Minutes of the London FXJSC Main Committee Meeting – 9 June 2022

Minutes

Date of meeting: 9 June 2022
Time: 1pm – 3pm | Location: Hybrid / Deutsche Bank – 1 Great Winchester St, London, EC2N 2DB

Item 1: Welcome and Apologies

Andrew Hauser (Chair, Bank of England) welcomed guest presenters: Sam Lynton-Brown (BNP Paribas) and Janet Dawson (GFMA). The Chair introduced Philippe Lintern (Bank of England) as the new Bank of England standing FXJSC member.

Item 2: Minutes of the March Meetings

The minutes of the 4 March extraordinary meeting and 17 March meeting were agreed, with no comments raised by members.

Item 3: GFXC Update

Ouadi Belayate (Bank of England) provided an update on the June GFXC agenda and the GFXC’s work priorities. Mr. Belayate noted that the GFXC agenda would include: a presentation from Israel, as a recently joined associate member of the GFXC; local foreign exchange committee updates; and a discussion of market developments.

However, the main item would be discussion and agreement of the GFXC’s work priorities over next two years. This would include:

• Conducting a survey to review the effectiveness of the FX Global Code (Code) amongst market participants. The results of this survey were intended to serve as a starting point for the transition to the next Code review.
• Continuing to prioritise work to improve understanding of developments in settlement risk and potential mitigation mechanisms, including solutions based on emerging technologies.
• A discussion on the merits of improving data availability, in order to determine whether there was a sufficient and fair access to relevant market data for all market participants to ensure a level playing field in the FX market.
• A continuing focus on broadening Code adherence on the buy-side.

In support of this last item, Lisa Dukes presented on progress in raising the profile of the Code across the buy-side, including through her work as the FXJSC’s GFXC private sector representative. Ms. Dukes reflected on how corporate engagement with the Code could be improved. For example, using the Code as a lever to meet the Governance element of Environmental Social and Governance (ESG) obligations could be a strategy to increase Code engagement and embed governance standards within corporates. The Code could therefore be a valuable method to support a company’s strategy.

The Committee discussed the importance of continuing to deepen buy-side engagement with the Code, given that it was a set of principles for all organisations active in the FX market. Ms Dukes had been focusing on ways to reach corporate users with large FX operations, though the limited availability of data made it harder to target this group.

Finally, the Chair highlighted that the one year anniversary of the publication of the updated Code (following the three year review) was fast approaching. It was noted that there had been progress with the publication of disclosure cover sheets. Focus was also needed on completing re-attestation to the Code through updated Statements of Commitment. The Chair noted that members should reach out to the Secretariat if they identified any barriers to re-attesting to the Code. No barriers were noted during discussion.

Item 4: Market Conditions

Sam Lynton-Brown (BNP Paribas) presented an update on market conditions.

A key cross-cutting theme had been dollar strength, which members agreed had reflected a combination of elevated global volatility, macroeconomic uncertainty and the sharply higher interest rate path in the US. Consistent with those drivers, dollar strength had been seen even in relation to commodity exporters, despite high commodity prices.

More broadly, rising economic uncertainty and volatility in rates and risky asset markets had contributed to rising FX volatility, after a long period of exceptionally calm conditions. The combination of a strong dollar, heightened volatility and perceptions of relative policy paths had seen the euro fall steadily this year. Mr. Lynton-Brown considered how this might feed into changing patterns of investor engagement and corporate flows.

Finally, Mr. Lynton-Brown presented a number of factors bearing on the outlook for sterling, including trade conditions, energy prices and the effects of a tight labour market.

Item 5: Transparency and Data Availability in FX Forwards

Kevin Kimmel (Citadel Securities) introduced a discussion on differences in the transparency between FX spot, FX forwards and FX swaps markets. The ability of liquidity consumers to conduct meaningful pre- and post-trade Transaction Cost Analysis, an increasingly important and valuable tool for investors in other markets, had developed significantly over the past several years in over-the-counter (OTC) FX spot. However, there were product elements, such as multiple tenors, collateral posting and managing credit risk, which made a similar evolution more challenging for OTC FX deliverable forwards. As a result, electronic trading had developed differently between products, with FX spot trading on streaming order books while FX forwards and swaps were still primarily traded using voice or screen-based request-for-quote, with bespoke pricing being provided to clients on request, inclusive of credit risk. Against that backdrop, prices could vary widely and transparent real-time pre- and post-trade data were limited.

