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ACI BRIEFINGNEWS FROM THE FINANCIAL MARKETS ASSOCIATION

http://www.aciforex.org

Marshal Bailey: The Ethical Banker . . . . .1Meet the President . . . . . . . . . . . . . . . . . . .3ACI Germany Hosts World Class Congress . . . . . . . . . . . . . . . . .4The Benefits of Algos vs Fixes: Panel Discussion . . . . . . . . . . . . . . . . . . . . . .7Non-Dealer Financial Institutions Behind FX Volume Surge . . . . . . . . . . . . . .9Regulatory Focus: ACI FXC to Tackle Impact on Industry . . .11

ACI Mauritius Hosts Education Event . . .11The Congress in Pictures . . . . . . . . . . . . .12Committee for Professionalism to Add Sections to Model Code . . . . . .13European Buy Side Expresses Concerns About FX Regulation Impact . . . . . . . . . . . . . . .14Industry Concerns Push European Commission into FX Definition Consultation . . . . . . . . . . .17

ACI Board of Education to Launch New ACI Diploma Structure . . . . . . . . . . . . . . .18Attention Turns to Italy 2015 . . . . . . . . .19Chicago Fed Explores Thorny Issue of High Speed Trading . . . . . . . . . . . . . . .20

Q2 2014 VOL 19, ISSUE 113 ISSN 1469-2031

ACI BRIEFING IS PUBLISHED BY:

Marshall Bailey’s appointment asACI’s full-time President comes at acritical time for members, especiallythose involved in trading businesses.

“Marshall’s experience, strong ethicalstance and leadership will help us forge apath with sell- and buy-side individualsand our regulators,” says Eddie Tan,Chairman of the ACI Managing Board.“We conducted a year-long search anddetermined that we needed someone whocan guide us through the challengesfacing the industry, and who can workclosely with the many facets of ourAssociation. ACI has been a leader formany years with its Model Code andfinancial markets education andcertification programs, as well as on FXoperational matters.”Philippe Jeanne, Head of ACI Europe,adds: “Marshall’s appointment wasresoundingly endorsed by the ACIRegional Presidents, and by anincredibly strong majority of the ACICouncillors. We are excited to be movinginto a period of strength and opportunityfor ACI, especially given the challengesand conditions in the market place. Weknow the value proposition ACI canoffer to market participants, and we areready to help our clients, the generalpublic and industry thrive in a way thataddresses the concerns of all of ourconstituents.”On the sidelines of the ACI WorldCongress, ACI Briefing sat down withMarshall Bailey to discuss his role, hisvision for the Association and the workthat needs to be done over the comingmonths to take ACI forward.

ACI Briefing: What attracted you to therole of President of ACI? Marshall Bailey: ACI is an organisationthat says something important. Themessage it has is that our members standfor best behaviour in the marketplace andwe have our best behaviour laid out in ourModel Code. It isn’t a lawyer’s view ofhow things should be but the aggregate ofthe best thinking of practitioners in themarket. That it has been endorsed andused by a number of central banks and FXcommittees globally speaks to the powerof that message of good behaviour andbest practice. What I also really like about ACI is that itis a voluntary body of more than 13,000dedicated members from more than 60countries, which means it truly is a globalorganisation. These people are similarly-inclined not only to pursue best practicebut to network and discuss ways of takingthe industry forward, and challenge eachother in their thinking.I’m astounded by the commitment ofACI’s members. They are dynamic,energised and they give their free time forthe betterment of the industry. For me,joining ACI at this time in its history, andit has a long history, at a time when a

strong, unbiased voice in the financialmarkets community needs to be heard,was an opportunity that was too hard topass up. I genuinely believe that financialinstitutions that work with us and endorseour work are helping themselves andhelping their clients. If you want to instil a culture of bestbehaviour in banking and you want toprove to others that you are able to followthe best code in the market, joining ACI,putting your members through theeducation programmes and having themratify the Model Code is an obvious wayto go.AB: What is your vision for ACI and howdo you plan to move forward? MB: My vision is being solidified as Iwork with members of ACI. I report to theManaging Board and my plan is to workwith the leadership of the Association toexecute on our plan. So, while I have verystrong ideas about what is needed andhow we can best help the financialmarkets community, how we can bestposition ourselves and our membership, Ineed to make sure that I am serving ourglobal membership, and follow the leadthat we have set up here in Berlin. The plan and vision will includeprofessionalising our contact with thecommunity, in other words how we workwith traders, heads of trading desks andprofessional market participants. We aregoing to be heavily focused on our ModelCode and on the work that the Board ofEducation does in providing certificatesand diplomas, and we are going to help thefinancial markets to deliver a standard thatupholds the highest values for the industry.

Contents

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Marshall Bailey: The Ethical Banker

PROFIT&LOSSIN THE CURRENCY & DERIVATIVE MARKETSACI Head Office: 8 rue du Mail, F-75002 Paris, Tel: +33 1 42975115 / Fax: +33 1 42975116

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ACI BRIEFING I NEWS FROM THE FINANCIAL MARKETS ASSOCIATION I Q2 2014 VOL.19, ISSUE 113 I http://www.aciforex.org

AB: Do you see ACI as a lobby group?MB: While I think we have an importantmessage and voice that will be heard, Idon’t believe that lobbying on regulation,for instance, will be a central theme for usat this point. If we stick to our strengthswe will not only grow rapidly in thisenvironment with our membershipexpanding in important ways, but we willbe able to determine how much time wehave to engage in lobbying and for whomwe might want to speak. It is important toremember that we don’t only representbanks, but also other participants such asclients, and we bring a voice that has best-practice as a constant theme.AB: Will your approach be proactive orreactive to events?MB: Definitely proactive! Just like theglobal financial crisis in 2007 helpedbanks to better understand their ownbalance sheets and help the industry toimprove the culture in banking and lookat liquidity in different ways, I think thatthe question around LIBOR and thequestions being raised around the FXfixes will allow us to examine ourindustry, and we will certainly be able tohelp the market to respond by leading itinto a world of best practice.AB: What role could or should ACI playaround the whole fixing scandal?MB: I think if you are a head ofcompliance or legal, or a senior executiveor on the board of a financial institutionand you need to satisfy yourself or yourboard or your shareholders that membersof staff are completely au fait with bestpractices and model code behaviours andhave a way of endorsing those behavioursthrough education, certification andratification then you are going to be inmuch more comfortable position. I believe that we are in a regulatedbusiness, but it is self-regulation, and jointcooperation around best behaviour isgoing to be most effective if it is done ona level playing field, i.e. if financialinstitutions and professional participantsare subject to the same rules andbehaviour and we use an internationallyaccepted code like the Model Code ratherthan splintering off regionally or usingdifferent measures for commercialpurposes. Our clients are global, our membership isglobal, we represent both the buy-side andsell-side, we represent people who tradeand people who don’t trade in themarketplace and the foreign exchangeindustry is the world’s biggest market, soto be able to come to the ACI and provide

that assistance with each segment in thetrading community seems to me to be anobvious way to go.AB: What challenges and opportunities doyou see for the Association in the yearahead?MB: The biggest opportunity for themembership is to become relevant toglobal financial markets. Thatopportunity, like so many things in somany industries, comes out of thechallenges of the global financial crisisand the LIBOR and foreign exchangebenchmark order execution questions.And because there are things to improveupon, like conduct with clientinformation, I think there will beopportunities for us to offer membersfresh reasons to join. Because our existingmembership provides such personalcommitment I’m sure when others jointhey will also want to participate in newways, and we will find ourselves with allkinds of new momentum as a result ofvolunteering.AB: So one of your aims is to increasemembership?MB: Absolutely. We have been increasingmembership and broadening the types ofasset classes that we represent. Foreignexchange is our core strength and we canlegitimately claim to represent the foreignexchange industry as a result of the coreexpertise that comes from that but weshould do as well in other asset classes aswe have done in FX. We also have hadstronger membership in some regionsthan in others. My view is that if you are aprofessional market participant and youwant to participate in a group like ACI –The Financial Markets Association thathas a history and a tradition of bestpractice, why would you not want to joinus? It doesn’t matter where you are in theglobal markets. And to your questionearlier about whether we are going tolobby, there are plenty of associations andindustry groups that are doing wonderfulwork and represent various segments ofthe market. From my perspective, if youwant to join ACI, you’re very welcomeand if you want to participate and help usto get better you’re very welcome to doyour part as well.AB: Do you plan to work with these otherindustry groups?MB: Yes, I think there is a place at thetable for all of us and what I want toensure is that we understand what theothers are doing and we play to ourstrengths and do what we do well. We arenot specialist lobbyists in ACI, and do notrepresent one segment. We focus on

conduct and education, and provide strongsupport to our members in other areas. Tothe extent that we may have gaps andother groups have strengths, we can helpto fill in with our specialism by workingtogether.AB: What do you plan to discuss andachieve in Berlin?MB: What I want to do is understand theviews and concerns of the senior ACIleadership. What they say is reallyimportant to me and from all of this Ihope to have an endorsed vision that I canwork with and execute on the mandategiven to me by these people. So I’m nevergoing to have a better chance in my firstmonth on the job to really sink my teethinto it as I have this week, I’m reallyexcited about it. AB: What message would you like to giveto ACI members?MB: To me the message is the importanceof what we, as an Association driven byindividual membership, can bring to anindustry that is frankly crying out forleadership and knows that while it hasalways tried to do the right thing and isfull of well educated, hardworking,determined, professional marketparticipants, it has a chance now to do itsjob better. As an example of that, over the last monthactivity in the foreign exchange markethas dropped off dramatically, andparticipation in the fixes has dropped offdramatically, but why? To me the answeris obvious – the reason why people havepulled away from doing what they knowhow to do very well is that there is toomuch uncertainty about what can andcan’t be done. It’s that uncertainty that wecan help clarify. The market has beenfrozen by uncertainty. We will help tobring clarity through dialogue. What we as an Association can do is helpshine a light on what is expected as aprofessional market participant aroundthis kind of activity and if I were a trader Iwould welcome that clarification; if Iwere the head of compliance or legal Iwould want to be reassured that peopleworking for me understand best practicesand from that, as has always been thecase, people will do what is required toget things done and to do their jobs well.Individual bank codes of behaviour willnot be as trusted, not as robust, and mightadd to the confusion. ACI’s membershiphas helped drive a globally acceptedCode. Members have always had theirclients’ interests at heart, they’ve alwayshad their shareholders’ interests at heartand we can help them along.

