Minutes

1: Welcome / introductions

The Chair welcomed the Group and those present as part of the observers program.

2: Diversity, Equity & Inclusion

The Group has recently engaged in several initiatives to increase diversity, including knowledge sharing initiatives, an observers program and initiating a survey of diverse characteristics. The aim is to ensure that the Group provides a welcoming, inclusive and diverse forum for participation in discussion pertaining to SONIA and sterling money markets.

3: Knowledge Sharing

Members of the Group presented knowledge sharing topics. LSEG provided an analysis of the LCH-cleared SONIA swaps activity and Mizuho provided an overview of potential impacts of changing monetary policy in Japan on sterling money markets.

It was noted that the SONIA swaps market is now more liquid than the pre-transition combined SONIA-LIBOR swaps market. SONIA futures volumes are also higher than short sterling volumes.

The end of negative rates and yield curve control in Japan, is expected to have a limited impact on participation in sterling markets, even as some Japanese companies repatriate capital to Japan.

4: Retrospective review of market conditions

The SONIA to Bank Rate wedge has remained at 5bps below Bank Rate since 7 May 2024. Volumes have remained robust through the period with movements occurring within the normal range.

The Bank’s liquidity facilities (notably the Short Term Repo Facility) continues to support liquidity in sterling money markets as quantitative tightening progresses.

5: RFR Update

Market Notice

The Bank of England (the Bank) has been offering Indexed Long-Term Repo (ILTR) operations weekly, on a temporary basis, since March 2019. Prior to this, ILTR operations were offered once a month. 

The Bank is today confirming that the ILTR, which offers reserves for a 6-month period against the full range of SMF-eligible collateral, will continue as a weekly operation on a permanent basis. 

The permanent instatement of the ILTR as a weekly facility reflects the Bank’s ongoing transition to a repo-led, demand-driven operational framework. Within this framework, the ILTR will play a key role in supplying the stock of reserves demanded by the system for monetary and financial stability reasons.  

From w/c 4 November 2024, the maturity structure of ILTR operations will be amended to reflect the weekly frequency of the operation. This means that the term of all ILTR drawings will now mature after exactly 6 months. Previously, all ILTR operations in a given month had the same single maturity date. 

The Bank’s Market Operations Guide has been updated to reflect this announcement. Participants should review the relevant settlement process information for ILTR operations. 

The updated schedule of operations is set out in Table 1 below. 

Further changes to ILTR calibration are being considered by the Bank as part of the transition to a repo-led demand-driven framework for supplying reserves. The Bank plans to seek views on this via a Discussion Paper which is due to be published later this year. Any further changes to the ILTR will be announced in due course.

Table 1: Schedule of Indexed Long-Term Repo operations

Other than as amended by this Market Notice, the Terms and Conditions and Operating Procedures for participation in the Bank’s Sterling Monetary Framework will continue to apply to ILTR operations.

Bank of England (BoE) Levy Classification

The Bank of England (BoE) Levy is a new levy that was established on 1 March 2024 as a replacement to the Cash Ratio Deposit scheme. Both schemes enabled the Bank to undertake functions in pursuit of its monetary policy and financial stability objectives.

On 20th September 2024, the ONS classified the BoE Levy with effect from 1 March 2024 as other taxes on production. As such, institutions paying the BoE Levy are advised to report their levy payments on Form PL under taxes payable (PL16 / PL.01.01.01 R1600 C0010) on an accrual basis.

The BoE Levy year runs from 1st March, and eligible institutions will be advised of their BoE Levy charge for the year in July (after the Q1 reporting cycle). Ideally, institutions should start accruing the BoE Levy on their Form PL from Q1 reporting, however, we ask that institutions accrue the BoE Levy from Q2 reporting onwards given the marginal impact on Q1 reporting. That is, for PL reporting purposes the BoE Levy payment for a given levy year should be apportioned from Q2 reporting until Q1 reporting for the following calendar year.

Institutions paying the BoE Levy for the levy year 2024/25 are requested to resubmit their Form PL Q2 2024 submission to include the BoE Levy payment accrual for this levy year.

The ONS have also provided a clarification on the classification for the FMI Levy and PRA Levy. These have been classified as a fee for financial services paid by eligible financial corporations. As such, these should be captured under fees and commissions payable (PL6 / PL.01.01.01 R1060 C0010).

Additionally, the PL Guidelines will be updated to reflect the above guidance in due course.

If you have any questions or require further clarification, please reach out to DSDPLTeam@bankofengland.co.uk.

Footnote

A summary of all Statistical Notice items that are yet to come into effect are also available to view on the Statistical notices page. Statistical Notices should be received by all those responsible for the completion of Bank of England returns. To amend the circulation list please subscribe.

