Bank Of England: Minutes Of The London FXJSC Operations Sub-Committee Meeting - 3 March 2021

Minutes

Time: 2pm – 5pm 3 March 2021 | Location: Teleconference

Item 1 – Welcome and Apologies

John Blythe (Chair, Goldman Sachs) welcomed members to the FXJSC Operations Sub-committee meeting held via conference call. Mr Blythe welcomed new member Boyd Winston (JP Morgan) who will be replacing Jason Flynn, and guest presenters Cameron Lyle (Bank of England), Umang Sinha (Bank of England) and Yvonne Deane (UK Finance).

Mr Blythe announced that David Broadway would be stepping down from the Committee.

Item 2 - Minutes of the 12 November meeting

The minutes of the 12 November 2020 meeting were agreed. There were no matters arising.

Item 3 – FXJSC Turnover Survey Results

Cameron Lyle and Umang Sinha (Bank of England) delivered a presentation on the October 2020 FXJSC Turnover Survey results^footnote[1]. Average daily reported UK FX turnover had increased by 7% since April 2020 to $2.6 trillion, but there was a 10% year on year decrease on the all-time high figures reported in October 2019. A positive six month change was seen across almost all products with an 11% increase in FX swap turnover. It was also noted that there was a reversal in the trend of FX spot activity, having declined for the three previous reporting periods, which rose 4%.

Record highs were seen in USD/CNY in October, with turnover rising 56% since April 2020 and 43% year-on-year. These increases were largely driven by FX Spot and FX Options trades, with turnover in each up 73% and 266% respectively since April 2020. Members commented that this increase is likely correlated with China’s increasing internationalisation, which is expected to continue in the future.

Sterling activity rose significantly from April 2020 to October 2020, with GBP/USD overtaking USD/JPY as the second most widely traded currency pair in London. USD/EUR remained the most traded currency pair. Members commented that the end of the UK EU Transition period was likely a key driving factor in high sterling turnover.

The proportion of turnover transacted via Interdealer Direct fell from 23% to 21% and this fall was concentrated in FX swaps. Turnover conducted via Electronic Trading systems increased from 22% to 24%. While Customer Direct saw a relatively steep fall, retracing gains seen in the last survey, voice broker turnover increased from 16% to 19%.

The number of trades fell 9% relative to April 2020 and average daily trade size increased by 18%. It was noted that one potential driver was seen to be increasing volumes of FX swap trading, given that FX swaps are often traded in relatively large ticket sizes. It was also noted that the gradual decrease in volumes of spot FX may have led to the fall in the average number of trades.

In terms of global activity, London accounted for 54% of global turnover, a slight dip since the April 2020 results, down by 1%, with a 4% fall year on year.

Item 4 – Brexit Trade Deals

Yvonne Deane (UK Finance) presented an update on Brexit Trade Deals from a UK Finance perspective. Ms Deane noted that while Brexit was officially 31 January 2020, the transition period muted any immediate changes until 1 January 2021 when the UK access to the European financial regulatory framework for cross-border services ended – and vice versa. Over the last days of December 2020 it was noted there had been a flurry of activity to agree the Trade and Cooperation Agreement^footnote[2] (“the Deal”), although it was noted that this deal was seen to be ‘light’ on financial services.

UK Finance stated members did not report significant market volatility. Ms Deane outlined other impacts identified on markets and trading, specifically Share Trading Obligation (STO) and Derivatives Trading Obligation (DTO), central counterparties and central securities depositories, and Central Securities Depositories Regulation.

Members discussed the road ahead post-Brexit and how the UK will shape its future relationship with the European Union as well as strengthen its relationship with other key markets.

Members also discussed how, from an operational perspective, the UK’s exit from the European Union and the subsequent transition period was a smooth process; it was noted that this was likely a result of extensive preparations by the market.