Marshall Bailey Continued from p.1

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Marshall Bailey was officiallyinaugurated as the ACI-The FinancialMarkets Association’s first full-timePresident in its 60-year history at the53rd ACI World Congress.

Addressing attendees at the Congress inBerlin, Bailey, who has held a range ofsenior financial managerial roles over a25-year career, said: “During much of thistime I have been a proud member of ACI.I remember with fondness the honour wefelt when saying that our ‘word is ourbond’ and ‘once a dealer, always adealer’, because that was the moral codethat testified to the gold standard of ourreputation as traders.”A former foreign exchange trader,London-based Bailey was chief operatingofficer, UK and EMEA with State StreetGlobal Markets, managing the Marketsbusiness day-to-day until his departure inDecember 2012. During his time withState Street he also served as head of theLondon branch of State Street GmbH andheld the roles of Director in State StreetBank Europe and Chairman of StateStreet Global Markets International.He joined State Street following an 18-yearcareer with RBC Capital Markets in Torontoand London, where he served as head ofEMEA and Asia global financialinstitutions, global head of central bankcoverage and as head of institutional FX.Prior to this he was an FX and fixed incometrader at UBS in Geneva and Toronto. “My appointment is the first ever full-time global President delegated by theManaging Board in the ACI GlobalCouncil. For all of us here this representsan opportunity to review our activity andto drive our Association in the directionwe need,” he said. “It is the power of yourvoices that are represented globally thatwill continue to see the strengths of ourAssociation shine through.”His appointment comes at a critical time,particularly for the foreign exchange marketwhich is facing one of the biggest crises inits history. While investigations intoallegations that traders colluded tomanipulate benchmark fixings of ratescontinue and financial markets face thespectre of increased regulation, Baileybelieves the upheaval will ultimatelyimprove the way markets operate. He alsofirmly believes that ACI has a role to play inproviding clarity on what is allowed andwhat is off limits in the trading environment.

“The errors committed before thefinancial crisis set in and the exposurethat is given to the darker side of bankingculture means that all permitted marketparticipants are facing increasedregulation and demands that we proveourselves to be of the highest quality,” hetold delegates in Berlin. “We at ACI areof the highest quality and we have a wayof proving it.”He pointed to the Association’s long heldModel Code, a code of conduct written bypractitioners for practitioners that coversstandards of behaviour, includingguidance on morals and ethics, personalconduct and dealing practices.“When the global financial crisis put ourindustry under more pressure than it hasseen in many lifetimes, and the publicwho spent their tax money bailing thesystem out demanded changes to whatthey see is a banking culture that hasdistorted values, the ACI Model Code hasbeen a guiding light for the FX and otherprofessional markets. It can be used byour membership to show that we, as ACImembers, believe in having the rightculture for our industry, a culture based onethical behaviour, the highest standards ofdealer and operations education and aninclusive and diverse group of individualsto find a practical answer to the practicalproblems that we face,” he said.“For our markets’ behaviour to be lesscriticised we need to educate all sidesincluding politicians, regulators and themedia about how benchmarks are set, howfixings work, what is good, what is risk,and importantly how to avoid falling intobad habits with respect to sharing

information inappropriately on clients’behaviour. We have very important thingsto say about this. I know that if I were theglobal head of compliance or the generalcounsel in the legal department or the headof markets, the head of trading or a juniordealer starting a career, I would demandproof that my area of responsibility wascompliant with the Model Code.“Our strength is that we provide guidanceon ethics and behaviour in a largely self-regulated market via our offer of theModel Code,” he continued. “It is criticalbecause our membership organisationsrepresenting the buy-side as well as thesell-side in foreign exchange, moneymarkets, fixed income, commodities,derivatives and many other professionalareas are demanding clarification andguidance. We can educate and certify toprovide safety and comfort for thosewanting to follow best practice. “We can use our experience, our historyand our leadership from each of you,” hetold attendees, “to create a secureenvironment for ourselves and for thenext generation of our membership andwe can expand into new markets, we canrebuild the associations that have fallenaway and we can work globally to securea financially viable Associationinternationally, capable of meeting theneeds of the 21st century.” Bailey said the ACI would follow on fromthe strengths and great work done byprevious Presidents, particularly ManfredWiebogen who led ACI for six years.Wiebogen was commemorated for his work,dedication and many achievements for ACIat the General Assembly at the Congress.

MARSHALL BAILEY ADDRESSING ATTENDEES AT THE ACI GENERAL ASSEMBLY

Meet the President

The 53rd ACI World Congress, hosted by ACI Germany in Berlin from27 to 29 March 2014, was heralded agreat success by attendees, speakers andexhibitors alike. Financial market professionals from allsides of the markets attended theCongress to participate in a businessprogram that dealt with many of thecrucial issues facing today’s financialmarkets.

“ACI Germany is proud that more than1,000 participants from all over the worldfollowed our invitation to attend the 53rdACI World Congress in Berlin,” saidGeorg-Heinrich Sieveking, President ofACI Germany. “We are very happy that wecould offer to so many delegates ourcomprehensive program on the most recentquestions and trends across the financialmarkets business, as well as opportunitiesfor discussions and networking amongbusiness partners.” Following a dinner exhibition to welcomeattendees, the two-day business programbegan on 28 March with the ACIInternational General Assembly. Eddie Tan,Chair of ACI began his speech by outlining the challenges thefinancial markets face and how the industry needs to be resilientand strong. “We, the ACI, must take the same lesson as Berliners, who arestrong and resilient people, for the banking and financial marketsare going through a difficult period of time and the toughestchallenges are still ahead of us,” he said.“There have been many changes for the industry and the bankingsector at large and we are all going through some form ofstructural transformation to win back the credibility with ourregulators and customers. The regulator landscape has changedrapidly and is forcing banks to rethink and react to the demand ofstringent rules,” Tan said.“While regulations such as Dodd-Frank and EMIR have theirmerits, the reality is that the heightened regulatory environmenthas brought its own problems. These regulations haveunintentionally shifted much of the recent activities into the lessregulated shadow banking sector. This is creating a concentrationof risk and is real in Europe, in the US and all of the emergingmarkets.“Banks are also struggling to find growth. Where isprofitability going to come from? Many US and Europeanbanks are struggling to lower their cost income ration.Regulatory capital is going up, therefore cost is going up,” Tansaid. “In addition, business models are being challenged bythis environment which is seeking transparency over costs andstringent protection through substantial holding of capital.Banks today are often seen as a utility-like model withnominal returns.“This is not an encouraging position. As an industry we need tostay resilient and strong, we need to adapt to the changes and

meet the challenges head on. ACI is no exception. We need torepresent our membership and their interests in all these arenas.We can only do that by promoting skill development in ourprofessions and promote the quality of our engagement with allplayers in the market space. “ACI is moving forward and embracing this change. It has a fulltime staff and President, and the Board Committees are workinghard in the areas of training, accreditation and engagement withthe financial markets. ACI can stay strong and resilient, it muststay relevant, and we will become a stronger organisation.”Tan then handed the assembly over to the Chairs of theCommittee for Professionalism (CFP), the ACI FX Committee(ACI FXC) and the Board of Education to discuss the projectsthat they are working on.David Woolcock, Chair of the CFP, said the Committee plans toamend or include a number of sections this year to ACI’sguidelines covering the professional activities of financialprofessionals – the Model Code – in response to market demand. He highlighted four particular areas of focus: expanding theadvice on what the Committee regards as best practiceconcerning rate settings; adding best practice guidelines forforeign exchange aggregation procedures; providing guidance fortrades that are done at technically off market rates, often referredto as mis-hits or off-market trades; and monitoring the volumesin virtual currencies, particularly the Wocu and Ven. If thesereach an efficient volume and form a significant part of themarket then the CFP will consider adding best practiceguidelines to the area of virtual currencies.Stephane Malrait, Chair of the ACIFXC, gave attendees anupdate on US and European regulation, the differences and how

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ACI Germany Hosts World Class Congress

As an industry we need to stay resilient and strong, we need toadapt to the [regulatory] changes and meet the challenges headon. ACI is no exception, we need to represent our membership

and their interests

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EDDIE TAN SPEAKING AT THE ACI GENERAL ASSEMBLY

regulation has and will impact the FXmarket in the year ahead.“The definition of an FX forward is anissue in Europe because it is considered bythe European Commission as a derivativebut its implementation of that for each localjurisdiction in Europe is different,” Malraitsaid. “For example in the UK for themoment it is not considered a derivativewhere it is in some other Europeancounties. For that the EuropeanCommission is working on a clarification inorder to have a unified mandate. This is stillwork in progress.”He added, “MiFID is going to be thetrading requirement to trade electronically.It has been defined at the Europeanregulation side and now it is in the processof being written into law by ESMA forderivatives. This will happen this year so it is important for theACI FXC to focus on this and see how we can help the industry.”Malrait also discussed the findings of a White Paper, co-produced by the ACI FXC and financial market consultantAdsatis, on the impact of regulation to the buy side, highlightingconcerns regarding the imposition of trade reporting, centralclearing and transacting on approved electronic venues.Updating attendees on the work of theBoard of Education, Claudia Segre, Chairof the BoE, said it has updated the ACIDealing Certificate with a new ALM topicand a revamped risk topic and has updatedand extended the ACI OperationsCertificate with a new topic, Best PracticesOperations. In addition, the Board ofEducation has created a new ACI Model Code Certificate and anew Senior Certification. The Model Code exam will at the sametime be a pre-requisite for participants to become eligible for theACI Diploma for ACI Operations. In other developments, the new ACI Global Education Centreonline platform (WikiACI) has become increasingly popular andprovides candidates with two study guides, one for the Dealing

exam and one for Operations exam.In another important development, the Board of Education islaunching a new ACI Diploma, the first four units of which arescheduled to go live in October. After the Committee updates Tan called Marshall Bailey, thenewly appointed full-time President of ACI, to the stage toaddress the audience.