Minutes of the Meeting of the Court of Directors held on 5 July 2024

Present:

David Roberts, Chair

Andrew Bailey, Governor

Sarah Breeden, Deputy Governor – Financial Stability

Clare Lombardelli, Deputy Governor – Monetary Policy

Sam Woods, Deputy Governor – Prudential Regulation

Jonathan Bewes

Sabine Chalmers

Lord Jitesh Gadhia

Anne Glover

Sir Ron Kalifa

Diana Noble

Tom Shropshire

In attendance:

Ben Stimson, Chief Operating Officer

Apologies:

Sir Dave Ramsden, Deputy Governor – Markets & Banking

Frances O’Grady

Secretary:

Sebastian Walsh

News release

The Bank of England, in partnership with UK Finance, the financial sector and the other UK financial authorities (HM Treasury and the Financial Conduct Authority), has undertaken its latest UK market wide simulation exercise, SIMEX 24. The simulation set out to exercise the UK financial sector’s ability to respond to a major infrastructure failure that would require a total shut down and restart of the sector.

SIMEX has been developed and delivered by the Cross Market Operational Resilience Group (CMORG), a strategic partnership between the financial authorities, UK Finance and industry, established by the Bank of England in 2015. It is the latest exercise in a continuous programme that explores the financial sector’s response to some of the most challenging scenarios, including those on the UK Government’s National Risk Register.

The exercise and wider programme to develop financial sector capabilities, supports both the aims of the financial authorities and of firms to ensure collective response tools are in place to respond to disruptive events. This improves the operational resilience of the financial sector and promotes a stable financial system that the public can depend on.

Sam Woods Deputy Governor of Prudential Regulation and CEO of the Prudential Regulation Authority said:

“It is vital to prepare our response to a wide range of risks, including for the most challenging scenarios. SIMEX and the sector exercising programme provide unique opportunities for the whole banking sector, across industry and the authorities, to practise how to protect and defend services on which the economy depends.”

David Postings, Chief Executive of UK Finance, said:

“A resilient financial sector is crucial in a modern economy and a continual area of focus for the financial services industry. The sector-wide exercise this week helps ensure we can respond effectively to any potential incident and protect the UK’s financial system and its customers.”

CMORG enhances the operational resilience of the UK financial sector through collective action, and is supported by specialist industry groups. It achieves this through the identification of systemic risks, the development of solutions to support sector-wide mitigation strategies and sharing capabilities and knowledge across the sector.

As part of this work, CMORG oversees the approach for sector-wide response to systemic incidents through the Sector Response Framework (SRF). The SRF is a key component exercised through SIMEX to ensure the UK’s financial services industry is ready to respond effectively and in a coordinated manner to severe disruption.

Record of the Financial Policy Committee meeting on 19 September 2024

1: The Committee met on 19 September 2024 to agree its view on the outlook for UK financial stability. The FPC discussed the risks faced by the UK financial system and assessed the resilience of the system to those risks. On that basis, the Committee agreed its intended policy action.

Developments in financial markets and vulnerabilities in market-based finance

6: The FPC discussed the reasons why core markets had remained insulated from the shock, beyond the fact that subsequent macroeconomic news had been positive. First, although levels of margining in certain markets such as equities and foreign exchange had risen sharply, as central counterparties (CCPs) increased margin requirements consistent with the increased volatility, there was a more limited impact across wider financial markets and the size and persistence of the shock was such that firms were sufficiently prepared. No defaults were reported, firms raised no issues with clients’ abilities to meet margin calls, and there were no concerns about counterparty credit, which otherwise may have increased funding pressures. Clearing infrastructure and margining systems were also reported to have operated well amid the sell-off.

7: Second, hedge fund net short positioning in US Treasuries futures was not materially unwound. This had been in contrast to the deleveraging that occurred in March 2020. Widening pressure on the US Treasuries cash-futures basis (the spread between government bond rates and corresponding futures contract) had been mitigated, in this instance, by repo markets continuing to function well, the lack of counterparty credit concerns, and the timing of the episode; the proximity to the futures roll date reduced risk and increased liquidity. This had alleviated the spill-over effects of broader market volatility onto the cash-futures basis trade, reducing deleveraging pressure. Market intelligence had also suggested that these investors had not been materially affected by the unwinding of yen carry trades.

UK banking sector resilience

34: The FPC noted a PRA announcement that the thresholds for application of the leverage ratio requirement were being reviewed. The Committee would discuss the outcome of this work at a future meeting.

Basel 3.1

35: The FPC welcomed the publication of the PRA’s second near-final policy statement on the implementation of Basel 3.1 standards in the UK on 12 September 2024. The first near-final policy statement was published in December 2023. Together, these publications would implement the final package of prudential reforms developed by the Basel Committee on Banking Supervision in response to the GFC, aligning the UK’s banking system with international standards and promoting its resilience.

Strong and Simple framework

36: The FPC welcomed the PRA’s Consultation Paper – the Strong and Simple Framework: the simplified capital regime for Small Domestic Deposit Takers (SDDTs). The FPC supported the proposal to descope SDDTs from the CCyB and Capital Conservation Buffer to allow the creation of the new Single Capital Buffer (SCB) for these firms. The SCB would simplify the capital regime for SDDTs while maintaining the overall level of resilience. The FPC judged that the UK CCyB would continue to be effective in protecting the supply of credit to the UK real economy, as it would continue to apply to the vast majority of lending by the banking system to UK households and firms.