Item 5 – FX Settlement Crisis Playbook Update

Jon Goddard (BNY Mellon) provided an update on the progress of the FX Settlement Crisis Playbook (“the Playbook”). Mr Goddard recapped on the origins of the Playbook, noting that it was produced in response to the Sector Desktop Exercise held by the Cross Market Operational Resilience Group (CMORG) in January 2015. The Playbook sets out various strategies, trigger points, operating principles as well as common and unilateral options for recovery and re-start of FX settlements following a FX settlement crisis caused by the unavailability of a critical vendor. It was noted that while the Playbook provides a range of relevant options in crisis, underpinned by core planning details, rather than a set of prescriptive rules, it could still be used by firms and supplement existing risk management procedures. Mr Goddard explained that the Playbook has undergone a number of reviews and an overview of it was recently presented to the FXJSC Legal Sub Committee.

Mr Goddard highlighted that there was still an outstanding question regarding the future of the Playbook, how it is used, shared and published. Members discussed how relevant the Playbook would be in current times, being created before the implementation of the FX Global Code (“the Code”) and the Covid-19 pandemic. It was noted that the Playbook may be a good foundation to build on, as members discussed whether it could be further linked to the principles of the Code or upcoming regulation on operational resilience which includes the planning of severe but plausible scenarios.

Item 6 – GFXC Update

David Edmunds (FXJSC Secretariat, Bank of England) updated members on key topics discussed at the GFXC meeting on 8 December 2020 and the progress of the three-year review. Discussion at the meeting focused on the GFXC’s three-year review of the FX Global Code and centred on initial feedback on proposals from the GFXC’s working groups, across five areas: Disclosures; Anonymous Trading; Algos & TCA; Execution Principles; and Settlement Risk.

Mr Edmunds noted that feedback on the working group proposals had been incorporated into the final draft of the papers, which are due to be discussed at the March GFXC meeting. There will be a final opportunity for Committee members to comment on the proposals and provide feedback ahead of the proposals being publicised for public feedback in April - May, with a view for the GFXC to conclude the 3-year review at its June meeting.

Committee members were invited to provide written comments on the GFXC papers. An aggregated summary would be provided to the GFXC Secretariat ahead of the 29 March meeting.

Item 7 - Deutsche Bank Operations Overview

Adam Jukes (Deutsche Bank) provided committee members with an overview of Deutsche Bank’s operational structure from an educational perspective.

Mr Jukes noted that Deutsche Bank’s Chief Operating Office (COO) divisional structure is broken down into six primary areas which correlate with the company’s executive committee: 1. CB, IB & CRU Operations (Corporate Bank, Investment Bank and Capital Release Unit); 2. CB IB & CRU KYC Operations and DBIS (DB Investment Services); 3. Corporate Services; 4. Divisional Control and Risk Office; 5. Central Functions; and 6. COO Americas.

Mr Jukes presented an overview of Deutsche Bank’s Fixed Income & Currencies (FIC) Operations team, which is part of CB, IB & CRU Operations, which covers products including foreign exchange, rates derivatives credit derivatives, listed derivatives, and e-commerce. It was highlighted that this area covers functions including Derivatives Settlement & Confirmations, Middle Office and Fixed Income Securities processing. It was noted that there is a three-way matrix from a Management & Oversight perspective:: 1: Global Product Leads, generally based in London, with responsibility for ensuring front-to-back oversight for the product area and maintaining primary relationships with Trading & Sales and other infrastructure functions for that business; 2: Cross-Asset Functional Leads in offshore teams, who are responsible for the teams managing the day-to-day processing of the Operations functions; and 3) Regional Cross-Product Leads around the globe providing benefits from a local Business and Regulatory standpoint. Regional coverage included the Americas, Asia-Pacific, India, Germany and UK & Ireland. These Product, Functional and Regional Leads all report into the Global Head of FIC Operations.

It was noted that Deutsche Bank Operations has a large overseas presence, particularly in India and Manila. Mr Jukes explained that one benefit from having distributed locations is the increased resiliency that comes with it and noted that, while there were some initial challenges, he believes this setup has worked well for DB FIC Operations throughout the Covid-19 pandemic.

Item 8 – CLS Update

John Hagon (CLS) updated members on CLS Convergence Project progress, highlighting that most members should have completed or be going through regression and scripted testing with an expectation that CLS will migrate its settlement service to the new platform in the first half of 2021, subject to board and regulatory approval.

