Minutes of the London FXJSC Operations Sub-Committee Meeting - 17 November 2021

Minutes

Minute 1 – Welcome and Apologies

John Blythe (Chair, Goldman Sachs) welcomed members to the FXJSC Operations Sub-committee meeting held via conference call. Mr Blythe welcomed guest presenters Jonathan Sepanski, Orlando Fernandez Ruiz (Bank of England), Loic Moreau (LCH), Phil Hermon (CME), Hugo Gordon (The Investment Association), and Keith Tippell (CLS).

Minute 2 - Minutes of the 15 September meeting

The minutes of the 15 September 2021 meeting were agreed. There were no matters arising.

Minute 3 – Operational Resilience, Outsourcing and Third Party Risk Management

Jonathan Sepanski and Orlando Fernandez Ruiz (Bank of England) presented to members on the latest updates to operational resilience and critical third parties policy, highlighting the core elements to the work: i) identifying important business services; ii) setting impact tolerances; and iii) importance of firms remaining within impact tolerances.

Mr Sepanski covered some of the key learnings from the work. These included a notable dispersion in what firms are reporting as important business services and the speed at which they are agreeing their impact tolerances. Mr Sepanski noted the importance for all firms to understand the thinking behind how to identify important business services, beyond internal impacts and more on customers and external stakeholders. This has been an area of improvement over the last 2-3 months, and discussions will be had to try and help more firms improve further in this respect.

Mr Fernandez Ruiz provided an overview of how thinking on Critical Third Parties (CTPs) has progressed, including new measures related to binding minimum resilience standards for any critical services provided to UK financial institutions (FIs) and resilience testing of CTPs. Regulators are planning to publish a Discussion Paper on these proposals in 2022.

Members noted that these discussions provided a useful starting point for further improving operational resilience throughout the UK financial sector and beyond. It was highlighted this will continue to remain a large and complex operation, especially when considering collaboration with the wider economy.

Given this and the time taken up by it in individual firms, it was suggested that there be further discussion on this topic at future meetings.

Minute 4 – Clearing in FX

Loic Moreau (LCH) and Phil Hermon (CME) provided business updates on clearing in FX markets. Mr Moreau indicated that increased volumes in cleared FX at LCH had been driven by margin rules and capital requirements, with the majority of activity in NDF markets, but there was still substantial room for volumes to grow further. There are expectations for growth in FX options. LCH are working with members to try and find more cost effective ways of clearing FX forwards^{footnote [1]}, while FX spot is likely to remain on a bilateral basis.

Mr Hermon outlined two main channels through which FX products can be cleared with CME: OTC clearing and Listed FX. Both serve to: remove gross notional from the average aggregate notional amount (AANA) calculation; net all positions against a CCP and remove counterparty risk against the original liquidity provider (LP); and allow the CCP margin regime to be utilised instead of ISDA SIMM on bilateral positions. According to CFTC data there has been a clear growth trend in the number of large open positions held by customers in the period 2009 to 2021, excluding the immediate impacts of the COVID pandemic in 2020, leading to a more diverse ecosystem for listed FX – with volumes also significantly higher than those of OTC clearing at CME.

Minute 5 – FX Global Code: Adoption and Adherence

Hugo Gordon (The Investment Association) provided an update on adoption and adherence to the FX Global Code (“the Code”) by asset and investment management firms. Mr Gordon highlighted the IA believe the GFXC is beneficial in building market standards and have recommended that their members sign up, although they do not monitor adherence.

The IA have held large scale events, alongside direct bilateral discussions, to help encourage adoption of the Code, while providing regular updates to members on any changes and developments. Initially, there were two main concerns for members: i) that the Principles did not apply to them, so there was no reason to sign up; ii) a lack of awareness. Mr Gordon indicated the IA had tried to address the former by highlighting proportionality and how certain Principles do not apply to all firms, while also indicating the importance of the Code in raising standards more generally. With regards to the latter, the IA have tried to support better education of members on the importance of the Code.