Resolution framework

37: The FPC noted the published findings of the Bank’s second assessment of the eight major UK banks’ resolvability under the Resolvability Assessment Framework and the conclusion that they provide further reassurance that a major UK bank could enter resolution safely if needed: remaining open and continuing to provide vital banking services, with shareholders and investors—not public funds—first in line to bear the costs of failure. The FPC welcomed the Bank’s continued progress to maintain a credible and effective resolution regime, and to undertake targeted work with firms ahead of the next assessment, as well as the significant progress made by major UK banks in enhancing their preparations for resolution and embedding resolvability within their organisations. Maintaining a credible and effective resolution regime was a continuous process, and both authorities and firms needed to respond as the financial system and regulatory landscape evolves. 

38: The FPC welcomed the introduction of the Bank Resolution (Recapitalisation) Bill to Parliament on 18 July. The FPC supported this targeted enhancement of the UK bank resolution regime in light of the resolution of SVB UK in 2023. The FPC also noted the Bank’s work to operationalise the resolution regime for CCPs, as legislated for by Parliament in 2023. This helped to ensure resolution arrangements across the financial sector were credible, effective, and proportionate.

The Bank’s development of new liquidity tools to support financial stability

42: The FPC received an update on the work the Bank has been doing to develop new tools for lending to NBFIs in the event of severe gilt market dysfunction that threatened UK financial stability. As part of its responsibilities under the Principles of Engagement governing the Bank’s balance sheet, the FPC approved the scope and principles determining the design of these new tools to ensure that they would be effective in ensuring the stability of the UK financial system:

43: As a first phase in this work, the Bank was putting in place a new Contingent NBFI Repo Facility (CNRF). The CNRF, which would be activated at the Bank’s discretionfootnote [1] during times of severe gilt market stress that threatened UK financial stability, would allow participating eligible pension funds, insurance companies and LDI funds to borrow cash against gilts at times of severe market dysfunction.^{footnote [2]} The CNRF was expected to be open for eligible firms to sign up in 2024 Q4.

44: The FPC welcomed the progress the Bank had made in developing the CNRF. The Committee encouraged potential counterparties to familiarise themselves with the expected design and features of the CNRF and to assess what steps they would need to take in order to be ready to sign up to the facility when it opens for applications, to ensure that they would be operationally ready to use the facility if needed when it is activated during a market-wide stress. It is in the collective interests of all market participants that this new facility is effective at delivering liquidity to eligible counterparties when activated in order to restore UK financial stability.

45: The FPC would be kept updated on progress on the level of sign up to the facility as well as the Bank’s work to explore how to design a facility that could reach a broader set of NBFIs relevant to the functioning of core UK markets.

46: The FPC considered that resilience standards for MBF should be developed in coordination with work to enhance central bank tools to respond in stress. It was vital that domestic and international regulators continue to develop and implement policies that mitigate vulnerabilities in the system of MBF to ensure that it could absorb and not amplify severe but plausible shocks. As part of the Bank’s work to design a facility that could reach a broader set of NBFIs, it would engage closely with firms, industry bodies and regulators.

47: The FPC had previouslyfootnote [3] highlighted the need for further policy work to address risks arising from procyclicality in margin requirements as part of addressing vulnerabilities in the NBFI sector. In cleared markets, NBFIs could struggle to predict initial margin calls during periods of market volatility and there could be added uncertainty about how clearing members would pass on these margin calls to their clients. Separately, in some bilateral markets such as government repo, very low or zero haircuts could allow NBFIs to take on excessive leverage. The bilateral and centrally cleared markets were interconnected, with investors in certain cases able to choose between the two. This interconnection leads to transmission of stress between the bilateral and cleared markets, and underscores the need for risk assessment and policy to consider them holistically. These dynamics were currently being explored through the Bank’s system-wide exploratory scenario exercise.

48: Proposals by the Basel Committee on Banking Supervision, the Bank for International Settlements’ Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions that were consulted on earlier this year, seek to improve the transparency of initial margin calls in centrally cleared markets, and will require CCPs to further consider the potential procyclicality of margin calls by enhancing their evaluation of the responsiveness of initial margin models. The FPC supported this work to reduce potential risks arising from margin reactivity while ensuring robust management of counterparty credit risk in cleared markets, and looked forward to the proposals being finalised by relevant standard-setting bodies, incorporated into their respective policy frameworks and subsequently implemented by relevant authorities and industry.

49: Alongside greater transparency, the FPC supported other international work on margin, including the Financial Stability Board’s consultation on enhancing the liquidity preparedness of non-bank market participants to face spikes in margin and collateral calls. As these activities often involve taking on leverage, which can amplify liquidity stress, it was important that international work to identify and mitigate risks associated with non-bank leverage continues to progress.

Innovation in wholesale markets

50: The FPC and the Financial Markets Infrastructure Committee (FMIC) met jointly to discuss innovation in wholesale markets.

