Minutes of the London FXJSC Main Committee Meeting - 13 September 2022

Minutes

Item 1 – Welcome and Apologies

Andrew Hauser (Chair, Bank of England) and members of the FXJSC expressed their heartfelt condolences to the Royal Family, following the death of Her Majesty Queen Elizabeth II. Mr Hauser noted that, in light of the period of national morning, the meeting agenda had been pared back to focus on business continuity arrangements and market conditions.

Mr Hauser welcomed guest attendees: Sharon Wallis (Bank of England), Lee Elliot (Bank of England), Paul Robson (NatWest Markets) and Lisa Pitman (M&G plc).

Mr Hauser announced that Neill Penney (LSEG) had stepped down from the Committee. He thanked Mr Penney for his valuable contributions to the FXJSC and the GFXC over the past five and a half years.

Item 2 - Minutes of the June Meetings

The minutes of the 9 June meeting were agreed and no comments were raised by members.

Item 3 – Market Functioning

John Blythe (Chair Operations Sub-Committee, Goldman Sachs) updated members on the extraordinary FXJSC Operations Sub-Committee meeting which had convened the previous day. The Operations Sub-Committee had discussed arrangements for the unplanned bank holidays announced by the United Kingdom (UK) and other countries, with a particular focus on settlement. At the time of the meeting, the UK and Australia had declared bank holidays, and there were ongoing discussions as to whether New Zealand would also declare a bank holiday. Mr Blythe noted that many members of the Operations Sub-Committee were invoking their pre-existing playbooks for unplanned bank holidays.

Members of the FXJSC noted that the bank holidays were being loaded into trading and settlement systems. It was observed that most banks were amending deals to settle for the next good business day, without revising the forward rate (in line with market practice). Any other amendments were being discussed between counterparties on a bilateral basis. In repo markets, Mr Blythe noted that bilateral repo markets were largely amending maturity dates from the 19 September UK bank holiday to the next good business day. Participants in cleared repo markets planned to leave maturity dates as 19 September, and their systems would enable actual settlement to occur on 20 September. Additionally, at the Operations Sub-Committee, CLS had confirmed that the unplanned bank holidays had been processed in their system and GBP trades would automatically settle on the next good business day.

Although no critical issues were raised, it was noted that the timing of the unplanned UK bank holiday fell around equity rebalancing and International Monetary Market (IMM) roll dates which presented some potential complications that would need working through. Members also recognised that there could be increased flow following the bank holiday. Mr Blythe noted that the Operations Sub-Committee had also received some useful queries from the European Venues & Intermediaries Association (EVIA) – focused on a number of issues relating to FX rolls, FX option expiries, FX benchmarks and adjustments on SONIA derivatives. Finally, members noted that they were considering resource coverage on 19 September to service non-UK clients.

Lee Elliott (Bank of England) noted that the Cross Market Business Continuity Group (CMBCG) had convened on 10 September for a central information exchange within the sector to support industry planning for a bank holiday. Different Financial Market Infrastructures, regulated firms and key stakeholders had been represented at the meeting. At the CMBCG meeting, the Bank of England had provided an update on the UK bank holiday implications on GBP operations and had confirmed the closure of RTGS and CHAPS on the bank holiday. Operational planning assumptions were then provided by key market infrastructure providers. As members of the Sector Response Framework, it was noted that the FXJSC would receive a full write-up of the CMBCG meeting.

The Committee was reminded that the Main and Operations Sub-Committees could be convened at short notice should the need arise.

Item 4 – Market Conditions

Paul Robson (NatWest Markets) presented an update on recent market conditions. Mr Robson noted the key theme in markets at present was the USD, which had been trading at multi decade highs in recent weeks. Market participants appeared to have a preference for holding cash, reflecting a range of drivers, including central banks front loading their tightening plans and their perceived reduced sensitivity to the growth outlook. Cash holdings were also concentrated particularly in USD relative to other safe haven currencies (e.g. EUR, JPY and CHF) given USD’s role as a global reserve currency status, and idiosyncratic challenges associated with other sovereigns. It was possible that such demand had pushed USD valuations above their longer-term sustainable levels. At the same time, members described how it was difficult to see a change in the current USD strength narrative without a catalyst such as a de-escalation in the Russian invasion of Ukraine, or relaxation in zero-covid policies in China. Members discussed how markets were currently reflecting divergence across G10 economies, similar to the 1970s and 1980s.

JPY had been the biggest underperformer against the USD over the previous month. This appeared to be driven by continued monetary policy divergence, with US yields having continued to rise in recent weeks. Members noted market discussions about the potential role of, and challenges facing, FX intervention.

Mr Robson outlined how geopolitical risks, and risks around energy supply, continued to be the primary drivers in European currencies in recent months.

GBP had notably underperformed relative to the USD, with only JPY and SEK having performed worse in the time period. Members discussed the different drivers behind the weakness in GBP. Some members suggested that on top of the USD strength narrative, UK specific factors might have been weighing on markets, despite the Bank of England having begun its hiking cycle ahead of G10 peers. Members discussed narratives in support of the argument that GBP outlook could improve. For example, UK holdings of foreign assets were still relatively high, GBP/USD had not stayed below 1.20 for long periods historically, and international investors were underweight UK assets. Additionally, GBP might also benefit from a period of prolonged political stability and near-term energy support announcements.

Finally, members discussed how, although volatility had risen, overall FX markets had continued to function well in challenging circumstances. For example, no significant credit issues had materialised, including counterparty default. By contrast, fixed income and rates markets were functioning less well in the context of the upcoming UK bank holiday. Drivers for this trend might have included fewer market participants and regulation reducing primary dealer activity.

Item 5 – Any Other Business

Next meeting date: Tuesday 22 November

Attendees

Alan Barnes – Financial Conduct Authority
Andrew Hauser (Chair) – Bank of England
David Clark – Refinitiv Benchmark Services Ltd
Galina Dimitrova – The Investment Association
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
Nina Moylett – M&G plc
Philippe Lintern – Bank of England
Rajesh Venkataramani – Goldman Sachs
Russell Lascala – Deutsche Bank
Richard Bibbey – HSBC
Richard Purssell – Insight Investment
Robbie Boukhoufane – Schroders
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
George Johnston (Legal Secretariat) – Bank of England
Grigoria Christodoulou – Bank of England
James O’Connor – Bank of England
Sita Mistry – Bank of England
Nirvar Singh- Bank of England

Guest attendees

Sharon Wallis - Bank of England
Elliot Lee - Bank of England
Paul Robson - NatWest Markets
Lisa Pitman - M&G plc

Apologies

Neill Penney – LSEG