It was discussed whether the IA could do more to actively encourage adherence, such as placing an expectation on members to sign up (although the IA does not wish to set such a requirement at this time), and improving visibility of the Code through more coordinated advertising across different areas and events.

Minute 6 – CLS: Alternative PvP Solutions

Keith Tippell (CLS) provided an overview on CLS’s three stage plan to deliver their alternative PvP (Payment Versus Payment) service for non-CLS currencies. This is currently CLS’s number one strategic initiative. Stage 1 completed in June and Stage 2, which has included market engagement, has almost completed. The major focus for the project was on operational and funding timelines as well as optimisation, and the draft findings have resulted in one proposed model being taken through to Stage 3 of the plan: verification and refinement with industry engagement.

Minute 7 – FCA Regulatory update

Babatunde Carew (FCA) provided two main updates to members: i) engagement with operational resilience; and ii) firm expectations for hybrid and remote working.

The first highlighted three key takeaways: i) firms are still determining how to designate important business services, and the need for focus on external services; ii) impact tolerances, whereby most firms were unable to submit impact tolerance data and, as such, there is a sense that firms do not realise when tolerances are breached those business services fail; and iii) the importance of critical third parties. In relation to the second point, Mr Carew noted that firms need to consider the impact on markets and consumers rather than internal impact and suggested that the March 2022 target may be missed.

Several firms had been in contact regarding the FCA’s expectations on hybrid and remote working^{footnote [2]} in relation to fulfilling regulatory obligations. Mr Carew specified the FCA had assessed this during the pandemic but a lot of firms will continue to monitor the situation. The FCA have indicated firms will be able to meet their regulatory commitments while continuing with these new ways of working.

Minute 8 – Education & Outreach

i. ECB OMG

Steve Forrest (UBS) provided members with an overview of the topics discussed by the European Central Bank (ECB) Operations Managers Group (OMG) meeting on 29 September. Mr Forrest noted the discussion included: an update from Credit Agricole on the scope and challenges for Central Securities Depositories Regulation (CSDR). Some of the obstacles to greater automation to settlements and confirmations were also highlighted.

ii. GFXD Update

Mr Forrest provided an overview of topics discussed by the Global Financial Markets Association (GFMA) Global Foreign Exchange Division (GFXD) meeting in November. The main highlight was a review of FX market surveys, presented by Ernst and Young, which touched on new classifications, structures and settlement risk. There had also been a notable increase in cryptocurrency volumes.

Minute 9 – Any Other Business

Mr Blythe indicated that dates for 2022 meetings will be shared in due course. Mr Blythe also thanked Devin Bennie for his work as Secretary to the Committee and welcomed Mr Bennie’s replacement, Timothy Mukopi.

Next FXJSC Meeting: TBC

Attendees

Andrew Grice – Bank of England

Andrew Rogan – UK Finance

Babatunde Carew – FCA

Boyd Winston – JP Morgan

Claire Forster-Lee – Morgan Stanley

Gail Smith – RBC

Gavin Platman (Deputy Chair) – Insight Investment

James Kaye – HSBC

Joe Halberstadt – SWIFT

John Blythe (Chair) – Goldman Sachs

John Hagon – CLS

Juna Nashi – Citadel

Mike Irwin – XTX Markets

Sharon Chapman – Barclays

Steve Forrest – UBS

Terri Van Praagh – Northern Trust

FXJSC Secretariat

Alex Hutton – Bank of England

Devin Bennie – Bank of England

Ouadi Belayate – Bank of England

Matthew Hartley (Legal representative) – Bank of England

Guest attendees

Hugo Gordon – The Investment Association

Jonathan Sepanski – Bank of England

Keith Tippell – CLS

Loic Moreau – LCH

Orlando Fernandez-Ruiz – Bank of England

Phil Hermon – CME Group

Apologies

Adam Jukes – Deutsche Bank

Kerry Peacock (Deputy Chair) – MUFG