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Date of meeting: 14 June 2021 | Location: Teleconference
Item 1 – Welcome and Apologies
Andrew Hauser (Chair, Bank of England) welcomed guest presenters Andrew Harvey (GFMA), Harri Vikstedt (Bank of Canada), Nick Butt, Arif Merali and Tom Horn (Bank of England).
Item 2 – Minutes of the 9 March meeting
The minutes of the 9 March meeting were agreed. There were no matters arising.
Item 3 – GFXC Discussion
The FXJSC Secretariat provided an overview on the upcoming Global Foreign Exchange Committee (GFXC) meeting on 28 June, with the main focus on any ‘fatal flaw’ comments on the three-year review of the FX Global Code (Code) proposals related to algorithmic trading & transaction cost analysis (TCA), anonymous trading, disclosures and FX settlement risk.
Harri Vikstedt (Bank of Canada) provided an update on the pre-hedging guidance paper, noting that the submissions to the GFXC public request for feedback were broadly supportive, and hence had resulted in only minor edits to the final paper. Specifically the pre-hedging working group had recommended: a change to the wording on fixing orders to align with language in Principle 10; and removing the current positive stop-loss example in the Code (on page 54).
Neill Penney (Refinitiv) updated members on the last look paper noting that much of the feedback had been on the ‘hold time’ issue, specifically with regards to how it was defined and how it fitted within the context of Principle 17. In summary, work had been ongoing to reinforce that last look should be used for price and validity checks only, with an updated paper due to be presented at the GFXC. If the proposals are agreed, the paper is expected to be shared with local foreign exchange committees, including the FXJSC, for final comments before publication.
Members were invited to provide ‘fatal flaw’ comments. An aggregated summary on behalf of the FXJSC would be provided to the GFXC Secretariat ahead of the 28 June meeting. Following the GFXC meeting and Code proposals being approved, the updated Code text would be published on the GFXC website in mid-July, and the Code updated subsequently thereafter.
Item 4 – Update on LIBOR Transition
Arif Merali and Tom Horn (Bank of England) provided an update on the LIBOR transition, with a focus on transition in the cross-currency swaps market. On 5 March 2021, the FCA had announced that all LIBOR settings would either cease to be provided by any administrator or no longer be representative immediately after: 31 December 2021 in the case of all GBP, EUR, CHF, JPY and 1-week and 2-month USD LIBOR settings; and 30 June 2023 in the case of remaining USD LIBOR settings. Guidance had also been issued from US supervisors related to limiting new use of USD LIBOR after end-2021, which had been supported by both PRA and FCA in a letter to CEOs in March 2021, and by the international Financial Stability Board.
Tom Horn noted good progress had been made in the UK, ceasing new use of sterling LIBOR in most core markets by the end of Q1 2021, supported by the March 2021 ‘Dear CEO’ letter, which set out supervisory expectations for firms’ transition from LIBOR to risk free rates. Looking ahead, focus in sterling markets was turning toward end-Q3 milestones aimed at moving away from new use of GBP LIBOR in cross-currency swaps and completing active conversion of legacy LIBOR contracts where viablefootnote .
Arif Merali gave an update on recent market developments, including how sterling cash markets, linear derivatives, futures and non-linear derivatives and US dollar markets were progressing with the LIBOR transition. He highlighted the CFTC’s recent announcement of the forthcoming SOFR-first initiative in the USD interest rate swap market, supported in the UK by the Bank of England and FCA. Following this, international authorities and working groups were beginning to discuss whether similar steps could be taken to support transition in cross-currency swaps.
Committee members discussed the timeline for transition in the cross-currency swaps market and steps that could be taken to support the milestone to cease initiation of new cross-currency derivatives with a LIBOR-linked sterling leg by end-Q3 (over and above those required for risk management of existing positions). Members were supportive of the end-Q3 deadline, noting that many forms were already well underway with the transition. Members supported steps being taken to identify specific dates on which to switch interdealer liquidity, as had been done in a range of other markets, and suggested any announcements should be made to the market as soon as possible to allow ample time for firms to prepare. Finally, members preferred to see market conventions move directly to use of risks free rates on both legs of cross-currency swaps at the same time if possible, rather than move in two steps.
