Minutes of the London FXJSC Main Committee Meeting - 17 March 2022

Minutes

Minute 1 – Welcome and Apologies

Andrew Hauser (Chair, Bank of England) welcomed guest presenters: Paul Bedford and Michaela Costello (Bank of England), Jason Williams (Citigroup), Joanna Marshall and George Saravelos (Deutsche Bank), Greg Edwards and Mark Williamson (HSBC). Andrew noted the appointment of Lisa Dukes as the private sector FXJSC representative to the Global FX Committee (GFXC) and thanked her predecessor in that role, Russell Lascala, for his contributions over the past two years. He also noted that this meeting was Rohan Churm’s (Bank of England) final meeting.

Minute 2 - Minutes of the 23 November Meeting

The minutes of the 23 November meeting were agreed, with no comments raised by members.

Minute 3 – Market Update

Jason Williams presented an overview of recent market developments in short-term funding markets. Mr Williams noted expectations that funding markets would retain ample liquidity in 2022 and through 2023: although liquidity was likely to be affected by anticipated reductions in central bank balance sheets, he judged there to be little likelihood of funding stress given the high levels of cash reserves that would still be held at central banks.

George Saravelos presented on emerging market currencies, focusing on the impact of the Russian invasion of Ukraine. He observed that commodity price moves had been the predominant driver of these currencies since the Russia invasion, working through sizeable moves in relative terms of trade. Looking ahead, Mr Saravelos expected that emerging market countries with strong growth prospects and more hawkish central banks, in particular the commodity producers, would experience currency appreciation in the near term. The impact of developed economy central bank policywas discussed. Mr Saravelos remarked that the Federal Reserve’s liquidity injections during 2020-22 had had a limited impact on emerging market capital inflows. A larger impact had been via stronger demand for core durable goods from US households, which mostly benefited Asian exporters. Mr Saravelos believed that increasing policy rates in the US would likely hurt trade flows and negatively impact Asian currencies, perhaps more so than in previous tightening cycles. The ECB’s anticipated move away from negative rates in 2022 was likely to reverse European capital outflows to the US and the UK, possibly supporting an appreciation of the euro against both the US dollar and sterling.

Joanna Marshall highlighted the importance of managing counterparty risk, especially under strained geopolitical circumstances, and provided an overview of her own firm’s approach. She noted that under the umbrella term of counterparty risk, a variety of individual risks were identified. These included but were not limited to: credit risk, legal risk, operational risk, collateral risk and settlement risk. Specific groups within the firm were set up to observe and monitor each of these risks closely. Committee members discussed their own perspectives on monitoring counterparty risk, highlighting in particular the importance of monitoring leveraged and uncollateralised exposures. Members also touched upon the challenges around the settlement of transactions, noting that market participants had responded by reducing their risk and were working to resolve any outstanding issues quickly.

John Blythe noted the 10 March Operations Sub-Committee had also had a detailed discussion on the operational impacts of the Russian invasion of Ukraine, particularly in relation to the operational impact of the heightened market volatility and challenges around the settlement of transactions. Other agenda items at the meeting had included: a presentation of the October 2021 FXJSC Turnover Survey Results; a discussion of FX Market Conditions; and regular updates from SWIFT and CLS.

The Committee thanked the presenters and discussed the topics raised. Despite concerns related to uncertainty, market volatility and credit risk, FX markets had in general continued to function well through the period. Questions about potential liquidity risks had briefly arisen in the early days following the invasion, but had rapidly receded. The Committee underscored the important ongoing role that awareness of the central bank swap line network played in reassuring market participants of access to liquidity. The Bank of England noted the longstanding arrangements under which weekly US dollar repo operations took place in the UK, euro zone, Switzerland and Japan.^{footnote [1]}

