Minutes of the London FXJSC Operations Sub-Committee Meeting – 15 November 2022

Minutes

Minute 1 – Welcome and Apologies

John Blythe (Chair, Goldman Sachs) welcomed members to the FXJSC Operations Sub-committee meeting held at HSBC and via video conference. Mr Blythe welcomed guest presenters and observers Andrew Cooper, Keith Tippell (CLS), Lisa Dukes (Dukes & King), Mark Williamson, Richard Oliver (HSBC), Sandeep Tayal, Sumita Ghosh (Bank of England). Observers as part of the Meeting Varied People (MVP) initiative: Anna Chadderton (Goldman Sachs) and Rita Davy Sen (HSBC).

Minute 2 – Minutes of the 7 and 12 September meeting

The minutes of the 7 and 12 September 2022 meeting were agreed, with comments from CLS noted for update.

Minute 3 – Adherence to the FX Code

Lisa Dukes (Dukes & King) informed the members that she was part of a GFXC working group focusing on proportionality in the implementation of the FX Global Code (Code). She explained that the group was reviewing proportionality with a view to lowering the cost of adherence for market participants. Ms Dukes cited cost as one of the barriers to Code adherence. She added that the team was working on a web-based tool that would make proportionality and applicability clearer, in the process reducing some of the barriers to engaging with the Code. Further, she stated that the proportionality-working group was working with the GFXC Code adherence buy-side engagement-working group, whose focus was on highlighting the tangible benefits of Code adherence.

Ms Dukes stated that most firms thought the Code was a great idea but were unclear on the implementation process. She suggested that improving engagement with the Code would require involvement from senior leadership in organisations, including the auditors. She added that whilst prioritisation of aspects that would improve the user friendliness of the Code was key, there was a need for other measures like tracking corporates that were using the Code as part of a monitoring process to complement these measures. Ms Dukes explained that GFXC was working on getting organisations to see the benefits from Code adherence, which would potentially result in increased numbers of organisations publishing their signed statement of commitments to the Code. She cited recognition through rating agencies, by enhancing an organisation’s credit scoring with respect to ESG (particularly the significance of the governance part of ESG), as a motivation for corporates to adopt the Code.

Members thought challenges to the adherence to the Code were largely operational, affecting areas like FX settlement among others. Members agreed there was less understanding of the operationalisation of the Code by Corporate Treasurers and felt that GFXC was well suited in improving this understanding. Ms Dukes suggested additional measures like getting corporates to engage on a knowledge share basis as another way of enhancing Code adherence. Ms Dukes observed that reasonable marketing of the Code had increased its awareness but barriers to signing up to the Code remained. She suggested other practical measures to improve adherence to the Code including taking a proportionate approach in application of the Code, increasing the number of advocates of the Code on the corporate side and citing simple operational examples on each principle, among others. Overall, members agreed on the need to continue demonstrating the Code’s relevance among corporates to encourage more of them to sign up to the Code. Ms Dukes promised to share progress updates with the committee on relevant milestones of the proportionality-working group.

Minute 4 – Meeting Varied People (MVP)

Sumita Ghosh and Sandeep Tayal (Bank of England) presented on the Bank of England’s MVP Programme. The MVP team presented the background of MVP and how it relates to the Bank’s Strategic priority. The team updated the committee on the MVP Phase 1 launch event, which resulted in more than 100 new contacts, and how it had benefited the Bank and market participants. (there were now approx. 400 diverse contacts with whom the Bank engages). The team talked about the objectives of MVP.

The update was followed by discussion of a draft objective, drafted by the MVP team, to consider whether the committee should have a specific diversity and inclusion objective.