Wholesale uses of systemic stablecoins

51: In November 2023, the Bank published its proposed regulatory regime for systemic payment systems using stablecoins and related service providers, alongside a separate publication by the FCA proposing a regime for non-systemic stablecoins. The Bank’s proposed regime focused on sterling-denominated stablecoins that were intended to be used for retail purposes, and the Bank noted it would consider the risks and benefits of the use of stablecoins for wholesale purposes.

52: As such, the FPC discussed the implications of wholesale use of systemic stablecoins. The FPC noted that there were potential benefits of this. For example, stablecoins, like other forms of tokenised assets, could offer a reduction in settlement times, mitigating settlement risk and improving efficiency. They could also simplify the structure and chain of intermediaries within wholesale transactions and enable further automation, offering new functionalities and efficiencies.

53: The FPC had previously noted the importance of new forms of money respecting the principle of ‘singleness of money’, whereby all different forms of money must be exchangeable with each other at par value at all times. Even if stablecoins were backed with central bank deposits, there remained risks to the stability of the value of the stablecoin, for example as a result of operational risks or an imbalance between the supply and the demand for stablecoins, including if financial market participants run to this new low-risk asset at times of stress. If the value of stablecoins were to deviate from par, this would compromise their acceptance as a settlement asset and could have broader consequences for trust in money. These risks were particularly acute in wholesale markets given their systemic nature and could have financial stability implications.

54: The FPC noted that further technological solutions, business and risk management practices or regulation might mitigate these financial stability risks in future. The FPC supported their exploration given the potential benefits of wholesale use of stablecoins. More broadly, the FPC had a low risk appetite for a significant shift away from central bank money as the primary settlement asset in the financial system, given its role as a vital anchor for confidence. The FPC supported exploring how the benefits of innovation in money and payments could be harnessed, including central bank money alternatives that were compatible with distributed ledger technology, like improvements to central bank provided infrastructure or wholesale central bank digital currency technology.

Wholesale uses of tokenised funds

56: Fund tokenisation activity was already emerging and there were potential efficiency gains and cost reduction from using new technology to administer fund shares. It also had the potential to affect what was used as collateral in the financial system. The FPC discussed the potential benefits and risks of using tokenised MMF shares as collateral in uncleared transactions. For example, it could reduce some liquidity mismatch risks in stress events by reducing the need for investors to redeem their MMF shares for cash to meet short-term liquidity needs—such as margin calls—where market participants could transfer tokenised MMF shares instead. But this activity could also create new risks particularly in more severe stress events where funds need to suspend redemptions, or where confidence was lost that the MMF unit could be redeemed at par.

59: The use of AI in the financial sector could deliver benefits, by driving greater operational efficiency, improving portfolio diversification and risk management, and providing new products and services. However, the adoption of AI could also introduce or amplify existing systemic risks. Both microprudential and macroprudential risks were seen as relevant to an assessment of the systemic risks from AI.

61: The Bank and FCA had taken steps to understand and address the microprudential risks from AI in regulated firms. This included a Discussion Paper and subsequent Feedback Statement on the implications of AI and ML for the prudential and conduct supervision of firms. In contrast, the macroprudential implications of AI had been less explored in regulatory work to-date.

62: Good firm-level risk management was the foundation of managing systemic risks from AI. Specifically, the most advanced AI models, including those based on Generative AI, could pose significant data (eg bias and privacy concerns), model risk (eg explainability), governance (eg predictability and incentive alignment) and risk management challenges. If the use of these advanced models became widespread, particularly in core financial applications, crystallisation of these risks could have systemic implications. As AI models become more powerful and autonomous, and as adoption increases, it would be important to ensure that regulatory frameworks that are neutral to different technologies are able to mitigate these risks sufficiently.

63: At the level of the financial system as a whole, macroprudential risks from AI could arise through structural vulnerabilities. Specifically, disruptions to or issues with common AI model technology and infrastructure systems (eg third party providers of services such as data or cloud infrastructure) might impact the AI models of many firms simultaneously.

64: Macroprudential risks could also arise because of externalities which have procyclical implications for financial markets, though the likelihood of these materialising was uncertain and debated. For example, common model dependencies could result in increasingly correlated trading strategies, and as AI-based trading algorithms become more sophisticated, they could adaptively learn and exploit the strategies of other participants in a manner which, whilst individually rational, could be destabilising for financial markets overall.

65: Systemic risks might also arise from the impact of AI outside the financial system, with second-order impacts on financial services (eg AI-enabled cyber attacks). The FPC noted the importance of the broader economy-wide context when considering the systemic risks from AI. The FPC received an update on broader AI policy context, including legislative developments in the UK and EU.

66: When considering next steps, the FPC supported the Bank, in collaboration with other regulatory bodies, taking actions to enable the effective monitoring of the systemic risks from AI. Developing an effective monitoring framework to understand the most material changes in the use and risks from AI was necessary in order to judge how well captured these risks were in existing regulatory approaches. The FPC also intended to clarify and set out the main systemic risk channels from AI, and planned to publish that assessment, and its proposed approach to monitoring those risks, in a Financial Stability in Focus report in the first half of 2025.

