Minutes of the London FXJSC Main Committee Meeting – 22 September 2021

Minutes

Item 1 – Welcome and Apologies

Andrew Hauser (Chair, Bank of England) welcomed guest presenter Shirley Barrow (Refinitiv Benchmark Services Ltd). Andrew noted that Nina Moylett (M&G plc) and Rajesh Venkataramani (Goldman Sachs) have joined the Main Committee and announced that Frances Hinden (Shell) had stepped down. He thanked Ms Hinden for her valuable contributions to the FXJSC’s discussions since joining in January 2016.

Item 2 – Minutes of the 14 June meeting

The minutes of the 14 June meeting were agreed, with no comments raised by members.

Item 3 – Market Conditions: FXJSC Turnover Survey Results

James O’Connor (Bank of England) delivered a presentation on the April 2021 FXJSC Turnover Survey Resultsfootnote [1].

Overall, average daily FX turnover had reached $2,985 billion in April; that was another record high, and represented a 16% increase since the October 2020 turnover. Turnover had increased across all FX products, but was again particularly driven by FX swaps, where turnover had risen to $1,575 billion, an increase of 18% relative to October 2020. The rise in turnover had been led by major currency pairs; USD/EUR remained the most commonly traded pair in London with average daily turnover of $914 billion.

Daily average turnover had also increased across Emerging Market currencies, with the exception of the Chinese Renminbi (CNH). Members noted normalisation in interest rates across some eastern European countries – namely the Czech Republic and Hungary – had driven greater trading opportunities and had accounted for some of the increases. By contrast, lower volatility and tighter ranges in USD/CNH were likely contributing factors to the fall in CNH activity.

Members noted that turnover had subsided somewhat since the substantial levels seen in April, which had been broadly driven by continued re-opening from Covid-related restrictions. Low volatility and limited trading opportunities had seen a particularly quiet period in FX markets over the summer.

Item 4 – ESG and FX

Lisa Dukes (Drax) presented on Drax’s recently announced FX derivative contracts with an Environmental Social Governance (ESG) component. The contracts incorporated an ESG element whereby Drax would receive a rebate for reducing its carbon intensity below a pre-set threshold.

Two differing methodologies for incorporating ESG considerations into derivative contacts were outlined: either in single derivative transactions or across whole derivative portfolios. The former was relatively simple, and tied a specific trade/project to ESG targets, but was not extended to wider business or strategy. This was potentially most relevant in situations where a standalone project could clearly be linked to ESG goals, e.g. in transition sectors such as mining. Alternatively, a firm could take a derivative portfolio approach, which covered multiple trades across derivative classes. In such an approach, a firm agreed a common ESG-linked overlay (e.g. through an ISDA amendment/side letter) for multiple transactions, linked to its company-wide strategy for the short, medium or long term. The approach was intended to encourage long term relationships with like-minded ESG focused counterparties, and also created a consistent message across the entire business.

Turning to the key considerations for adopting ESG derivatives, it was noted that the implementation of ESG agreements took a reasonable amount of time and resource, particularly the first time round. The legal documentation was relatively simple, though where the process was new for both parties, it inevitably took some time. It was noted that EU banks had typically been ahead of their UK and US counterparts in terms of their ESG service offerings, though the gap seemed to be narrowing as ESG-related considerations became more mainstream.

The introduction of ESG-linked FX derivatives to Drax’s business had tied sustainability metrics into day to day derivative activity, and built on previous work tying sustainability metrics to other treasury operations (e.g. term loans, revolving credit facilities and working capital). Drax noted that the banking sector had reacted very positively to the greater focus given to ESG considerations, and most were working to understand and adopt the initiative.

Members discussed the demand they had seen for ESG related agreements in their different businesses. ESG considerations had perhaps been somewhat later to arrive in FX than in some other asset classes, and the linkages perhaps needed somewhat greater up-front motivation. General market transparency and market promotion around positive ESG efforts was however promoting greater conversation on ESG in the FX market. Members also discussed the mechanics underpinning ESG-linked derivatives, including: responsibilities for monitoring when ESG thresholds were triggered; how the rebate was funded; and how the drive for ESG incorporated broader client outcomes.

Members highlighted the recently published GFXD paper on ESG and FX,footnote [2] which explored a range of challenges and opportunities, particularly drawing out how the FX Global Code could support a firm’s Governance considerations (the ‘G’ in ‘ESG’).

Item 5 – FX Benchmarks

Shirley Barrow (Refinitiv Benchmark Services Ltd) presented on Refinitiv’s latest analysis regarding the WMR 4pm benchmark. Data on trade frequency, price volatility, and price movement around the 4pm window were presented and the major developments to WMR methodology and benchmark services, regulation and user engagement between 2015-21 were also set out.