During the General Assembly ManfredWiebogen, the former ACI President andHonorary ACI President gave a farewelladdress to the audience. Tan thankedWiebogen for his dedication, tireless workand numerous achievements over his six-year term and attendees applauded andgave him a standing ovation.

The General Assembly was followed by a high level buyside/sell side panel discussion on recent developments in theforeign exchange markets with a particular focus on fixings,regulation and how to keep the ethos of a self-regulatedmarket alive. The panel discussion was moderated by Woolcock and thepanellists included: Malrait; Chris Knight, head of e-trading

(East), FX, rates and credit, StandardChartered; Robert Entenman, Global Headof e-Commerce, UniCredit Banking Group;Paul Chappell, founder and CIO ofcurrency manager, C-View; Patrick Fleur,manager of trading and execution at PGGMInvestments; and Sven Carlsson, head ofmarkets at Ericsson Treasury.With regard to the ongoing fixing enquiries,the panellists agreed that while there is aneed, particularly internally, for abenchmark fixing rate, using algorithmscould be a better way of getting currencytrades done.All panellists are members of the ACI FXC,which recently released a white papergauging the buy side’s reaction toupcoming regulatory changes in the FXmarket. Stephane Malrait, Chair ofACIFXC told attendees: “The feedback we

EDDIE TAN AND MANFRED WIEBOGEN

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Congress Continued from p.4

The feedback we get froma lot of the buyside is thatthere is still a need for areference price

Stephane Malrait

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get from a lot of the buy side is that there is still a need for areference price. The FX market doesn’t have an opening or aclosing price so we need a way to be able to permission areference price.” He continued, “However, we are seeing more and moreinvestors using algorithmic trading to smooth their tradingrequirements. The fix was created for a purpose but if youhave 200 million of a currency that you wish to sell and youtry to do it at 4pm in one minute and it’s an illiquid currency,of course you are going to move themarket. Therefore it is much better toslice and dice and execute an orderover time using an algorithm.”The panellists also discussed regulatoryfragmentation and the possibility ofregulatory arbitrage and the buy siderelationship with banks.Contact sessions closed out the day’s proceedings beforedelegates enjoyed the evening party, with the theme of “Germanymeets the World” at the U3-Subway tunnel. The next day began with the General Assembly of ACI Germany.In parallel Helmut Rittgen, Head of Cash Policy DepartmentDeutsche Bundesbank gave a keynote speech to internationaldelegates on the introduction of the Deutsche Mark in the formerGerman Democratic Republic. Following this, a speech was

made to all delegates by Jens Weidmann, President of theDeutsche Bundesbank, on the economic and monetary situationin the Eurozone. The morning sessions closed with a keynote from Peter Zöllner,Head of the Banking Department at the Bank for InternationalSettlements on recent trends in the foreign exchange and moneymarkets. Total FX turnover reached an all-time high of $5.3 trillion perday in April 2013, up by 35% relative to 2010, Zöllner said. Heattributed a large proportion of this growth to a rise in

participation by non-dealer financialinstitutions. The volume share of non-dealer counterparties rose from $1.9 trillionper day in 2010 to $2.8 trillion per day lastyear, an increase of 48%, and accounted foraround two thirds of the rise in totalturnover during those three years.Zöllner also commented on the fall in the

inter-dealer share of turnover from 63% in the late 1990s to39% in 2013, saying that the fall came about for two reasons:banks netting more trades internally, and the emergence ofmore sophisticated electronic dealing technology,incorporating liquidity aggregation and algorithmic trading.He also discussed the currency composition of the turnover in2013 pointing out two major themes that stood out last year: a60% increase in yen turnover relative to 2010, and a significantrise in the global importance of emerging market currencies. Theshare of key emerging market currencies in total turnoverincreased from 12% in 2007 to 17% in 2013, he said.In the afternoon, the World Congress played host to a stream ofworkshops covering recent trends in Asset LiabilityManagement, Covered Bonds, Credits, Foreign Exchange,Liquidity Management, Regulation and Repos. Topics rangedfrom regulatory issues to ESM and EFSF, Paper or Gold andcentral counterparty clearing. The Congress closed with a final networking event in theevening, the Gala Diner, which included the traditional handingover of the ACI flag to ACI Italy, the next host of the WorldCongress. The 54th ACI World Congress will take place in Milanfrom 12-15 February 2015. ACI Germany would like to express its special thanks to theexhibitors and sponsors for their support of the Congress. In ahighly frequented exhibition area, delegates had the opportunityto see many of the latest products and innovations available inthe market.

JENS WEIDMANN HELMUT RITTGEN

ROBERT ENTENMAN

The inter-dealer share ofturnover has fallen from 63%in the late 90s to 39% in 2013

Peter Zöllner

Congress Continued from p.5

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While there is a need, particularlyinternally, for a benchmark fixing rate,using algorithms could be a better wayof getting currency trades done, said apanel of buy- and sell-side speakers atthe ACI World Congress.

Instead of pushing large trades throughso-called fixes, one of the most popularbeing the WM/Reuters 4pm closing spotrates service, investors could benefit fromusing algorithmic execution, typically amethod to execute larger tickets into themarket without the order beingdiscovered.“It is impractical to try and put a vasttransaction through a fix that exists for anano-second in time,” said PaulChappell, founder and CIO of currencymanager, C-View. “There are now anincreasing number of facilities availablefor investors to slice and dice interestthrough timing execution around fixingtimes. I believe it would be moreprudent for industry participants tomove towards using some of theseautomated processes in order to smooththe flow and impact of any largeprojected transactions.” Chris Knight, head of e-trading (East),FX, rates and credit, Standard Chartered,agreed with this sentiment. “Technologycould definitely help investors achievebetter execution. For instance, clientalgorithms, slice and dice etc. There aresuccessful dark pools in the market nowthat could also potentially be used – firmscould put in an interest and see if theycan offset it. I can see differentmechanisms becoming available forinvestors,” he said.The benchmark fixes were introduced 20years ago for asset managers, investors

and corporations to provide them with astandard set of currency rates so thatportfolio valuations could be comparedwith each other and their performancemeasured against benchmarks withouthaving any differences caused byexchange rates. The benchmark rates are determined onthe basis of buy and sell transactionsconducted by FX traders during a 60-second window (30 seconds either sideof 4pm).The benchmark rates for 21 majorcurrencies are based on the median levelof all trades that go through in this one-minute period. The benchmark rates areused to value trillions of dollars ininvestments held by buy-side firmsglobally. Stephane Malrait, Chair of ACI’s FXCommittee, which recently released a

white paper gauging the buy side’sreaction to upcoming regulatory changesin the FX market, told attendees at theBerlin conference: “The feedback we getfrom a lot of the buy side is that there isstill a need for a reference price. The FXmarket doesn’t have an opening or aclosing price so we need a way to be ableto permission a reference price. A lot ofcorporate clients and asset managers haveto trade with their different Treasurycentres at a reference price; therefore theyneed to have this for accounting reasonsand for booking an internal trade.” He continued, “However, we are seeingmore and more investors usingalgorithmic trading to smooth theirtrading requirements. The fix was createdfor a purpose but if you have 200 millionof a currency that you wish to sell and

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The Benefits of Algos vs Fixes: Panel Discussion

PANELLISTS: CURRENT DEVELOPMENTS IN FX – A SELLSIDE-BUYSIDE DISCUSSION

PAUL CHAPPELL CHRIS KNIGHT

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you try to do it at 4pm in one minute andit’s an illiquid currency, of course you aregoing to move the market. Therefore it ismuch better to slice and dice and executean order over time using an algorithm andthen have a tool to measure the efficiencyof your algo. But algo execution is still inan early stage in FX compared to theequities market. It’s definitely growingbut still a small part of the market.”Reiterating Malrait’s point, SvenCarlsson, head of markets at EricssonTreasury, added: “We don’t use fixingwhen we execute externally, however wedo use it internally. Our accountants wantto have a reference rate. We have adefined and limited risk mandate toexecute and we have good executers whotrade when it’s appropriate, when there’s amarket for it. We execute over time ratherthan at one point to smoothen the marketimpact and secure the best possible price.However, internally it’s important for usto be able to show transparency on thepricing by the fix to secure confidencefrom our internal clients.” Patrick Fleur, manager of trading andexecution at PGGM Investments, agreed.He told attendees: “I do think there is aneed for fixings, now and in the future.

We see trends that people want to investin beta, which are investable andtransparent and therefore accountable, sothere is a need from our clientele fortransparent products. “However, we do recognise that the fix isnot always a good reflection of theaverage price of the day, therefore wetransact with a lot of algos.”PGGM uses close to 100 algorithms totransact currencies throughout the day,Fleur said.The panellists’ comments were made inthe wake of allegations that senior tradersat banks used electronic chat rooms toshare client order information and then“colluded” to move markets away fromclient orders ahead of the WM/Reutersfix. The allegations have led to thesuspension of more than 30 members ofthe foreign exchange markets and formalinvestigations have been started byseveral regional regulatory bodies.While the headlines have involved thewords “collusion” and “manipulation”there is a strong body of opinionthroughout the FX industry that ifproved, the allegations are actually thoseof “front running” customer ordersrather than a deliberate attempt to movemarkets, meaning that the profits the

traders earned through their actionsultimately came directly out ofinvestors’ pockets.ACI believes its Model Code of conductfor traders – already used by many majorinstitutions – can play a central role in theindustry’s efforts to take action of its ownbefore regulators sink their teeth in to theissue. David Woolcock, Chair of the Committeefor Professionalism (CFP) and Moderatorof the panel discussion, said, “The ModelCode covers client confidentiality and thefiduciary duty that people have towardsthat. It has definitions of front running,parallel running of orders and it coversthe tricky areas of collusion and marketmanipulation. It also puts a line in thesand as to what is a sensible riskmitigation tactic and what wouldconstitute insider trading.”He added that while its content is relevantand correct the CFP will considerexpanding the advice on what it regardsas best practice concerning rate settings. “I think we will see an evolution of bestpractice recommendations and theCommittee for Professionalism and theACI FX Committee are working veryclosely on how they might beformulated,” Woolcock said.

