John Blythe (Chair, Operations Sub-committee) – Goldman Sachs

Kevin Kimmel – Citadel Securities

Lisa Dukes – Drax

Marc Bayle de Jesse – CLS

Neehal Shah – BNP Paribas

Neill Penney – Refinitiv Benchmark Services Ltd

Nina Moylett – M&G plc

Rajesh Venkataramani – Goldman Sachs

Richard Bibbey – HSBC

Richard Purssell – Insight Investment

Robbie Boukhoufane – Schroders

Rohan Churm (Chair for items 5 - 8) – Bank of England

Russell Lascala – Deutsche Bank

Sarah Boyce – Association of Corporate Treasurers

Sharon Blackman (Chair, Legal Sub-committee) – Citigroup

Simon Manwaring – Natwest Markets

Sophie Rutherford – State Street

Stephen Jefferies – JP Morgan

Wang Yan – Bank of China

Zar Amrolia – XTX Markets

FXJSC Secretariat

Alice Hobday – Bank of England

Ed Kent – Bank of England

Grigoria Christodoulou – Bank of England

James O’Connor – Bank of England

Jonathan Grant (Legal Secretariat) – Bank of England

Ouadi Belayate – Bank of England

Guest attendees

James Pearson – LCH

Andrew Batchelor – LCH

Loic Moreau – LCH

Keith Tippell – CLS

Paul Bedford – Bank of England

Michaela Costello – Bank of England

Lisa Gupta – Bank of England

Karin Oldham – Bank of England

Victoria Hampson – Goldman Sachs

Apologies

Nina Moylett – M&G plc