Ms Barrow noted that, looking forward, WMR had a range of focus areas. These included: investment and technology transformation; engagement with clients to identify and implement enhancements for WMR spot, forward and NDF measures; and continued regulatory compliance.

Members discussed the use of the 4pm fix. They reflected on the volatility seen in March 2020 and discussed the impact of portfolio rebalancing and subsequent large moves around the fixing window. It was noted that use of the fix appeared to have increased among passive managers, whilst active managers have seen decreasing demand from end-clients. Passive management usage was inherently linked to assets under management, so as that segment of the market grew, WMR usage had also been growing.

The Chair noted the importance of efforts, both by WMR and by market participants to continue to broaden and deepen user engagement. WMR noted it had an ongoing outreach strategy aimed at raising awareness and knowledge around the fix. Members underscored the importance of engaging with the passive management community in particular, given their greater use of the fix.

Item 6 – GFXC Discussion

Following the conclusion of the three-year review of the FX Global Code (Code), the FXJSC Chair proposed submitting a formal request to the FCA, on behalf of the FXJSC, for it to consider re-recognising the updated Code text as an ‘FCA recognised industry code’ in the UK.footnote [3] Members agreed to submitting a request.

The Committee discussed what an appropriate timeframe for members to refresh their Statement of Commitment to the Code would be. It was agreed that all relevant FXJSC members should target updating their Statements by the end of July 2022 at the latest. This would be in line with the Global FX Committee’s (GFXC) expectations and the anticipated timelines set by other local FX Committees for their memberships. Those FXJSC members that required additional information were asked to contact the Secretariat in the first instance.

Grigoria Christodoulou (Bank of England) noted that, following the publication of liquidity provider (LP) and FX e-trading platform cover sheet templates in August, the GFXC was looking to assist an early group of LPs and platforms in populating and publishing their disclosures cover sheets before the end of this year. The ability of FX market participants to make informed decisions was important to the overall integrity and effective functioning of the FX market, and clear, easily accessible disclosures were therefore a critical aspect to the success of the Code. It was requested that relevant FXJSC members consider being a part of that early group, and that those interested should contact the Secretariat.

Hugo Gordon (The Investment Association) provided an update on the Investment Association’s work on standardising reject codes, with the aim of bringing about greater standardisation by Q3 2021footnote [4].

Item 6 – Legal Sub Committee Update

The Legal Sub-committee had met on 14 September 2021. Agenda items included: an overview from the Bank of England on the legal issues arising from the review of the FX Global Code; Leslie Jacobs (EMTA) introduced the Emerging Markets Traders Association and their upcoming work; and the Bank of England provided an overview of the recent update to the UK Money Markets Code.

Item 7 – Operations Sub Committee Update

The Operations Sub-committee had met on 15 September 2021. Agenda items included: an overview of the Sector Response Framework from the Bank of England; and an update on Digital Assets also from the Bank of England.

Item 8 – Update from the FCA

The FCA noted the upcoming deadline for HMT’s Wholesale Markets Review and identified some areas which might be relevant for the FX market. The FCA also stated that it was restarting its proactive supervision work and that the transitional period for all third country benchmarks in the UK Benchmark Regulation had been extended until end-2025.

Item 9 – Update from the FMSB

The FMSB highlighted two recent and key publications. Firstly, the FMSB large trades paperfootnote [5], published in May 2021, sets out the expected behaviours for the execution of Large Trades by participants in FICC markets. Secondly, the Hybrid Workingfootnote [6] paper examines the remote working risks in FICCC markets.

Item 10 – Any Other Business

Next FXJSC Meeting: 23 November 2021

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 – Drax
Marc Bayle de Jesse – CLS
Neehal Shah – BNP Paribas
Neill Penney – Refinitiv Benchmark Services Ltd
Nina Moylett – M&G plc
Rajesh Venkataramani – Goldman Sachs
Richard Bibbey – HSBC
Richard Purssell – Insight Investment
Robbie Boukhoufane – Schroders
Rohan Churm – Bank of England
Russell Lascala – Deutsche Bank
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
Ed Kent – Bank of England
Grigoria Christodoulou – Bank of England
James O’Connor – Bank of England
Jonathan Grant (Legal Secretariat) – Bank of England
Lauren Rana – Bank of England

Guest attendees

Hugo Gordon– The Investment Association
Shirley Barrow – Refinitiv Benchmark Services Ltd

Apologies

Galina Dimitrova – The Investment Association

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