PATRICK FLEUR DAVID WOOLCOCK

SVEN CARLSSONSTEPHANE MALRAIT

Algos vs Fixes Continued from p.7

9


Greater participation in the foreignexchange market by non-dealerfinancial institutions was a major factorbehind the surge in FX volumes in thethree years to 2013, said Peter Zöllner,Head of the BIS Banking Department,in a presentation to attendees at the53rd ACI Financial Markets WorldCongress.

The volume share of non-dealer financialcounterparties rose from $1.9 trillion perday in 2010 to $2.8 trillion per day lastyear, an increase of 48%, and accountedfor around two thirds of the rise in totalturnover during those three years. TotalFX turnover reached an all-time high of$5.3 trillion per day in April 2013, up by35% relative to 2010, faster than the 20%rise from 2007 to 2010.Zöllner’s comments drew mainly on theBank for International Settlements’ 2013Triennial Central Bank Survey of Foreign

Exchange and Derivatives MarketActivity. He said greater participation by non-dealer financial institutions represented asea-change in the make-up of participantsin the FX markets, which had traditionallybeen dominated by inter-dealer trading.To illustrate the point, Zöllner said theinter-dealer share of turnover fell to 39%in 2013, much lower than the 63% in thelate 1990s. For the first time in its 25-year history, theTriennial survey provided a more granularbreakdown of non-dealer financialinstitutions in 2013. Zöllner said theincrease in FX turnover was drivenmainly by two categories: lower tierbanks; and institutional investors andhedge funds. A significant proportion of dealers’transactions with non-dealer financialcustomers in 2013 was with lower-tierbanks. While ‘non-reporting banks’tended to trade smaller amounts, andsometimes traded these sporadically, in

aggregate they accounted for roughly onequarter of global FX volumes. The other significant category wasprofessional asset management firms,captured under the two labels‘institutional investors’, including mutualfunds, pension funds and insurancecompanies; and ‘hedge funds’. The twogroups each accounted for about 11% ofturnover.Commenting on the fall in the inter-dealershare of turnover, Zöllner said: “This isthe flip side of the increasing importanceof ‘other financial institutions’, and hascome about for two reasons. The first isthat major dealing banks nowadays netmore trades internally. Due to higherindustry concentration, top-tier dealers areable to match more customer tradesdirectly on their own books, whichreduces their need to offload inventoryimbalances and hedge risk via thetraditional inter-dealer market.”

The second, he said, is the emergence ofmore sophisticated electronic dealingtechnology, incorporating liquidityaggregation and algorithmic trading,and which is also now accessible to amuch broader range of marketparticipants.Similarly, non-financial customers,mostly comprising corporations, but alsogovernments and high net worthindividuals, accounted for only 9% oftotal FX turnover, the lowest level sincethe inception of the Triennial in 1989. Reasons for the shrinkage in this categoryincluded the sluggish recovery from theglobal financial crisis, low cross-bordermerger and acquisition activity andreduced hedging needs, as major currencypairs mostly traded in a narrow range overthe past three years. Another key factorwas more sophisticated management ofFX exposures by multinationalcompanies. “Firms are increasingly centralising theircorporate treasury function, which allows

hedging costs to be reduced by nettingpositions internally,” Zöllner said.

Emergence of algorithmic trading

The emergence of liquidity aggregationand algorithmic trading techniques hasincreased interconnectivity between agreater number of market players andenabled a more widespread sharing of riskamong market participants, while alsoenabling quicker execution times andlower trading costs. This also contributedto a rise in total FX turnover. “The more fragmented structure thatemerged after the demise of the inter-dealer market as the main pool ofliquidity could potentially have harmedtrading efficiency by raising search costsand exacerbating adverse selectionproblems. Yet, one of the most significantinnovations to prevent this has been theproliferation of liquidity aggregation. This

new form of aggregation effectively linksvarious liquidity pools via algorithms thatdirect orders to a preferred venue e.g. theone with the lowest trading costs,”Zöllner said. “Widespread use of algorithmictechniques and order execution strategiesallows the sharing of risk to occur fasterand among more market participantsthroughout the network of connectedvenues and counterparties. Over theperiod 2007 to 2013, algorithmic tradingat EBS grew from 28% to 68% ofvolumes.”The availability of new dealingtechnologies has redefined the roles ofeach of the major FX market players.Electronic trading in general and retail-oriented trading platforms in particularhave provided FX market access to abroader range of end users and favour amore active participation of non-dealerfinancials, he said.Zöllner also discussed the currency

The fragmented structure that emerged after the demise of the inter-dealer marketas the main pool of liquidity could potentially have harmed tradingefficiency...One of the most significant innovations to prevent this has been theproliferation of liquidity aggregation

Non-Dealer Financial Institutions Behind FX Volume Surge

continued on p.10 w

10


composition of the turnover in 2013. TheUS dollar retained its dominant positionwith an 87% share, rising from 84.9% in2010, while the share of the eurodecreased from 39% in 2010 to 33% in2013. Two major themes stood out lastyear, he said. The first was a 60% increasein yen turnover relative to 2010, lifting itsmarket share to 23%. The monetarypolicy regime shift by the Bank of Japantriggered a phase of exceptionally highturnover, peaking in April 2013. However,yen trading had already started to riserapidly in late 2012, as marketparticipants anticipated Abenomics.The second theme was the significant risein the global importance of emergingmarket currencies. The share of keyemerging market currencies in totalturnover increased from 12% in 2007 to17% in 2013.“As liquidity in emerging marketcurrencies has improved, these marketshave attracted the attention of

international investors. The strong growthis particularly visible in the case of theMexican peso, whose market share nowexceeds that of several well establishedadvanced economy currencies. Anotherimportant case is the renminbi, which hasexperienced growth of 250%, mainly dueto a surge in offshore trading. China setitself the task of promoting moreinternational use of its currency andintroduced offshore renminbi (CNH) in2010.”While trading in renminbi representedonly 2% of global currency trading lastyear, international use of the renminbi hasbeen increasing, with about 17% ofChina’s global trade settling in its owncurrency last year compared with lessthan 1% in 2009. Anther factor accounting for the rise inFX turnover was a growth of investmentin international assets. With yields inadvanced economies at record lows,investors increasingly diversified intoriskier assets such as international equitiesand local currency emerging marketbonds. Over the past three years, equitieshave provided investors with attractivereturns, emerging market bond spreads

have simultaneously dropped, andissuance in riskier bond market segments– for example local currency emergingmarket bonds – has soared. “Not only did these three factors give riseto the need to trade FX in large quantitiesand to rebalance portfolios morefrequently, but it also went hand in handwith greater demand for hedging currencyexposures. This triggered currency tradingas a by-product of investments,” Zöllnersaid.

Trends in Money Markets

Turning to recent developments in moneymarkets, Zöllner said there have been twonoticeable trends over the past quarter: anincrease in secured funding and changesin the repo market.“There has been an ongoing sizeable shiftfrom unsecured to secured funding byfinancial institutions, particularly in theeuro area, as well as a shortening ofmaturity. In the unsecured market, banks’

cash borrowings decreased by 44%, whiletheir lending declined by 17%, withtrading activity remaining concentrated onmaturities of less than one week.” Overnight transactions account for themajority of borrowing and lendingactivity in the unsecured market. Thesecured funding market’s total turnoverrose by 17%. This was driven mainly by a27% increase in overnight maturities,while the turnover out to one weekincreased by 16%.The ICMA European repo market surveyestimated that the market shrank by 8.2%over the second half of 2013 compared togrowth of 8.6% in the first half. Despitethe slightly positive year-on-year growth,the total market size remains below thelevels observed in 2011 and before thecrisis. Anticipation of future regulatoryconstraints is one reason for the continuedcontraction in repo books, Zöllner said.The composition of the repo market hasalso been shifting. As market confidencecontinues to recover, the share of directlynegotiated repos has increased at theexpense of electronically traded repos. “Furthermore, the share of anonymouselectronic trading cleared through central

counterparties has increased, contrary toanecdotal evidence suggesting that bankswere opportunistic in looking for lowerhaircuts in the uncleared market.”One potential reason for this, Zöllner said,was the increasing tendency of Italianbanks to trade through CCPs as a result ofheightened counterparty credit concerns. “In terms of collateral composition, therehas been a notable increase in Italiancollateral, and to a lesser extent Spanishcollateral, while the share of Germancollateral was unchanged. However, thetriparty agents noted that the biggestincrease has been in French collateral,reflecting increased collateralised lendingby US money market mutual funds toFrench banks.”As banks continue to repay the liquidityfacilities provided by the ECB, they havereturned to the repo market for funding. Thesurvey reveals that the market share of euro-denominated repos has recovered from 57%in June 2012 to 66% in December last year.As a result, collateral remains in high

demand, not only from central bankholdings, due to asset purchases and capitalrequirements, but also from banksattempting to secure funding.Zöllner concluded his presentation withsome general observations about regulation.“The financial crisis exposed significantweaknesses in the resiliency of banks andother financial market participants tofinancial and economic shocks. As part ofthe response, the new Basel rules imposeboth qualitative and quantitative changes tocapital requirements, in addition tominimum liquidity buffers,” he said.“Furthermore, systemically important, or‘too big to fail’, banks have been identifiedand will be made to adhere to even morestringent standards.“It is inevitable that compliance with allthese regulatory requirements will involvecosts. But, even with capital holdings wellabove the minimum levels set in Basel III,the initial investments will reap benefitsin the long term. For one, a more resilientfinancial system will allow the globaleconomy to grow with fewer interruptionsfrom financial crises. And also, whencrises do occur, they are likely to be lesssevere than before.”

As liquidity in emerging markets’ currencies has improved, these markets haveattracted the attention of international investors...this is particularly visible in theMexican peso, whose market share now exceeds that of several other well established,advanced economy currencies

FX Volume Surge Continued from p.9

ACI Mauritius Hosts Education Event

11


The implementation of regulations inthe global foreign exchange andderivatives markets will be a definingfeature of 2014. As such, the ACI’s FXCommittee (ACI FXC) will continue towork with market participants,national ACI Associations andregulators to address the significantchallenges these regulatory changes willbring.