News release

Yesterday, 30 September 2024, the remaining synthetic LIBOR settings were published for the last time and LIBOR came to an end. All 35 LIBOR settings have now permanently ceased.  

The transition away from LIBOR, once referenced in an estimated $400 trillion of financial contracts, has made financial markets safer, more stable and fit for modern use. UK regulators, their international counterparts and market participants have worked together over the past decade to move to risk-free rates (“RFRs”), based on robust data.

Synthetic LIBOR was a temporary bridge to give firms more time to move outstanding legacy LIBOR-linked contracts towards alternative RFRs, allowing for an orderly cessation.

A milestone to celebrate

The transition from LIBOR has been a complex international cross-industry effort spanning well over a decade. The successful transition away from LIBOR would not have been possible without the work and contribution of many people across the globe, including market participants, trade bodies, regulators and other authorities.

Andrew Bailey, Governor of the Bank of England, said: “When I spoke about the future of LIBOR in 2017, this day seemed a long way off. However, market participants have worked tirelessly to update old contracts and support a smooth and effective transition to alternative risk-free reference rates. It has been exciting to follow the immense progress markets have made and I would like to express my thanks to all those involved. The financial stability risks from LIBOR in the UK have been effectively mitigated and allowed for an orderly cessation. It has been a long road, but markets are now operating on more robust and resilient foundations.” 

Nikhil Rathi, CEO of the Financial Conduct Authority, said: “The end of LIBOR is the epitome of a quiet regulatory success, of huge and complex risks unwound diligently over time, including during periods of unprecedented market turbulence. The transition away from LIBOR is one of the most significant events in markets in this generation. It was a task that at times seemed Herculean. Achieving it required coordination between public bodies, across borders and with industry. It shows what can be done through collaboration and with a shared goal. I want to thank everyone who made it happen.”

The Working Group has met its objective

Now LIBOR has been phased out, the Working Group has met its objective. Following agreement from its members, it will be wound down effective today 1 October 2024. 

The Bank and the FCA would like to thank all members of the Working Group, Sub-Group and Task Force members over the years for their valuable contributions in ensuring a successful transition away from LIBOR.

In particular, the Bank and FCA would like to thank the current chair, Sarah Boyce of The Association of Corporate Treasurers, and all former chairs for their support and guidance navigating the successful transition away from LIBOR.

Sarah Boyce, Chair of the Working Group on Sterling Risk-Free Reference Rates, said: “The Working Group has achieved its current objective of finalising the transition away from LIBOR, marking the end of its work. The successes of the Working Group would not have been possible without the efforts of its members and the effectiveness of the public-private partnership. I would like to thank all our members for helping us achieve an orderly transition from LIBOR to more robust reference rates.” 

Looking ahead

Market participants are encouraged to continue to ensure they use the most robust rates for the relevant currency, such as SONIA for GBP and SOFR for USD. Market participants should ensure their use of term risk-free reference rates, such as term SONIA and term SOFR are limited and remain consistent with the relevant guidance on best practice on the scope of use.

With the transition away from LIBOR completed, the Bank, the FCA and Working Group remind market participants that credit sensitive rates (“CSRs”) should not emerge as successor rates, supported by the FPC’s view that these rates are not robust or suitable for widespread use as a benchmark. In particular, the FCA and FPC have communicated to the market that USD CSRs have the potential to reintroduce many of the financial stability risks associated with LIBOR. 

Minutes

Item 1 – Welcome and Apologies

James Kaye (Chair, HSBC) welcomed two new members to the Committee, Daniel Hoye (NatWest Markets) and Mark Codling (Deutsche Bank). The Chair also welcomed guests Adam Conn (Baillie Gifford), Andrew Harvey (Global Financial Markets Association), Lia Oyman (Franklin Templeton), Nigell Todd (Fidelity International) and Sarah Healey (Fidelity International). The Chair also welcomed alternates Aparna Shrivastava (Morgan Stanley), Dean Chard (SWIFT), and Emily Martin (Bank of England).

The Chair noted apologies from Andrew Batcher (LCH), Andrew Grice (Bank of England), Claire Forster-Lee (Morgan Stanley) and Joe Halberstadt (SWIFT).

Item 2 – Minutes of the February Meeting, feedback from the March Main FXJSC Committee meeting and Terms of Reference Review

The Chair provided an overview of the March Main Committee meetingfootnote [1] noting that there had been an update on the FX Global code review, and a discussion on the evolution of custody FX.

The Chair noted that the Terms of Reference (ToR) had been updated following the annual review. The updates were to include the monitoring of actual and emerging operational risks as a key aim of the Committee and to streamline the membership process. It was noted that the updated ToR would be circulated to members after the meeting for comment.