Mr Hagon noted in relation to ClearedFX, that Eurex plans to go-live on 22 March with three clearing members, subject to an internal and regulatory approval process. CLSNow activity has been low and banks have been slow to adopt the service, likely due to reprioritisation. CLSNet was migrated to the cloud over the weekend, now segmented from the rest of the CLS settlement estate.

CLS had recently undertaken an exercise in collaboration with a global bank Settlement Member (SM), to get a better understanding of how FX trades are settled in CLS eligible currencies and a deeper understanding of what is influencing non-PvP (Payment Versus Payment) settlement. CLS plans to share the preliminary results at the upcoming GFXC meeting and to complete analysis with an additional two members in 2021.

Item 9 – SWIFT Update

Joe Halberstadt (SWIFT) noted that the SWIFT board had recently met to approve six changes for 2021, two of which were new changes and four which were originally postponed from 2020. The most significant change noted was tightened party fields of MT300 series messages for options and commodities, as well as the addition of a new UTI reference code for derivative trades executed in the UK.

Mr Halberstadt highlighted that the industry would need to consider the impact of trades using digital coins and to what extent these trades need to be confirmed, and whether these coins will need to be treated as currency or commodities.

Item 10 – Education & Outreach

i. UK Finance Update

Andrew Rogan (UK Finance) updated members on recent discussions with the Bank of England on the operational resilience policy statements due to be released at the end of March. It was stated that while firms will be expected to evidence that work is underway to implement the policy outlined in the statements at the end of the first 12 months, they will be taking a more liberal view in allowing firms time to build their processes and learn from the statements, giving them additional time to deal with issues.

Mr Rogan noted that the Financial Conduct Authority (FCA) had requested UK Finance to organise a webinar on these statements closer to the publication date. Mr Rogan will forward the details of this webinar and any additional information to the FXJSC Secretariat to share with committee members.

ii. ECB OMG

Steve Forrest (UBS) provided members with an overview of the topics discussed by the European Central Bank (ECB) Operations Managers Group (OMG) at the December meeting. Agenda items included: update on the T2S consolidation project; discussion on the Target2 payment outage on 23 November 2020; update on regulatory changes on benchmarks; draft revisions to the FX Global Code; update from members on current Covid-19 impacts; and a review of the 2021 work program.

iii. GFXD Update

Mr Forrest provided an overview of topics discussed by the Global Financial Markets Association (GFMA) Global Foreign Exchange Division (GFXD) February meeting. Topics on the agenda included: an update from the settlements working group on types of transactions not covered by CLS; and an update on the confirmations working group looking at vendor outreach on platforms and where matching can be improved.

Mr Forrest also noted a discussion related to liquidity management in emerging market currencies was had, and what could be learnt from the Turkish Lira incident.

Item 11 – Any Other Business

The FXJSC Secretariat noted that a 2021 forward agenda had been drafted for the Committee, based on feedback received by members, and would circulate to members for additional comments after the meeting.

Next FXJSC Meeting: 9 June 2021

Attendees

Adam Jukes – Deutsche Bank

Alison Kett (alternate) – Bank of England

Andrew Rogan – UK Finance

Boyd Winston – JP Morgan

Claire Forster-Lee – Morgan Stanley

Daniel Horgan – Citigroup

Gail Smith – RBC

Gavin Platman (Deputy Chair) – Insight Investment

James Kaye – HSBC

Joe Halberstadt – SWIFT

John Blythe (Chair) – Goldman Sachs

John Hagon – CLS

Jon Goddard – BNY Mellon

Kerry Peacock (Deputy Chair) – MUFG Bank

Mike Irwin – XTX Markets

Sharon Chapman – Barclays

Steve Forrest – UBS

Terri Van Praagh – Northern Trust

FXJSC Secretariat

David Edmunds – Bank of England

Devin Bennie – Bank of England

Lauren Hustwitt – Bank of England

Paul Avanzato (Legal Secretariat) – Bank of England

Guest attendees

Cameron Lyle – Bank of England

Umang Sinha – Bank of England

Yvonne Deane – UK Finance

Apologies

Babatunde Carew – FCA

David Broadway – The Investment Association

Matt Dukelow – Bank of England