Already this year, the ACI FXC hassurveyed a wide selection of buy-sidefirms and produced a white paperhighlighting their concerns on theimposition of trade reporting rules inEurope and incoming regulationsconcerning central clearing andtransacting on approved electronicvenues.The White Paper was distributed to ACImembers at the World Congress and tothe media at large and is available onthe ACI website. It is now being usedby the ACI FXC as a valuablecommunication tool with regulators toraise awareness of those concerns andthe potential impact these regulationswill have on buy-side firms (see relatedstory).In the coming year, the ACI FXC will alsolook at the continuing FX fixing issue andwill work closely with the Committee forProfessionalism on making amendmentsto the Model Code to expand the advice italready provides on best practices in thearea of rate setting. It will also continue topromote the Model Code to regulators andcentral banks.“Generally there is a fear in the tradingcommunity because we are a self-regulated market and not everyone is

aware of what is off limits. Potentiallywhat was acceptable ten years ago mightnot be permissible now, so we willpromote the use of the Model Code andpush regulators and central banks torecognise it internationally. The Banquede France, for example, promotes it anduses it internally,” said Stephane Malrait,Chair of the ACI FXC. “At the World Congress at least threecentral banks came to us to discuss theModel Code and how it is implemented.Obtaining validation for it, not only fromcentral banks and regulators, but from

banks and buy side firms as well, will be akey area of focus for us,” said Malrait.“Promoting the Model Code to centralbankers and regulators may result in ushaving to tweak it to support localrequirements but this is more a medium tolong term goal.”He continued, “In the short term what wewant to do is go back to the idea of whatis right, what is wrong. We would like toproduce a report on current practices inthe markets through surveying ACI

members on their internal policies andwhat they think is and isn’t admissiblebehaviour.” ACI FXC is looking to launchthe survey within the next three months.The Committee will also continue tofollow regulation updates closely and is inconstant discussions with other industrygroups. “The idea is that we can circulateinformation about the activities of theseother industry groups back to members ofACI. ACI FXC isn’t a lobby group for themain reason that we represent individuals,not the company they work for, and assuch we bring a different type of trust to

central bankers and regulators,” saidMalrait.The ACI FXC represents the whole FXindustry and promotes an orderly,transparent, well-functioning market. Ithas 17 members from different sectors inthe FX industry, including banks,corporates, asset managers, money fundsand trading platform providers. Themembers are located in the major tradingcentres in Asia, Europe and NorthAmerica.

Regulatory Focus: ACI FXC to Tackle Impact on Industry

STEPHANE MALRAIT

In the short termwe want to go backto the idea of whatis right and what is

wrong...byproducing a report

on currentpractices in the

markets throughsurveying ACI

members on theirpolicies and whatthey think is andisn’t admissible

behaviour

The Financial Markets Association ofMauritius in collaboration with ACIGlobal and Thomson Reuters hostedan educational and networking eventat Flying Dodo in March 2014.Participants were members of ACI,economic operators.

At the event, Brigid Taylor, ACIRegional Representative for Africa,

stressed the importance of ACI. Shealso observed that ACI accreditation isone of the preferred requirements forfinancial markets in many countries anddiscussed the education programmesavailable, including the ACI DealingCertificate, ACI Operations Certificate,and the ACI Diploma.Taylor also addressed members of thefixed income markets in Mauritius

and suggested a roll out of aprogramme to the market aimed atenhancing participants’ understandingof how fixed income marketsfunction, enable hands-on applicationto trading fixed income and deliverpractical abilities in accessing pricing,to better enhance the secondarymarket flow of fixed income productsin the local market.

12


WELCOME EVENT - "GERMANY MEETS THE WORLD" ACI GENERAL ASSEMBLY

GEORG-HEINRICH SIEVEKING, PRESIDENT OF ACI GERMANY GEORG-HEINRICH SIEVEKING AND PETER SCHUSTER

MEMBERS OF BERLIN ORGANISING COMMITTEE AND EXECUTIVE COMMITTEE EDDIE TAN AT THE FLAG HAND-OVER CEREMONY

ACI WORLD CONGRESS 2015 ORGANISING COMMITTEE ACI WORLD CONGRESS 2015 ORGANISING COMMITTEE

The Congress in Pictures

13


The financial industry’s need for theACI Model Code has never been morepronounced than it is now and theACI’s Committee for Professionalism(CFP) plans to amend or include anumber of sections to the Model Codethis year in response to marketdemand.

Redrafted by the CFP in 2012 and 2013,the Model Code is a set of guidelinescovering the professional activities of ACImembers. It includes morals and ethics,personal conduct, dealing practices andsegregation of duties, among many otherareas in the front, middle and back office,and these form the main body of the code.Areas that are likely to change over timeas the markets evolve are included in theModel Code as appendices. “We are getting an unprecedented numberof enquiries on the Model Code frombanks and regulators who are seekingmore information on what it contains,how we maintain it and how it is a globalinstrument written by practitioners forpractitioners,” says David Woolcock,Chair of the Committee forProfessionalism, which advises the ACIExecutive Board on market practices.According to Woolcock and KeithSedergreen, the recently appointed ViceChair of the CFP, an area that has drawn anumber of enquiries is related to theongoing issue of fixing. They say marketparticipants in different jurisdictions haveasked the Committee to review the partsof the Model Code that concern ratesettings. “We believe that the content we currentlyhave is relevant and correct but somepeople have approached us to see if wewould expand the advice on what weregard as best practice concerning ratesettings. The CFP is going to review thatto see whether we can be more detailed inthe best practices we recommend,” saysWoolcock.The requests come against a backdrop ofglobal regulatory investigations intoallegations that traders at some majorbanks “manipulated” or “colluded” tomove markets away from client ordersahead of the popular WM/Reuters 4PMFix. The allegations have led to the suspensionof at least 30 traders with an increasingnumber of regional regulatory bodies

announcing that they too have begunreviews to ascertain whether anywrongdoing may have occurred in theirjurisdictions.The CFP has maintained an active stanceon the alleged rate rigging issue, firstly byissuing a press release the day after thefirst revelations, drawing the market’sattention to the relevant sections of theModel Code in which the guidelinesexplicitly cover the responsibilitiesdealers have with regard to clientconfidentiality.“This press release was well received anda lot of work so far this year continues tobe giving background briefings about theModel Code to journalists andregulators,” says Woolcock. “The ModelCode covers client confidentiality and thefiduciary duty that people have towardsthat. It has definitions of front running,

parallel running of orders and it coversthe tricky areas of collusion and marketmanipulation. It also puts a line in thesand as to what is a sensible riskmitigation tactic and what wouldconstitute insider trading.”The CFP is looking to add to the wording,so it is more fixing specific, addsSedergreen. Included in the guidelines is awarning that dealers and sales staff shouldnot “profit or seek to profit fromconfidential information” and that wherea jurisdiction does not explicitly coverinsider trading and market abuse inlegislation or regulations, managementshould provide clear guidelines to staff onhow to handle such information.The Committee continues to recommendthat banks using the ACI Model Codeshould have it signed by traders as readand understood and that they agree toabide by the letter and spirit of it, which isof course mandatory for all individualmembers of the ACI already.

In addition, the ACI’s Board of Educationhas launched a module in theirexaminations on the Model Code. “This isa great addition for banks that are usingthe Model Code worldwide, as they canrest assured that not only have they askedtheir traders to read the Model Code, theycan now test them on it,” says Woolcock.

Aggregation

Another area for review concernsaggregation. Sedergreen says the CFP hasbeen approached by a number of marketparticipants who are trying to collaboratewith the industry in an initiative to havesome best practice guidelines around theuse of aggregation.“There is a mood in the market wherepeople feel there should be precise bestpractice guidelines regarding aggregation.

We have worked with a number of partiesthat are interested in this. We've spoken tovendors who supply aggregators and thebanks who use them and the CFP willcontinue to consult with theseparticipants.”The Committee will take on an intern thissummer to examine and research the areaof price aggregation and aims to add asection on best practices and proceduresfor FX aggregation – for example, howlong a price should be displayed – to theModel Code in Q4 this year. In a further area for review, the CFP hasbeen contacted by parties regardingguidance for trades that are done attechnically off market rates, often referredto as mis-hits or off-market trades,including what constitutes a mis-hit and aresolution process within that.“Although we have a prolonged period oflower volatility in markets, andpotentially because of a reduction in

Committee for Professionalism to Add Sections to Model Code

DAVID WOOLCOCK

We are getting an unprecedented number ofenquiries on the Model Code from banksand regulators who are seeking moreinformation on what it contains, how wemaintain it and how it is a globalinstrument written by practitioners forpractitioners

continued on p.14 w

14


The ACI FX Committee has released aWhite Paper that gauges the reaction ofmembers of the buy side to upcomingregulatory changes to the foreignexchange market proposed under theEuropean Market InfrastructureRegulation (EMIR), MiFID II andBasel III.Produced in collaboration with financialmarket consultants Adsatis, the researchhighlights the buy side’s concernsregarding the imposition of tradereporting, central clearing and transactingon approved electronic venues.It finds that although corporates, pensionfunds and asset managers support theoverall objectives of the regulations,many research participants believe therequirements have created confusionthrough a lack of agreed and timelydefinitions. They also fear that FX markets – arelatively transparent market with littleobvious systemic risk – and in particular

vanilla FX forwards and swaps, which areprimarily used for hedging by end-users,may be subjected to requirementsoriginally devised to regulate the interestrate and credit derivatives markets postthe financial market crisis of 2007-2008.While they were found to be “generallyresigned” to the impact of regulatory

change on the market, many researchparticipants felt that the inclusion offorwards and swaps in EMIR and MiFIDII to be unnecessary and that it wouldbring few benefits in terms oftransparency or reduction in systemic risk.Many companies were also found to beworking under the assumption that FX

swaps and forwards “for commercialpurposes” would be exempt from mostEMIR and MiFID II requirements.