There was a lot of interest and engagement from the committee members and a lively discussion with the following comments:

• Members were very supportive of this initiative and thought that having measurable and tangible objectives for the committee could demonstrate progress in the diversity of the committee meetings.
• Suggestion to adapt an objective to have a certain percentage of committee membership as diverse.
• The committee also discussed rotation of the Chair and Deputy Chair to allow opportunities and make progress in these areas.
• The committee suggested that it might be useful to have role descriptions for the Chair or Deputy Chair.
• Members strongly endorsed these ideas and suggested that it is entirely appropriate for the committee to focus on this agenda.
• The committee members were keen that the committee should be open and that “observers” should be encouraged to speak if they would like to.
• There was discussion on hosting networking event at the Bank or other venue and the committee were keen to attend.

The Chair of the committee announced that he would be stepping down after the March 2023 meeting having served 3 years in the role, allowing a smooth transition for his successor and allowing others on the committee to take on leadership roles.  The Chair and Deputy Chairs are focused on increasing the diversity composition of the committee, as well as the leadership group, to continue to evolve the future direction of the committee.   The committee thanked the Chair for his contributions to the committee and for his leadership over the past 3 years.

Minute 5 – Market Conditions – Recent Liquidity Dynamics in GBP FX Spot and Swaps

Richard Oliver (HSBC) referred to the Bank of International Settlements (BIS) paper (BIS CGFS no 55 of 2016) stating that dealers had continued to reduce their market making capacity in different jurisdictions. He thought this trend did not help the recent liquidity challenges in the UK, coupled with SONIA’s limited liquidity. Mr Oliver noted that lack of liquidity had adversely affected the swap market. He stated that liquidity was yet to recover from the adverse effect of the UK government’s 26 September 2022 mini budget. Mr Oliver stated that many interbank market makers had ceded their positions in the market as a result. Mr Oliver explained the magnitude as material given that there was no imminent recovery at the time, more than a month after the market events, with spreads remaining high.

On the GBPUSD FX SWAP, Mr Oliver mentioned that fewer banks ended up with the majority of risks, with the market witnessing limited appetite for risk taking. He said one consequence to the market was price reflection, where a single request could be interpreted as multiple requests resulting in liquidity providers taking a defensive approach. Mr Oliver thought other drivers for the liquidity shortage could be linked to the impact of regulation on banks’ capital. Mr Oliver said he had hoped that fintech solutions would help ease liquidity challenges but this was yet to materialise.

Members discussed the challenges, agreeing with Mr Oliver’s views including the opinion that more participants were moving to the buy side, leaving less experience on the market makers side.

Minute 6 – Digital Ledger Technology (DLT)

Mark Williamson (HSBC) noted that clients were largely embracing new technologies. Mr Williamson added that reverse enquiries on DLT had increased in the last six months. He explained that his expectations were to stream financial transactions to clients in real time. Mr Williamson said there was a new wave of innovation backed with funding in excess of $87bn for over 6,500 payment focused fintechs. Mr Williamson explained that the current market had three types of digital currencies including Central Bank Digital Currencies (CBDC), stablecoins and cryptocurrencies. He said there was also some tokenisation of existing market products.

Mr Williamson was cautious about adopting stablecoins until formal regulation was in place. He said digital assets were mainly divided into those that are fungible and those that were not, with fungible assets being a domain for traditional banks. The non-fungible assets had been a domain for specialist non-bank institutions. Mr Williamson said banks were moving to tokenise fungible assets, to enable recording and transfer of ownership. He said an example of such tokenisation would involve conducting fixed income trades on a bond tokenisation platform. This would include primary issuance, secondary market trading and asset guarantee on a tokenised blockchain.

Mr Williamson mentioned that benefits from digitisation of traditional markets included enhanced transparency and programmability, among others, whilst challenges included the use of numerous applications, regulatory and legal uncertainty, interoperability and immature technology, among others.

Members appreciated the development in DLT, noting that whilst this was largely the case for front office activities, the operational part still lagged behind in development.