Minute 4 – Progress in Cross Border Payments

Paul Bedford and Michaela Costello (Bank of England) provided an update on the G20 roadmap for enhancing cross-border payments, and in particular work on facilitating increased adoption of ‘Payment vs Payment’ (PvP) mechanisms, Building Block 9 of the roadmap.^{footnote [2]} It was noted that the work had progressed, with ongoing dialogue between the public and private sectors on a range of proposals to expand PvP. The CPMI had received 15 industry responses to its Call for Ideas in October 2021, and aimed to publish a consultative report in mid-2022 considering possible actions for central banks, regulators and industry. The presenters explained that work to expand PvP could be located within wider international discussion on FX settlement risk as well as the cross-border payments roadmap. The purpose of this workstream was to expand PvP coverage across emerging market currencies and additional FX products as well as encouraging the participation of additional users. It was noted that the FXJSC (and similar groups in other jurisdictions) could play a key role in this discussion, by participating in, coordinating or leading industry initiatives that addressed obstacles preventing greater PvP adoption.

Mark Williamson presented on how HSBC used distributed ledger technology (DLT) for simplifying foreign exchange transactions and streamlining the way in which payments were settled. They explained the constituent features of DLT, including blockchain mechanisms, algorithms and public infrastructure. In relation to financial services specifically, blockchain could simplify the ‘know your customer’ process and potentially enable payments in any future Central Bank Digital Currencies. The speakers noted that DLT and blockchain were seeing increasing take-up, and observed that their platform demonstrated how DLT could be used for cross border payments with low transaction costs, transparency around cash flows and reduced Herstatt risk. Some challenges associated with DLT were also discussed, including a lack of legal certainty in some areas, interoperability and the careful management required when migrating from heritage systems to digital systems. In discussion, members also stressed the importance of testing internal digital systems to minimise operational frictions.

Minute 6 – Legal Sub Committee Update

The Legal Sub-committee had met on 16 March 2022. Agenda items had included: a review of the October 2021 FXJSC Turnover Survey Results; a member discussion of the impacts of the Russian invasion of Ukraine on FX markets and a “look back, look forward from a regulatory perspective”.

Minute 8 – Update from the FCA

The FCA highlighted that a number of Post Brexit reforms to the regulation of wholesale capital markets and prospectus regime had been announced by HMT,^{footnote [3]} including various changes to MiFID arrangements such as applying a more proportionate pre- and post-trade transparency regime. Separately, the FCA noted HMT’s plans to establish a new Financial Market Intermediary (FMI) Sandbox, which amongst other things would help FMIs test how changes to legislative requirements could facilitate the use of new technology and practices, such as multilateral trading facilities using DLT for securities settlement.

Minute 10 – Any Other Business

It was noted that members should suggest items for the forward agenda to the Secretariat.

Attendees

Alan Barnes – Financial Conduct Authority
Andrew Hauser (Chair) – Bank of England
David Clark – Refinitiv Benchmark Services Ltd
Giles Page – Citigroup
Hugo Gordon (alternate) – The Investment Association
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 – Bank of England
Russell Lascala – Deutsche Bank
Sharon Blackman (Chair, Legal Sub-committee) – Citigroup
Simon Manwaring – Natwest Markets
Stephen Jefferies – JP Morgan
Wang Yan – Bank of China
Zar Amrolia – XTX Markets

FXJSC Secretariat

Alice Hobday – Bank of England
Frederick Ladbury – Bank of England
George Johnston (Legal Secretariat) – Bank of England
James O’Connor – Bank of England
Ouadi Belayate – Bank of England
Sita Mistry – Bank of England

Guest attendees

Greg Edwards – HSBC
Mark Williamson – HSBC
Paul Bedford – Bank of England
Michaela Costello – Bank of England
Jason Williams – Citi
George Saravelos – Deutsche Bank
Joanna Marshall – Deutsche Bank
Nick Singh – Bank of England
Charlie Warburton – Bank of England

Apologies

Sarah Boyce – Association of Corporate Treasurers
James Kemp – FICC Markets Standards Board
Richard Purssell – Insight Investment
Sophie Rutherford – State Street
Galina Dimitrova – The Investment Association