Trade Reporting

Regulation concerning theimplementation of trade reporting in

Europe attracted the most feedback fromresearch participants. According toStephane Malrait, chair of the ACI FXC,many of the buy side participantsinterviewed were not ready or aware oftheir own obligations for trade reporting.Starting on 12 February 2014, EMIR

liquidity, we are experiencing someextreme volatility in very short timeframes,” Woolcock explains.While the Model Code provides guidanceregarding these trades, the CFP hasreceived requests for more detailed andupdated market guidelines explainingwhose responsibility it is to resolve anyissues.Participants have also asked theCommittee whether it could come up witha new recommendation of best practice toprovide firm guidance on when to amendor even if it is right to cancel trades. “We have coverage in the Model Code ofoff-market trades but practices do evolveand best practice needs to follow thatevolution. We have spoken to primebrokers, banks, platforms and all of themsay they would welcome a betterdefinition of what their responsibilitiesare when we have off-market tradesoccurring,” says Woolcock. The CFPplans to unveil guidelines on off-markettrades in Q4.Virtual currencies have also made it ontothe Committee’s agenda this year with theCFP monitoring the use of the WorldCurrency Unit (Wocu) and more recentlythe Ven, noting that it has anecdotalevidence that some oil companies and

major multi-national companies are usingthe currencies for genuine risk mitigation. “We will continue to monitor the volumesthat are traded in these currencies and ifthey reach a sufficient volume and form asignificant part of the market then we willconsider adding best practices in this area.The Committee has also looked atBitcoin, but my personal view is that it isa fad and not really an area that we will befocusing on,” says Woolcock.“We’re looking at these, but it’s like anycurrency – we don’t target specificcurrencies, rather we provide guidance onthe procedures of trading currencies,”says Sedergreen.

Expanding the CFP Team

In other news, the CFP has been adding toits team over the past six months and is inthe process of recruiting some new

members with particular expertise. In October last year Sedergreen, who is aManaging Director at Tullett PrebonAustralia, was appointed Vice Chair of theCFP. The newly created role ensures thatACI members have a contactablerepresentative in the Asia region. Inaddition, Robert Entenman, Global Headof e-Commerce, UniCredit BankingGroup, was appointed liaison between theCFP and the ACI FX Committee. The CFP says it will be announcing a newmember from the prime brokeragecommunity shortly and hopes to expandthe committee to 10 members this year.Finally, in a move which serves tohighlight the global reach of its work, theACI Model Code has been translated intoGerman following its translation intoChinese in 2013. The Committee isanticipating a translation into Italianamongst other languages later this year.

European Buy Side Expresses Concerns About FX Regulation Impact

KEITH SEDERGREEN

There is a mood in the market wherepeople feel there should be precise bestpractice guidelines regarding aggregation

While the buyside was found to be “generally resigned” to theimpact of regulatory change, many felt the inclusion of forwardsand swaps in EMIR and MiFID to be unnecessary

CFP Continued from p.13

continued on p.15 w

15


made it mandatory for European andmultinational counterparties to reportdetails of any derivative contract (OTC orexchange traded) that they had concluded,modified or terminated to an EU-recognised trade repository. The implementation of trade reporting hasalready highlighted a problem, theresearch finds, of interpretation on whatactually constitutes a derivative for thepurposes of the regulation. EMIR passed the definitional questiononto MiFID II but as a directive, MiFID IIleft it to the national regulators in theEuropean Union member states to adoptthe rules, and their interpretation of theMiFID II definitions have varied. This is aparticularly critical aspect in theclassification between spot and forwardsin FX and the definition of “FX forwardsfor commercial purposes”. The European Securities and MarketsAuthority (ESMA) then requested in aletter to the European Commission, sent on14 February 2014, outlining the need forfurther clarity “as a matter of urgency” onwhich FX instruments should be defined asderivatives for the purposes of tradereporting and that the EC clarifies thesedefinitions and passes an act, or a similarmeasure, to create a standardised definitionacross all jurisdictions within the EU.On the 10 April, the EC launched a publicconsultation into the definition of FX spotand forward contracts. The consultationdocument asks for the industry’s views on“where the boundary lies between what isan FX financial instrument and what isnot; specifically the definition of a spotFX instrument”.The lack of clarity has so far resulted inFX forwards being excluded completelyfrom reporting requirements in the UKand Luxembourg, based on how theMiFID definitions were interpreted by theUK Financial Conduct Authority and theCommission de Surveillance du SecteurFinancier.Under the EMIR reporting requirements,the exemption is for FX forwards with asettlement date up to 7 days and FXforwards that are concluded forcommercial purposes. But according tothe EC, the majority of member states donot have a “definition of a forward ordelineate a boundary for FX spots in theirlegislation.” “Some member states have determinedcut off periods of up to seven days beforeclassifying a spot contract as a forward,although the majority “adopt a two-daydelineation and/or look at standard market

practice”, the EC says.“In practice, though, the delivery andsettlement of a spot transaction does nottake place immediately, for technicalreasons or as a result of market practice,and normally takes place a number ofdays thereafter,” the EC adds. “It istherefore necessary to determine howlong ‘immediate’ is and at what point aspot becomes a forward.”In the US, FX forwards and swaps wereexcluded under Dodd-Frank, leadingsome market participants to expect EUregulation to follow suit. The EC isinviting responses to its consultationdocument until 9 May 2014.“Apart from the regulators’ desire forconsistent application across the EU,these definitions are obviously a criticaldeterminant of which companies areimpacted by the new regulatoryrequirements. For a company to determinewhether its transactions are relevant forthe regulation and whether they exceedthresholds for compliance, it obviouslyhas to be provided with precisedefinitions. It is absolutely clear that thisuncertainty and confusion has added to

the burden on all market users,” the whitepaper research says.From the spring of 2013, it became clearthat the US approach of only requiringone counterparty (usually the bank) toreport a trade to a central repository wasalso not necessarily going to be followedin Europe. The nature of the regulatoryprocess in Europe, involving all memberstates, is inevitably more complex andslower moving than in the US. Also, thebias in Europe towards principle-based,rather than rule-based, regulation allowsmore scope for ambiguity, according tothe research.That accepted, nearly all buy-side firmsconsulted said that the imposition of tradereporting was unnecessarily confusingand prolonged. It was pointed out thateven for companies whose FX activitieswere likely to be below any threshold andtherefore unlikely to have to report, therewas a considerable management burden infollowing the debate and investigatingcontingency procedures. Traditionally,SMEs rely heavily on their banks asadvisors with regard to regulatoryobligations. However, without clear

definitions from the regulators, the banksthemselves were cautious about informingclients that there was no need for actionon their part. Another area of criticism was thatalthough there was theoretically enoughtime to allow implementation, delays onimportant points of detail meant that therewas insufficient time to put in placereliable processes and technology. For thisto happen the European trade repositorieshad to be authorised and they in turn hadto agree and define required formats forreporting. Until that point, it was difficultfor reporting entities to make realprogress on implementation projects. Itwas also impossible for banks and servicecompanies that intended to offer thirdparty reporting to be precise about theirservice offering, timing and cost. Companies consulted for the research alsohighlighted other problems related toreporting, the first concerning LegalEntity Identifiers. Providers of LEIs werealso relatively late to the game and it wasnot clear until late in the process whetherLEIs were needed for all subsidiaries,given the European requirement for large

groups to report intra-group trades.In addition, although guidelines forUnique Trade Identifiers were provided, itwas not clear in all cases whichcounterparty was responsible forgenerating the identifier. Mostrespondents said they were intending touse the UTI from the bank or platformthey dealt with, which again created aproblem for intra-group trades. It wasunclear for some time whether identifiersgenerated from the group’s treasurysystem would meet the requirements.Another problem identified by researchrespondents related to trade matching.The EU requirement for both parties toreport a trade means that it is quitepossible that the two counterparties enterslightly different details and could also besubmitting these through different traderepositories. However, the matchingreports which highlight discrepancies on afield by field basis are not permitted toprovide counterparty A with the data thatcounterparty B has entered (or vice-versa). This has resulted in an onerousreconciliation process, respondents said,

The implementation of trade reporting has already highlighted aproblem of interpretation on what actually constitutes aderivative for the purposes of regulation

Regulation Impact Continued from p.13

continued on p.16 w

16


that is almost totally manual and, evenwhere the differences might beimmaterial, a market user cannot simplyaccept the counterparty’s value for thedata item.While it is too early to examine the extentto which the reporting requirements willhelp achieve the overall objectives of theregulations – namely to make thederivatives markets more transparent –companies consulted for the researchmade a number of observations. The first was that the Europeanauthorities had not adequately explainedwhy they needed such a comprehensivecollection of data from both sides of atrade and which aspects they were goingto analyse to enable better management ofsystemic risks. It was generally assumedthat data would be centralised andanalysed to identify concentrations of riskthat would then be subject to furtherforensic investigation. However, many research participantspointed out that this had never been statedexplicitly nor had any guidance been givenon what the authorities might be lookingfor. Many believed that, if this had beenmade clear, it would have been easier toprioritise and resolve issues that aroseduring the implementation process. Inparticular, given that intra-group tradeswere nearly always zero sum and that itwas the net position between the grouptreasury and external counterparties thatmattered, several large companiesobserved that reporting intra-group activitywas a burden without obvious benefit. It was additionally observed that it waseasier to get senior management supportand budget for projects when the benefitsof the commitment could be clearlyarticulated and explained. “Given that most end-users were notregarded as systemically important, it wouldhave made sense to work out many of thedefinitional and practical implementationissues of reporting by starting with arelatively few large organisations such asbanks and repositories who would have hadthe resources and the expertise to resolvethese issues and implement solutions forthemselves and third parties,” says theresearch. “The remaining reporting entities couldsubsequently have been brought into theregime with a clearly defined set ofrequirements and solutions, giving themclear and informed options on how theycould proceed.“The Australian authorities are broadlyadopting this approach and it would

appear to have merits, with little or noeffective weakening of transparency andcontrol. Phasing implementation maybring benefits to the other components ofthe regulatory framework and the ACIwould recommend this approach to beconsidered wherever possible.” Malrait adds, “The impact of tradereporting isn’t going to be only in Europebut for all users who trade with aEuropean entity. This has a potentiallyglobal impact for ACI members.”