Item 5 – Central Bank Digital Currencies
Nick Butt (Bank of England) gave a presentation on the Bank of England’s work on Central Bank Digital Currencies (CBDC). CBDC would be a new electronic form of central bank money that could be used by households and businesses to make payments. Any CBDC would sit alongside physical cash, as the UK authorities remain committed to retaining access to cash.
Potential opportunities presented by CBDC were discussed, including: supporting a resilient payments landscape; managing the risks of new forms of private money creation; supporting competition, efficiency and innovation in payments; improving the availability and usability of central bank money; addressing the consequences of a decline in cash usage for transactions; and supporting better crossborder payments. Around 86% of central banks were now engaging in some form of CBDC work, with China, Canada and Sweden arguably the most advanced. For example, China is due to conduct a pilot at the winter Olympics in 2022.
Nick Butt noted the Bank’s recent discussion paperfootnote  on New Forms of Digital Money, which considered: the role of money in the economy; ensuring public confidence in digital money and payment systems; how digital money could affect the cost and availability of borrowing from banks, and the implications for monetary and financial; stability; and, given the uncertainty around demand, the possibility of precautionary arrangements to allow time and space to assess the impact of new forms of digital money on the financial system after any launch.
In terms of next steps, a Bank-HMT Taskforce is coordinating a cross-authority exploration of UK CBDC, including close contact with relevant industries and experts.
Andrew Harvey (GFMA) presented on wholesale FX considerations of CBDC including: how CBDC could help reduce costs and settlement risk; interoperability between central banks, different CBDC designs and technologies; and the potential for longer trading days and 24/7 settlement that would require new processes and new funding and liquidity management tools.
The GFXD Market Architecture Group had identified several key area considerations critical to the development and adoption of CBDCs in FX functions. These included: increases in headcount in order to staff and skill accordingly; implications for existing processes and controls; implications for liquidity, including how to ensure funds were in the right place; regulatory reporting; and how introduction of CBDC could lead to changes in operational cut-off times and concept of the global settlement date. Members discussed some of these points, and the importance of interoperability of new technologies and service providers.
Item 6 – Legal Sub Committee Update
The Legal Sub-committee had met on 10 June 2021. Agenda items had included: an update from GFMA on the Emerging Markets Traders Association (EMTA) template and guidance on the mitigation of basis risk and potential alternative calculation agent methodologies; a readout by the FXJSC Secretariat previewing the upcoming GFXC meeting in June; and a discussion on the format of future meetings as many move to hybrid ways of working.
Item 7 – Operations Sub Committee Update
The Operations Sub-committee had met on 9 June March 2021. Agenda items had included: an update on the Operational Resilience, Outsourcing and Third Party Risk Regulatory work led by the Bank; a presentation from HSBC on the future hybrid working environment; an update from the Bank on LIBOR transition; an update from SWIFT on ISO20022; and a readout by the FXJSC Secretariat previewing the upcoming GFXC meeting in June.
Item 8 – Update from the FCA
The FCA updated members on HMT’s Wholesale Market Review Consultation Paper which was considering changes to MiFID II including changes to the pre and post trade transparency regimes.
Item 9 – Any Other Business
Rohan Churm informed members that the Secretariat would be reaching out to members to ensure members and their alternates contact details were up to date ahead of the annual contingency call test due to take place ahead of the next meeting.
Next FXJSC Meeting: 22 September 2021
Alan Barnes – Financial Conduct Authority
Andrew Hauser (Chair) – Bank of England
David Clark – Refinitiv Benchmark Services Ltd
Frances Hinden – Shell
Galina Dimitrova – The Investment Association
Giles Page – Citigroup
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
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
Sophie Rutherford – State Street
Stephen Jefferies – JP Morgan
Wang Yan – Bank of China
Zar Amrolia – XTX Markets
Alice Hobday – Bank of England
Grigoria Christodoulou – Bank of England
James O’Connor – Bank of England
Jonathan Grant (Legal Secretariat) – Bank of England
Lauren Hustwitt – Bank of England
Andrew Harvey – GFMA
Arif Merali – Bank of England
Harri Vikstedt – Bank of Canada
Nick Butt – Bank of England
Tom Horn – Bank of England
David Edmunds – Bank of England
James Kemp – FICC Markets Standards Board
Sarah Boyce – Association of Corporate Treasurers