Minutes of the London FXJSC Main Committee Meeting - 22 November 2022

Minutes

Item 1 – Welcome and Apologies

Andrew Hauser (Chair, Bank of England) welcomed guest attendees: Vasileios Gkionakis (Citigroup), Morten Bech (BIS Innovation Hub), Rohan Churm (Bank of England) and Hugo Gordon (The Investment Association).

Mr Hauser announced that Lisa Dukes was moving on from her previous role but would remain a member of the FXJSC as a corporate representative for the Association of Corporate Treasurers. Mr Hauser noted Ms Dukes’ involvement in increasing buy-side engagement on the FX Global Code, which continued to be a priority for the FXJSC and the GFXC.

Item 2 - Minutes of the September Meeting

The minutes of the 13 September meeting were agreed, with no comments raised by members.

Item 3 – Market Update: Macro Perspectives and Drivers of Market Developments

Giles Page and Vasileios Gkionakis (Citigroup) presented an update on recent market developments. Mr Gkionakis noted a key question was whether the dollar had reached an inflection point. The combination of higher US interest rates and exogenous shocks from geopolitical events had caused the dollar to reach a multi-decade high during 2022. However, the downside surprise to US inflation in October and consequent perceptions amongst market participants that the peak in US rates was approaching meant market participants were now considering whether dollar strength had peaked. Mr Gkionakis also noted market focus on the scale and pace of China’s economic re-opening. Members debated whether this process might add to, or subtract from, global inflation trends, and what that might mean for the outlook for the dollar. Mr Gkionakis noted that here had been few precedents of the Federal Reserve raising interest rates while global growth was decelerating. As a result, the outlook remained particularly uncertain.

Mr Gkionakis covered the outlook for Sterling, noting market perceptions that the UK economy faced headwinds, as inflation remained consistently high, and growth lagged G10 peers. However, despite these headwinds, sterling had recovered in recent weeks, largely driven by the weakening dollar.

Mr Gkionakis noted euro area sentiment indicators had started to show signs of bottoming out; and the reduction in yield differentials with the United States had turned supportive for the euro. The euro was nevertheless judged likely to remain range bound against the dollar until the end of the year.

Item 4 – FX Market Functioning and Market Structure

Rajesh Venkataramani (Goldman Sachs) and Zar Amrolia (XTX Markets) presented an update on market functioning and structure. Market functioning had generally remained good despite high levels of implied and realised volatility in 2022. Bid-offer spreads had widened during periods of stress, in line with increases in volatility. There had been a notable drop in volumes, to 2021 levels, in early October.

The presenters noted that liquidity in sterling and yen had been impacted by idiosyncratic events during September. There was a discussion on the Japanese Ministry of Finance intervention that saw increased volumes compressed into very short timeframes. Analysis of price action showed temporary price inversions driven by counterparty credit limits being exceeded.

The presenters noted the proportion of volume traded on primary venues had been falling for many years, though appeared to have stabilised somewhat more recently. Some members thought that the trend reduction had adversely affected price discovery. But others felt the impact was unclear, given the increase in alternative methods for trading and price discovery.

Item 5 – Digital Currencies in the Future Financial System

Morten Bech (BIS) presented an update on the BIS work on Central Bank Digital Currencies (CBDCs). Mr Bech flagged the BIS working papers on the topic, and experiments with CBDCs around the world. Possible uses of CBDCs and distributed ledger technology for executing FX transactions were discussed by members, although the practicalities were still unclear.

Rohan Churm (Bank of England) presented on potential implications of CBDCs for central bank balance sheets. The declining popularity of public money and increased use of private money, including potential so-called ‘stablecoins’, for transactions set the context within which many central banks were considering offering CBDCs. Authorities were considering the appropriate regulatory model for stablecoins – and Mr Churm noted a Bank of England discussion paper on new forms of digital money. The committee raised several discussion points, including the importance of separating technology from the application of technology, and the range of potential operational and credit risks.

Item 6 – FXJSC Sub-Committee Updates

The Legal Sub-Committee had met on 15 November. The Legal Sub-Committee had welcomed new members. Agenda items had included a discussion on Benchmark Regulation.

The Operations Sub-Committee had met on 15 November. Agenda items included: discussion on increasing adoption of the FX Global Code in the corporate sector; a discussion of the Bank of England’s Meeting Varied People (MVP) initiative; a presentation on market conditions; and a presentation on Distributed Ledger Technology and operational resilience.

Item 7 – Regular Updates

Alan Barnes (Financial Conduct Authority) updated the Committee about an SEC consultation on moving securities settlement in the US from T+2 to T+1. The Committee discussed potential challenges for international investors and the timeline for implementation. Mr Barnes updated on an FCA consultation paper on guidance on the trading venue perimeter.

James Kemp (FICC Markets Standards Board) provided an update on ESMA’s work on pre-hedging and gave an update on a potential public consultation on the Multilateral Close Out Agreement currently under discussion.

Attendees

Alan Barnes – Financial Conduct Authority

Andrew Hauser (Chair) – 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 – Corporate Representative – Association of Corporate Treasurers

Marc Bayle de Jesse – CLS

Neehal Shah – BNP Paribas

Nina Moylett – M&G plc

Philippe Lintern – Bank of England

Rajesh Venkataramani – Goldman Sachs

Richard Purssell – Insight Investment

Russell Lascala – Deutsche Bank

Robbie Boukhoufane – Schroders

Sarah Boyce – Association of Corporate Treasurers

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

Stephen Jefferies – JP Morgan

Sophie Rutherford – State Street

Simon Manwaring – Natwest Markets

Yan Wang – Bank of China

Zar Amrolia – XTX Markets

Guest attendees

Hugo Gordon – The Investment Association

Morten Bech – BIS Innovation Hub

Rohan Churm – Bank of England

Vasileios Gkionakis – Citigroup

FXJSC Secretariat

George Johnston – Bank of England

Hamzah Abbas – Bank of England

James O’Connor – Bank of England

Natalie Lovell – Bank of England

Shaun Odili – Bank of England

Sita Mistry – Bank of England

Apologies

Galina Dimitrova – The Investment Association

Richard Bibbey – HSBC