Mandatory Clearing

The majority of respondents expect mostcorporates’ FX activity to be exemptedfrom mandatory clearing. However, thecombination of mandatory clearing andBasel III/CRD4 capital costs seemed torespondents to be designed to drive asmuch derivative activity as possible on toan exchange, leaving those required to useOTC with a choice of clearing andposting collateral and/or facing significantincrease in costs, unless the activity couldbe proven to be exempt. The ability to manage the provision ofinitial margin and collateral requirements

is something that varied considerablybetween respondents. Among the financialinstitutions, hedge funds typically havethese arrangements handled by their primebroker so see no material change, apartfrom potentially higher costs. Pension funds and their asset managersmostly have ISDAs with CSAs in place,so can also generally handle the processbut expressed concern about thepercentage levels of initial margin thatmight be imposed. However, those consulted indicated thatmuch of their currency hedging wasconducted on a rolling, shorter-term basisand the impact would be greater forinterest rate derivatives than FX.Intuitively, financial institutions would bebetter equipped to handle hedging throughexchange-traded derivatives but that maynot always be the case and the risk ofunhedged FX exposures might remain. From the corporate treasury viewpoint,most of those consulted were relying onthe “commercial purposes” and thresholdexemptions to avoid a burdensomecommitment. The precise definition thatdetermines whether a derivative is for the

reduction of risks from commercialactivities is back with the EuropeanCommissioner. However, most treasurers said they onlyused derivatives for hedging and wereconfident of an exemption. The largercompanies that were consulted weremostly already comfortable with theclearing process, had ISDAs in place andeither already posted collateral orunderstood the potential burden. The responses varied considerably as tohow mandatory clearing might changebehaviour but, on balance, researchparticipants were concerned that, withoutexemption, tying up working capital incollateral would directly impact theircommercial operations. The companiesinterviewed were assuming that thethreshold exemptions would apply andhad made no real provision for handlingclearing at this point.Michael Birks, executive chairman ofAdsatis, says, “Pensions have a temporaryexemption until 2016, and the feelingamong the pension funds was that wasreally just to give the industry time todevelop exchange traded derivatives touse instead of OTC instruments. The

capital requirements on ETDs were muchmore benign, so in the next few years theywill have to extend their use of theseinstruments. “Pension funds felt the higher costs ofderivatives would inevitably impact theirlonger term net returns, unless theindustry developed adequate liquidinstruments for FX which could be usedas a substitute without too muchassociated basis risk. Corporates weresaying that they may end up not hedging alot of their FX risk because of the cost. Ifthey do that, there are real economyimplications for them as they may end upwith more P&L and balance sheetvolatility as a result.”

Transacting on Approved e-Venues

The requirement to move sufficientlyliquid derivatives to specified tradingvenues did not worry most researchparticipants. Several respondents arguedthat the FX market was sufficiently liquid,transparent and, at the shorter end, largelyexecuted over platforms that would

The impact of trade reporting isn’t only going to be felt inEurope...it has a potentially global impact for ACI members


continued on p.17 w

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The European Commission (EC) haslaunched a public consultation into thedefinition of FX spot and forwardcontracts, some two months after the startof mandatory trade reporting revealeddifferent interpretations of therequirements were adopted by variousmember states.It follows the European Securities andMarkets Authority's (ESMA) letter to theCommission outlining the need for furtherclarity “as a matter of urgency” on whichFX instruments should be defined asderivatives for the purposes of tradereporting (Squawkbox, 20 February,2014). Regulators and market participants claimthe confusion ultimately stems from thelack of a clear definition under theMarkets in Financial InstrumentsDirective (MiFID).According to the consultation document,“concerns have been raised about whetherthe regulation of FX activity is adequateand applied on a consistent basis” andasks for the industry’s views on “wherethe boundary lies between what is an FXfinancial instrument and what is not,specifically the definition of a spot FXinstrument.”The lack of clarity resulted in FXforwards being excluded completely fromthe reporting requirements in the UK andLuxembourg, based on how the MiFID

definitions were interpreted by theFinancial Conduct Authority (FCA) andCommission de Surveillance du SecteurFinancier (CSSF).Under the EMIR reporting requirements,the exemption is for FX forwards with asettlement date up to seven days and FXforwards that are concluded forcommercial purposes.But according to the EC, the majority ofmember states do not have a “definitionof a forward or delineate a boundary forFX spots in their legislation” and in theminority of cases where they have, theapproach adopted has differed.“As a result this provision is not currentlybeing applied on a harmonised basisacross the Union,” the Commission adds.Some member states have determined cutoff periods of up to seven days beforeclassifying a spot contract as a forward,although the majority “adopt a two-daydelineation and/or look at standard marketpractice”.“In practice, though, the delivery andsettlement of a spot transaction does nottake place immediately, for technicalreasons or as a result of market practice,and normally takes place a number ofdays thereafter,” the EC adds. “It istherefore necessary to determine howlong ‘immediate’ is and at what point aspot becomes a forward.”The final definition of FX spot contracts

by the Commission will not only impactthe interpretation of requirements underMiFID, but will also impact theapplication of other key pieces of EUfinancial regulation including theEuropean Market InfrastructureRegulation (EMIR), CRD4 and theMarket Abuse Regulation (MAR).“Once a contract is considered a financialinstrument for the purposes of [MiFID],then activity in that instrument may giverise to authorisation and other obligationsunder MiFID,” the paper states.“Moreover, since the definition offinancial instrument in MiFID is used in awide variety of other legislation, theclassification of an FX contract as afinancial instrument will bring themwithin the ambit of this legislation, inparticular EMIR and its reportingobligations.”Stephane Malrait, Chair of ACI’s FXCommittee says that the outcome will alsohave a “potential global impact for ACImembers”. “The impact of this isn’t going to be onlyin Europe but also for all users who tradewith a European entity,” he adds.In the US, FX forwards and swaps wereexcluded under Dodd-Frank, leadingsome market participants to expect EUregulation to follow suit.The Commission says it is invitingresponses until 9 May 2014.

qualify under the wider definitions ofMiFID, in contrast to SEFs in the US. Some questioned whether there would besufficient liquidity in the longer termswaps and forwards for them to be viableinstruments on an exchange type model.However, the prevailing view was that thegeneral trend towards platform trading ofFX, already in place before the legislation,would continue and that the regulationwould not make a significant difference. However, it is clear that many usersbelieve that standardising FX to fit withan exchange model is neither necessarynor desirable. Although they may meetcriteria for liquidity and transparency, FXforwards and swaps are core bankingproducts supporting commercialtransactions and the bespoke nature ofeach contract needs to be maintained forthe majority of users.

The organised trading facility (OTF)definition may not require suchstandardisation but, in thosecircumstances, many users did not see thebenefits that would be derived from therequirement to move these instruments onto a platform.One observation from all the directfeedback that could potentially improvethe process of future regulatory changes isfor the relevant European authorities toadopt a more coordinated and clearcommunication strategy to keep allmarket participants and relevant tradeassociations adequately informed.Malrait says such feedback from the buyside is important for ACI, Europeanregulators and the FX industry. “Thishighlights buy side concerns and the needfor more dialogue between FX marketparticipants that the ACI represents andregulators,” he said.

“In the US, there were a lot of meetings inWashington between regulators, the banksand the buy side to negotiate the bestways to implement US regulations. Eventhough the US was strict, there were atleast dialogue and recommendations,”Malrait says.Adsatis and ACI consulted with around 20organisations, large and small, in Januaryand February 2014 to assess how theregulation directly impacted their FXactivity and their business as well asasking for their views on the widerimplications. The feedback wassupplemented by independent researchfrom Adsatis and members of the ACI FXCommittee. The ACI White Paper was circulated atthe ACI World Congress in Berlin.Malrait says it will be used as a valuablecommunication tool between regulatorsand each ACI association.

Industry Concerns Push European Commission into FX Definition Consultation



The ACI Board of Education hasundertaken an important project torestructure the ACI Diploma andwork on this will continue over thenext two years.

According to Claudia Segre, Chair ofACI’s Board of Education and AndreasEmser, the ACI Director of Education,candidates will need to have passed theACI Dealing Certificate or the ACIOperations Certificate plus the new ACIModel Code Certificate examination inorder to become eligible for the ACIDiploma exam. Alternatively, candidates who are seniorpractitioners with at least ten years’ workexperience in financial markets and havepassed the new ACI Model CodeCertificate exam will also be eligible forthe ACI Diploma exam. In this instancecandidates should submit their CV to theBoard of Education, which will thendecide on eligibility.In addition to the two mandatory units –Foreign Exchange and Fixed Income andMoney Markets – candidates will have topass an elective unit in order to beawarded the ACI Diploma. The electiveunits include ALM and RiskManagement, Advanced Derivatives,Compliance, Islamic Banking, andOperations. Each unit will be a separateexam of about two hours.The Board of Education will go live withthe first four units – Foreign Exchange,Fixed Income and Money Markets, ALMand Risk Management and AdvancedDerivatives – in October 2014. After thatit will begin designing the other units. The Board also plans to develop a newmembership framework for ACI Diplomaholders. It will set up a recognitionscheme for local ACI exams to beequivalent to the ACI Dealing Certificate.It also plans to establish a continuousprofessional development program tokeep candidates up-to-date with the latestmarket developments.Over the past year, the Board has beenbusy updating the ACI examinations aspart of its ongoing commitment toeducation and in August 2013 it launchedthe new ACI Model Code exam. As noted,the ACI Model Code exam is mandatoryfor senior practitioners and ACI OperationCertificate holders wishing to sit the ACI

Diploma, where they are not ACI DealingCertificate holders.The Model Code is ACI’s code of conductand provides market best practiceguidelines and conventions for globalfinancial markets. It is recognised bycentral banks and financial institutionsglobally as a market standard. The ModelCode exam, which lasts for one hour, isbased on the revamped Model Codepublished in January 2013 and includesthe new FX Best Practices Operations.The exam is designed for marketpractitioners in FX and money marketsand risk and compliance officers.In August 2013, the Board also launchedthe updated ACI Dealing Certificate witha new ALM topic basket and a revampedPrinciples of Risk topic basket. TheModel Code topic basket was adaptedaccording to the rewritten Model Code.Now the whole Model Code is beingassessed in the ACI Dealing Certificate,Emser says.With the ACI Operations Certificate, theBoard has added the FX Best PracticesOperations of the Model Code topicbasket.Exam candidates should also takeadvantage of the ACI Global Education

Centre online (WikiACI), says Emser, asthis offers study guides to help themprepare for both the ACI DealingCertificate and the ACI OperationsCertificate. “We see new registrations for the GlobalEducation Centre from around the worldalmost every day,” says Emser.In addition, ACI has a forum andcommunity site for candidates to connectwith counterparts. They should register at:http://aci.frankfurt-school.de.Last year the Board of Education saw anuptick in the number of exams taken,from 1317 exams in 2012 to 1860 in2013.In other developments, the Board ofEducation conducted special marketingand sales activities last year in Singapore,Malaysia, Indonesia, India, Israel, Russiaand the Gulf Cooperation Councilcountries.“In 2014 we will follow up on thosecountries and will also approachregulators in Hong Kong, Sri Lanka,Bangladesh, Pakistan, Philippines,Thailand, Vietnam and Sub-Saharancountries in order to seek formalrecognition for our exams and support thelocal market,” Emser says.