Item 3 – North American Transition to T+1 Securities Settlement

The Chair opened the discussion on the impact on FX markets of the North American transition to T+1 securities settlement, which had been implemented at the end of May 2024. The Chair noted that overall, feedback had been positive with no significant issues identified. This view was affirmed by guest attendees, noting that they had also seen limited impact from the migration.

Item 4 – Investment Association update

Natalie Lovell (Bank of England) gave a brief overview of the April 2024 FX Settlement Survey. It was noted that the October 2024 survey round would provide a further opportunity for other central banks to adopt the new approach for collecting FX Settlement data ahead of the 2025 BIS Triennial survey.footnote [2]

Item 9 – Update on FX Settlement Crisis Playbook

Gail Smith (Deputy Chair – RBC Capital Markets) and Kerry Peacock (Deputy Chair – MUFG) gave an update on the FX Settlement Crisis Playbook. The playbook would be revised to be a best practice, principles-based document, and would include a non-exhaustive list of considerations for firms to consider in the event of an outage of a critical FX settlement system. A draft of the proposed playbook would be circulated to committee members for comment.

Item 10 – Any Other Business

Aparna Shrivastava – Morgan Stanley

Minutes

Item 1 – Welcome and Apologies

Ms Saporta welcomed Adam Pickett (Citigroup), Jenny Wootton (Morgan Stanley), and Valentina Ziviani (Insight Investment) as guest presenters.

Ms Saporta welcomed Oliver McCausland (Financial Conduct Authority) and Lisa Danino-Lewis (CLS) as guest attendees; and Naresh Aggarwal (Association of Corporate Treasurers) and Chris Povey (CME) as observers.

Item 2 – March meeting Minutes

The minutes of the 6 March 2024 meeting were approved.

Item 3 – North America accelerated securities settlement cycle update

James Kaye (Chair of the FXJSC Operations Sub-Committee) noted that the Operations Sub-Committee had met on 19 June. The main agenda item had been a discussion on the impact on FX markets of the North American transition to T+1 securities settlement which had been implemented at the end of May 2024.

Mr Kaye noted that industry feedback on the transition had been positive with no significant issues identified. Firms had prepared for the transition in multiple ways, including through increased operating hours. The Committee cited some caution as firms reverted to business-as-usual following increased scrutiny during the transition period. Lisa Danino-Lewis (CLS) noted that there had not been an observable decrease in deals settling in CLSSettlement.

FXJSC members discussed that a transition to T+1 securities settlement in Europe would be more complicated than for the United States given Europe’s multiple markets and currencies.

Item 4 – Market Update

Giles Page and Adam Pickett (Citigroup) presented an update on recent market developments.

Mr Pickett outlined various factors driving FX markets. He noted that the macro picture remained relatively positive, driven by some robust global economic data.

Members discussed the potential impact of the various 2024 elections on the FX market and noted that the United States election would likely be the focus for H2 2024. Members noted that FX volatility broadly remained low in the near term, but some event volatility had been priced in to reflect election uncertainty. Members discussed that some of that uncertainty could persist beyond the elections as government policies unfolded.

Item 5 – Diversity, Equity, & Inclusion (DE&I) representatives meeting update

Jenny Wootton (Morgan Stanley) and Valentina Ziviani (Insight Investment) presented an update on a DE&I representatives’ meeting that took place on 15 May. The meeting was attended by twelve FXJSC member firms’ DE&I representatives across Human Resources and FX business units.

The presenters noted that the meeting was a welcome opportunity to discuss effective DE&I initiatives across firms, and the challenges that could arise.

Key themes that were highlighted during the discussion had included: the need for businesses to articulate a clear DE&I strategy; the importance of having DE&I representatives within FX business units; employees understanding the importance of firms collecting personal data to allow accurate benchmarking and to track progress; and the provision of training to middle management around inclusive leadership.

James Kemp (Financial Markets Standards Board) noted that the Global Foreign Exchange Division (GFXD) Next Step FX event had taken place on 6 June. The event had been aimed at diverse talent interested in exploring career opportunities within the FX market. The event had included a keynote speech from Sian Hurrell (Global Head, Sales & Relationship Management & Head of Global Markets Europe, RBC Capital Markets) and two panel sessions on the evolution and future of the FX market.

Item 6 – Global Foreign Exchange Committee (GFXC) Update and FX Settlement Survey Update

Simon Manwaring (NatWest Markets) gave a brief update on the GFXC’s FX Settlement Risk Working Group.

The Working Group was considering whether the FX Settlement Risk related areas of the FX Global Code (the “Code”) remained fit for purpose, as part of the three-year Code review. Mr Manwaring summarised the Working Group’s proposed changes to the Code, which included adding the risk waterfall approach for managing FX Settlement Risk to Principle 35. The proposed changes were due to be discussed at the Global FX Committee (GFXC) meeting on 1-2 July.

Philippe Lintern (Bank of England) gave a brief overview of the April 2024 FX Settlement Survey. It was noted that the October 2024 survey round would provide a further opportunity for other central banks to adopt the new approach for collecting FX Settlement data ahead of the 2025 BIS Triennial survey.^{footnote [1]}

Item 7 – Market Structure Update – FX Futures & CME FX Link

Jeremy Smart (XTX Markets) and Paul Houston (CME) presented an overview of FX futures trends and the potential impacts on market structure.