Members considered some of the possible ways to improve data availability, particularly in less liquid parts of the market, for example in longer-dated forwards. Managing credit risk was a key challenge, which could be addressed through the introduction of central clearing, but this had not been a priority for the industry. Moving towards greater use of more standardised future products could be an alternative approach, which would entail market participants accepting that they would not be able to match exactly the structure of their books. Some Committee members highlighted how a client’s ability to request a suite of prices on demand helped support broader transparency and accessibility in the FX market. Streaming every tenor and date of pricing in an executable format would be prohibitively expensive (and so would not occur), and some members had not seen significant demand for this type of service. It was noted that technology could help provide solutions to some aspects of the transparency challenge, for example through the creation of a Central Limit Order Book for forwards of one month duration and under. However, this was a solution that would take time to deliver, and would require clear evidence of market-wide demand.

Item 6: Multilateral Close Out Methodology for Russian Ruble (RUB) contracts

Janet Dawson (GFMA) informed the Committee of a GFMA initiative to launch a Multilateral Close-Out Agreement (MCOA) methodology for RUB contracts, in light of recent developments.

Ms. Dawson noted that the MCOA was a market-led approach to enable participants to closeout trades in the event of a convertibility or transferability disruption event. The MCOA attempted to establish a convention for an approach to an alternative reference rate and provide a common protocol for firms to participate in collating, netting and settling exposures via a central calculation agent as an alternative to numerous bilateral negotiations. Participation in the agreement was voluntary.

Ms. Dawson noted that the project had undergone extensive legal consultation focusing on anti-trust and competition law. While the initial approach was designed to tackle developments in RUB, the intention was for the project to develop a currency-agnostic agreement that could be tailored quickly to suit a geopolitical or natural disruption.

Item 7: Legal Sub-Committee Update

The Legal Sub-Committee had met on 8 June 2022. Agenda items included a discussion of recent regulatory updates on cryptoassets (Mayer Brown) and a member discussion on the impacts of the Russian invasion of Ukraine.

Item 8: Operations Sub-Committee Update

The Operations Sub-Committee had met on 7 June 2022. Agenda items included: a presentation on market conditions, including Ruble settlement challenges, and the impact on the FX Market (HSBC); a presentation on operational efficiency and risk mitigation for non-CLS settlement currency flows (CLS); and a presentation on ISO 20022 Target 2 implementation (Northern Trust).

Item 9: Update from the FCA

Alan Barnes noted that the FCA were continuing to work with HMT and market participants on the impact of sanctions relating to the Russian invasion of Ukraine. Mr. Barnes flagged two recent Market Watch publications from the FCA. Firstly, Market Watch 68^{footnote [1]}, discussed gaps in market participants’ arrangements for using web-based platforms, in particular the arrangements for the recording of users’ orders. Secondly, Market Watch 69^{footnote [2]} discussed firms’ market abuse surveillance arrangements under Article 16(2) of UK MAR and highlighted the continuing importance of firms having a comprehensive market abuse risk assessment in order to identify the potential risks and the necessary controls to address them.

Item 10: Update from FMSB

James Kemp flagged the upcoming publication of the Precious Metals Market Post-Trade Spotlight Review^{footnote [3]}, which outlined opportunities for innovation and improvement in post-trade processes. Additionally, Mr. Kemp noted that the FMSB was starting a number of workstreams to explore the findings from the Post-Trade Task Force’s report on ‘Charting the Future of Post-Trade’^{footnote [4]}, which pointed to improving standardisation and firms making use of technology and automated solutions.

Item 11: Any Other Business

Next meeting date: Tuesday 13 September

Closing remarks

The co-Chairs closed the meeting and thanked the Members for their contributions.

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
Robbie Boukhoufane – Schroders
Sarah Boyce – Association of Corporate Treasurers
Sharon Blackman (Chair, Legal Sub-committee) – Citigroup
Sophie Rutherford – State Street
Simon Manwaring – Natwest Markets
Wang Yan – Bank of China
Zar Amrolia – XTX Markets

Members

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

Guest attendees

Sam Lynton-Brown – BNP Paribas
Janet Dawson – GFMA

Apologies

Neill Penney – Refinitiv Benchmark Services Ltd
Richard Purssell – Insight Investment
Stephen Jefferies – JP Morgan