ACI Board of Education to Launch New ACI Diploma Structure

CLAUDIA SEGRE

ANDREAS EMSER

Candidates will needto have passed the ACIDealing Certificate or

the ACI OperationsCertificate, plus the

new ACI Model Code Certificateexamination, to

become eligible for theACI Diploma exam

Claudia Segre

We see newregistrations for the

Global EducationCentre from around

the world almostevery day

Andreas Emser

18

19


With a successful 53rd World Congressnow over, the attention of ACI membersnow turns to the 54th World Congress,which will be hosted by ASSIOM Forexnext year in Milan. Assiom Forex –ACI’s Italian national association, plansto merge its Annual General Meetingwith the ACI World Congress, thusoffering great opportunities fornetworking and debate for delegatesfrom around the world and allowingthem to meet ACI members in Milan,the host city of Expo 2015.

The ACI World Congress 2015 startsFriday, February 5 and ends on Sunday,February 8. The Congress will host thefirst speech of the year from the Governorof the Bank of Italy, addressed to thefinancial community, that usually takesplace at the Annual Meeting of ASSIOMForex. The speech explores the variousscenarios in domestic and internationalfinancial markets for 2015. ASSIOM Forex was founded in Milan in2009 by the merging of ASSIOM (theBond Dealers Association) and ATICForex (The Treasurers and FX DealersAssociation), but its origins date back to1957, when the first of the Italian financeassociations, ACI Forex Italy, was foundedand joined the Association CambisteInternational, called Forex Club, theforerunner of ACI – The FinancialMarkets Association. The Forex Club wasthe first international body made up ofofficials from foreign exchange desksthroughout the world, created with the aimof facilitatating the circulation ofinformation and the adoption of commonprocedures and standards.Assiom Forex nowadays has more than1,400 Members, representing about 450financial institutions, and works topromote and support the professionalgrowth of financial dealers throughtraining courses. It also promotes technical

expertise and market practices in order tocontribute to the development and integrityof the domestic financial markets in both aEuropean and international context. TheAssociation promotes the analysis, studyand research into techniques, tools andmatters relevant to financial markets. Itsupports relations with national andinternational monetary authorities andsupervisory bodies as well as withcompanies managing the markets and otherinstitutions operating in financial marketsand it reinforces ties with national,community and international bodies with

the aim of improving the activities of itsown Members.Thanks to the creation of a single body,market authorities and supervisory bodieshave, in ASSIOM Forex, a uniqueassociation that is as representative aspossible of the Italian financial systemwith which to discuss and shareproblematic issues, proposals and matters. Globalised financial markets, even at alocal level, need to be able to give globalanswers to investors and companies thatrequire a knowledgeable and transparentapproach from financial institutions readyto make a fundamental contribution to theeconomic growth of the country. TheAssociation carries out its activitiesthrough specific committees and workinggroups. The aims of the Association are:

To favour the adoption of indices relevant tothe markets in which its members operate,To promote and carry out initiativesaimed at improving the preparation andprofessional updating of the Associates.To share, using appropriate methods ofcommunication, information and newsrelevant to the technical operating contextof the markets, including problemsrelating to regulations and tax law,To support synergies with similar nationaland international associations.Synergy on an international level iscreated by the automatic recognition of amember of the Association as a pro-activespokesperson in ACI. Indeed ASSIOMForex is affiliated with ACI – TheFinancial Markets Association, theinternational Association for financialdealers, to which 65 countries and morethan 12,000 associates belong.The Italian financial community iscurrently the nation that has the largestnumber of members among thoserepresented in ACI International and it isvery proactive in that context, through awide and constant participation in all ofthe different ACI Working Groups. Thanks to the representation of allmarkets sectors, ASSIOM Forex hasbecome the single point of reference forthe italian banking and financial system. ASSIOM Forex played a major role in thedevelopment of Project STEP+, a unifiedEuropean money market. Giuseppe Attanà,President of ASSIOM Forex explains whatis behind the STEP+ project. “We start from the fact that the moneymarket needs to be better stimulated. Inorder to do this we need a place where thedifferent needs of the market (bid andoffer) can be better matched. Our idea, inthe case of the money market, is to bringthese different interests together on asingle electronic platform whereborrowers (typically banks) and investors(any kind of funds and insurance firms

Attention Turns to Italy 2015

GIUSEPPE ATTANA

20


typically) can show their interests. “This is a revolution for a market wheretransactions are still not always efficient.The process has become necessary afterthe recent scandals involving interbankrates, beginning with Libor, which wasfound to be manipulated – a scandal thathas resulted in huge fines for manyinternational banking groups,” Attanàcontinues. “And that also involved theEuropean rate, Euribor, calculated dailyby the Banking Federation of theEuropean Union. The project designed byus calling for the creation of a singleEuropean money market was taken overdirectly by the European BankingFederation, which has agreed to take theleadership and to facilitate it, togetherwith the European Central Bank. “The goal is to concentrate volumes oftransactions with the aim to give liquidityto the market, and identifying

mechanisms of supervision and controlthat will ensure the reliability of themarket. This solution will help to revivethe interbank market, because many bankshave left the Euribor panel, so restoringcredibility and confidence to the market,through a solution that ensures ampleliquidity and transparency is vitallyimportant, as is presenting an active roleto the European authorities,” he adds. “Given that the initiative has beendeveloped inside the Money Market andLiquidity Working Group of ACI, this is agreat opportunity to enhance its image andauthoritativeness within markets andinstitutions,” says Attanà. “As far asASSIOM Forex is concerned, thecollaboration with our internationalassociation is for us a real added value anda commitment that will drive much of ourwork. Important and concrete results canbe achieved, in a European perspective,

through the evolution of the markets,specifically the adoption of legislation andthe development of professionalism. Theinvolvement of the authorities will besignificantly important as we work tofinalise the project in a short time.” ASSIOM Forex is looking forward tohosting the 54th World Congress, Attanàsays, “We received ACI International'srequest to organise the World Congress of2015, and we gladly agreed. We haveengaged in the laborious (from the pointof view of organisation) but alsorewarding work. 2015 will be the year ofExpo (the Universal Exposition) that willbe also held in the city of Milan and thatcan represent a real turning point for oureconomy. We will work hard during thisyear in order to properly accommodatethe delegations from those countriesrepresenting ACI International and theFinancial Markets: Welcome to Italy.”

The Federal Reserve Bank of Chicagohas published analysis highlighting anumber of the issues facing bothregulators and market participants as aresult of what it terms “high-speedtrading” (HST).

HST includes high frequency trading,automated and algorithmic trading. In thelatest Chicago Fed Letter, senior policyadvisor, Carol Clark, notes the danger thata runaway algorithm can have as ittriggers other algorithms, adding that themyriad technologies that underpin HSTmeans “systems that are robust yetfragile” are created.Some HST proponents have noted thatthis type of trading represents a naturalevolution of the financial markets,arguing that the HSTs used to simply bethe biggest and loudest people on thetrading floor. Clark herself acknowledgesthe argument that this evolution is similarto those that have seen other majorindustries automated, but points out, “It isdifficult to find examples of firms in otherindustries that were rapidly brought to thebrink of bankruptcy due to technologicalmalfunctions like the 40 minutes it tookKnight Capital to lose $460 million.”Clark does note that in the example ofKnight Capital the market was able toabsorb this disruption with minimalimpact to the overall market, however shealso highlights a recent episode in whichKorean brokerage firm HagMagSecurities lost money (exceeding its

capital) due to erroneously placedautomated orders on the Korea Exchange.“One report indicates KRX had to usecash from an emergency reserve fund setup by the exchange’s brokerage firms tocover the loss,” Clark writes. “If HanMagfiles for bankruptcy and doesn’t find abuyer, the exchange’s brokers will berequired to replenish the money used fromthe fund.”The difference between the two events,Clark argues, is that Knight had customersdeemed valuable by its rivals, whereasHagMag did not. The benefits of HST are acknowledged byClark, who cites research that has found itcan lower costs, reduce volatility andnarrow bid-offer spreads to marketparticipants, however she notes that criticsof the strategy often argue this research isdeveloped by parties with an interest in,or sponsored by HST. She also notes thatsome institutional investors prefer theanonymity that electronic tradingprovides.Looking at the equity markets, Clarkhighlights that order flow is critical to atrading venue’s profitability, which is whythey are willing so sometimes provideHST firms with time, place ofinformational advantages over othermarket participants.The letter outlines the different pricingstrategies being adopted by these venuesin a bid to counter the increasing trend oftrading off-exchange, noting that anestimated 38% of equity trades now take

place in broker-dealer internalisers anddark pools.Finally, Clark claims that, while marketmanipulation has always been a concernin trading, it may be more difficult todetect such manipulation in the world ofHST.She says, “Electronic markets, whichhave been lauded for their transparency,actually have an element of opacitybecause trading firms do not know eachother’s identity.”That HSTs trade on correlated productsacross multiple asset classes and tradingvenues globally is another reason why itis harder to detect them, according toClark. “Moreover, trading venues may bemonitored by different regulators usingdifferent technologies, such as theCFTC’s Trade Surveillance System (TSS)and the SEC’s Market Information DataAnalytics System (MIDAS),” she adds.The letter concludes by posing a numberof policy questions, including whethermarket participants are underpricing therisks of HST, whether they have the real-time control necessary to manage theserisks and whether trading venues shouldevaluate alternative revenue models?On the regulatory side, Clark questionswhether venues and regulators have thetools necessary to effectively monitormarket manipulation and if anyone hasthe authority to implement aninternational approach to responding tosuch [email protected]

Chicago Fed Explores Thorny Issue of High Speed Trading

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