Mr Houston outlined the increased participation in FX futures over the past 10 years, mostly driven by asset managers. Additionally, trading had become more established in CME FX Link, a Central Limit Order Book (CLOB) for trading spreads between spot and futures. Although fundamentally a different product to traditional over-the-counter (OTC) spot FX, the futures market had nevertheless become an important source of price discovery and FX risk management.

Mr Smart outlined the potential trade-offs and differences between the CME futures market and traditional FX trading venues. For some participants, the futures market offered an efficient and robust rules-based trading venue, but it was also more complex, traded fewer currency pairs, and many market participants did not have access to the market. At times, primary price formation occurred on CME across several currency pairs, yet in some episodes of market volatility, trading and price formation had resorted to OTC cash platforms.

Members discussed the evolving FX market structure landscape. There was a range of views on the effect of reduced levels of spot activity on OTC primary venues relative to that in the FX futures market. For some participants, the change in location of trading could make price discovery challenging, particularly in times of heightened volatility. To date, the diverse nature of the FX market had been resilient in recent periods of high volatility, and both banks and non-bank market-makers continued to play an important role in the intermediation and provision of liquidity across that fragmented marketplace.

The Committee would continue to monitor this topic and bring it back to a future FXJSC meeting if required.

Item 8 – FXJSC Sub-Committee updates

Sharon Blackman (Chair of the Legal Sub-Committee) noted that the Sub-Committee had met on 18 June. Agenda items had included: an update on Artificial Intelligence (AI) and Financial Services from Latham & Watkins, which provided an overview of UK AI regulation and a discussion on the global divergence in regulatory approaches; a view from Jonathan Ashley-Norman KC, Three Raymon Buildings Barristers on the Post-Office Inquiry; and a discussion on ethics in the legal profession.

Item 9 – Regular updates

James Kemp (FICC Markets Standards Board) noted that the Financial Markets Standards Board (FMSB) continued to draft the pre-hedging Spotlight Review. Based on the outcome of the drafting process, the goal was to release the review to inform the IOSCO consultation expected later in 2024.

Attendees

Galina Dimitrova – The Investment Association

Giles Page – Citigroup

James Kaye (Chair, FXJSC Operations Sub-committee) – HSBC

James Kemp – FICC Markets Standards Board

Jeremy Smart – XTX Markets

Kate Hill – Aviva Investors

Kevin Kimmel – Citadel Securities

Lisa Dukes – Corporate Representative – Association of Corporate Treasurers

Mani Natarajan – Morgan Stanley

Neehal Shah – BNP Paribas

Nina Moylett – M&G plc

Paul Houston – CME Group

Philippe Lintern – Bank of England

Rajesh Venkataramani – Goldman Sachs

Richard Purssell – Insight Investment

Sally Francis-Cole – London Stock Exchange Group

Sarah Boyce – Association of Corporate Treasurers

Sarah Collins – UBS Asset Management

Sharon Blackman (Chair, FXJSC Legal Sub-committee) – Citigroup

Simon Manwaring – NatWest Markets

Sophie Rutherford – State Street

Stephen Jefferies – JP Morgan

Vicky Saporta (Chair) – Bank of England

FXJSC Secretariat

James O’Connor – Bank of England

Joseph Hanrahan – Bank of England

Laura Austin – Bank of England

Sakshi Gupta (Legal Secretariat) – Bank of England

Guest attendees

Adam Pickett – Citigroup

Chris Povey – CME

Jenny Wootton – Morgan Stanley

Lisa Danino-Lewis – CLS

Naresh Aggarwal – Association of Corporate Treasurers

Oliver McCausland – Financial Conduct Authority

Valentina Ziviani – Insight Investment

Apologies

Alan Barnes – Financial Conduct Authority

Marc Bayle de Jesse – CLS

Mimi Rushton – Barclays

Richard Bibbey – HSBC

Minutes

Minute 1: Introduction

The Chair (Sharon Blackman) opened the meeting.

Minute 2: Minutes

The minutes of the meeting of 5 March 2024 were approved.

Minute 3: AI and Financial Services update from Latham & Watkins (Becky Critchley & Gabriel Lakeman)

The speakers presented on the following five areas within AI.

Overview of AI regulation in the UK

There is no single overarching legislative framework or single regulatory function to govern AI. Instead, there is a non-statutory, principles-based approach to be implemented by sector-specific regulators.

There are a variety of examples of the rules and legislation that already apply to the use of AI in a financial services context, including:

• Consumer Duty: The Financial Conduct Authority’s Consumer Duty imposes broad “crosscutting” obligations on firms, including the requirement to “act to deliver good outcomes for retail customers”. The key issue is how to ensure use of AI is compliant with the Consumer Duty, including ability to foresee harm
• Outsourcing/Third-party risk management (“TPRM”): Firms are subject to a detailed regime when outsourcing critical or important functions, but the key issue is the extent to which the use of AI involves outsourcing/ reliance on third-party providers, and has been assessed against the firm’s outsourcing policies and procedures.
• Senior Manager & Conduct Rules (“SM&CR”): SM&CR aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. The key issue is who should ultimately be responsible for AI, including under the SM&CR.