Minute 7 – Operational Resilience update

Kerry Peacock (MUFG) updated the committee on Simulation Exercise 2022 (SIMEX22), which took place on 15 and 17 November 2022. He explained that the simulation involved a large bank whose technology had failed, testing this scenario and its effects on the market. Mr Peacock stated he was representing the committee in the exercise, together with another member of the committee, Terri Van Praagh (Northern Trust). Mr Peacock observed that the exercise provided an understanding of the interconnectedness of large banks, CLS and other players in the market. Members acknowledged the observation from the exercise, which positioned social media as a platform that could heighten the impact of failure of a key function in a large financial institution. This was mainly because of its ability to reach many recipients fast. The committee agreed to discuss the outcomes from SIMEX22 at a future meeting.

Minute 8 – FCA update

Alan Barnes (FCA) explained to the committee that the US Securities Exchange Commission had proposed changes to move the US market to T+1 settlement.  A principal driver for the change was to reduce margin calls.  One of the consequences of the changes flagged by some market participants was that international investors would have less time relative to US investors to settle their securities and related ancillary transactions such as FX.  This could result in international investors not having sufficient time between the execution and settlement of their US securities to make ancillary FX transactions to fund the cash settlement of those securities, resulting in them needing to pre-fund their transactions.   Members discussed the implications of this move, noting that the US authorities were supportive of the move. Members also noted the need for arrangements to consider the impact of bank holidays which would further reduce the ability of international investors to make ancillary FX transactions to support US securities settlement.    

Minute 9 – Education & Outreach

Operational Manager’s Working Group (ECB OMG and GFXD) Update

Steve Forrest (UBS) mentioned that Adam Jukes (vice chair) and Gail Smith (chair) had their tenor extended to stay on GFXD for another one year. Mr Forrest said the 2023 operational committee deliverables were as updated in September and included escalation process standardisation, resiliency, and settlement risk. Mr Forrest said the Russian Ruble claims backlog remained significant although there was marginal progress in settlement. He said the Board had a soft target to clear all claims up to H1 by year-end 2023.

Mr Forrest stated that the 22 September 2022 ECB OMG covered various topics including digital innovation in capital markets, FX Operations and Operational location strategy in a post Covid environment among others.

CLS Update

Andrew Cooper (CLS) explained that settlement volumes and values were elevated by geopolitical factors resulting in a 30% increase in September 2022 relative to same period in 2021. Keith Tippell (CLS) referred to the BIS survey results for November and noted that CLS had seen an increase in FX transactions volumes on their payment versus payment settlement system. Mr Tippell stated that this was also consistent with the overall growth in volume in the FX market. He noted that much of the growth related to new third parties onboarding to CLSSettlement.

Minute 10 – Any Other Business

Mr Blythe thanked Timothy Mukopi for his work as Secretary to the Committee and welcomed Mr Mukopi’s replacement, Enyi Chen.

Attendees

Adam Jukes – Deutsche Bank

Alan Barnes (Alternate) – FCA

Andrew Grice – Bank of England

Claire Forster Lee – Morgan Stanley

Gavin Platman (Deputy Chair) – Insight Investment

James Kaye – HSBC

John Blythe (Chair) – Goldman Sachs

Kerry Peacock (Deputy Chair) – MUFG

Mike Irwin – XTX Markets

Steve Forrest – UBS

FXJSC Secretariat

Enyi Chen – Bank of England

Matthew Hartley (Legal representative) – Bank of England

Natalie Lovell – Bank of England

Shaun Odili – Bank of England

Sita Mistry – Bank of England

Timothy Mukopi – Bank of England

Guest attendees

Andrew Cooper – CLS- Alternate

Anna Chadderton – Goldman Sachs (Observer)

Keith Tippell – CLS

Lisa Dukes – Dukes and King

Mark Williamson – HSBC

Richard Oliver – HSBC

Rita Davy Sen – HSBC (Observer)

Sandeep Tayal – Bank of England

Sumita Ghosh – Bank of England

Apologies

Gail Smith – RBC

Joe Halberstadt – SWIFT

John Hagon – CLS