Developments in AI use

The speakers noted that they are being asked increasingly about AI assistance, although they haven’t yet had clients ask for them to use co-pilot in meetings. The speakers outlined recent examples where AI is being used and in what context, highlighting that this is an area to watch.

Key risk considerations

There are a variety of emerging AI risks, some were highlighted:

• Making unsupported recommendations
• Lack of human oversight/interaction
• Conflicts of interests
• Completely false information (hallucinations)
• Bias and discrimination
• Inadvertent performance of regulated activities
• Data privacy and security
• Market stability

There are Risk Mitigation Strategies that can be adopted by firms, to ensure alignment with the current regulatory obligations:

• Firms can understand how legal and regulatory obligations interact with AI use, and ensure that they are able to explain their use of AI to regulators.
• Carry out risk assessments and assign risk ratings
• Consider and account for data protection considerations
• Consider governance arrangements and that a robust AI governance framework is in place
• Consider the existing systems and controls and policy framework and whether any enhancements should be made

The Global FX Code and AI principles

The speakers explained that there six leading principles under the Code which are relevant in the context of AI and under which the use of AI can be considered in an FX context:

• Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market.
• Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX Market activity and to promote responsible engagement in the FX Market.
• Execution: Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent FX Market.
• Information Sharing: Market Participants are expected to be clear and accurate in their communications and to protect confidential information to promote effective communication that supports a robust, fair, open, liquid, and appropriately transparent FX Market.
• Risk Management and Compliance: Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage, and report on the risks associated with their engagement in the FX Market.
• Confirmation and Settlement Processes: Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX Market.

Emerging ethical issues

There are emerging ethical issues that firms are grappling with when developing and utilising AI. Comparisons were drawn between approaches in the EU, UK and other jurisdictions. The speakers noted that the EU approach is quite interesting as they have come in with a legislative regime very early on.

The use of AI in the supply chain was discussed with the participants asking how far they should go to ensure that their suppliers are managing AI. The speakers noted that this is a question that could be asked of suppliers so that they declare what AI they are using, and firms can consider this in their AI risk management frameworks.

Minute 4: The Post Office Inquiry and ethics in the legal profession (Jonathan Ashley-Norman KC, Three Raymond Buildings Barristers)

Mr Ashley-Norman started by giving an historical overview of the events that led to the Health & Safety at Work Act (“HSAW”) 1974, which was developed in response to the particularly dangerous employment conditions that existed the UK at that time. He explained that, amongst other things, the HSAW 1974 made it a criminal offence for an employer to conduct its undertaking in such a way that it fails to ensure the safety of its employees. This created an extremely wide duty on the boards of companies, specifically the individual responsible for health & safety. As risk assessment regimes and codes of practice have been finessed over the years, there has been a corresponding decrease of deaths in the health & safety context. The HSAW 1974 has in large measure completed its task by instilling in the board room the matters relating to health & safety.

Other legislation can be looked at as doing effectively the same thing in instilling boardroom responsibility in other areas, by acting as the deterrent and changing corporate behaviour, e.g., Proceeds of Crime Act 2002, Bribery Act 2010 and Economic Crime Act 2023.

In relation to the Post Office, it will have had managers and directors subject to such obligations, various issues were brought to their attention, and yet they seemingly failed in their duty of care, and so will potentially be at the wrong end of criminal investigation.

Mr Ashley-Norman then put this into the context of the Global FX Code, which is organised around six leading principles: Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance and Confirmation and Settlement Processes. The history of dishonesty, the Ghosh test, which is an objective test, was discussed alongside the Ivey test.

It was noted that an organisation’s culture is hard to change and influence.

Minute 5: Any other business

There was no other business discussed.

Attendees

Sharon Blackman (Chair) – Citigroup
Baljit Saini – NatWest (virtual)
David Harris – Financial Conduct Authority (virtual)
Rakesh Shah – Standard Chartered (virtual)
Rowland Stacey – Goldman Sachs
Simon Goldsworthy – Deutsche Bank (virtual)
Tamsin Rolls – JP Morgan Chase

FXJSC Legal Sub-Committee Secretariat

Sakshi Gupta – Bank of England
Matthew Hartley – Bank of England
Carly Jones – Bank of England

Guest attendees

Becky Critchley – Latham & Watkins
Gabriel Lakeman – Latham & Watkins
Charlotte Branfield – Three Raymond Buildings Barristers
Jonathan Ashley-Norman KC – Three Raymond Buildings Barristers

Apologies

Gaynor Wood – CLS
Harkamal Singh Atwal – HSBC
Krisha Somaiya – UBS
Mayank Patel – Bank of America
Nimisha Kanabar – Morgan Stanley
Sunil Samani – XTX Markets