In association with

SPECIAL INSIGHT
The NeuGroups
FX Managers
Peer Group 2
FX VOLATILITY
OUTLOOK
by Ron Leven, PhD
THOMSON REUTERS
OVERALL MARKET
SHARE WINNER
MULTI-DEALER
PLATFORMS
PAUL CHAPPELL | FOUNDER & CHIEF INVESTMENT OFFICER | C-VIEW
For a long time the foreign exchange market boasted a
depth of liquidity that few other asset classes could claim.
Steadily rising trading volume and a resilient market
structure meant regulators didnt really need to worry
about the potential for a ash crash or liquidity event in FX.
Not any more, warns Paul Chappell, founder and chief
investment ofcer at C-View, a currency management
rm that has been operating in the UK since 1996. A
conuence of factors, including the increasing constraints
on the ability of banks to warehouse risk and devote
balance sheet to market making, means liquidity in some
currency pairs can turn out to be much shallower than it
used to be.
Many banks are now almost entirely precluded from
taking and managing proprietary risk of their own, which
leaves the market vulnerable to a situation where there is
a very limited number of price makers of last resort that
will warehouse risk, says Chappell.
Some have claimed the rise of non-bank market makers
could plug the hole that might be left by banks in times
of stress, but Chappell is unconvinced: Non-banks really
have less responsibility towards the market and its clients.
If for a period of time it suits them to make markets,
they will do so, but if volatility gets too high, they will
effectively just switch off their machines.
The reality in current market conditions, says Chappell, is
that there are times when the FX market is ooded with
liquidity, but at other times markets can be exceptionally
quiet. Liquidity can and does evaporate very quickly and
then takes a while to reestablish itself, which creates a
challenging market environment, he says.
In the meantime it has to be business as usual for
currency managers, and for C-View that has meant
largely electronic trading for many years. In some ways, a
preference for trading electronically means the rm has
been less affected by the cost rationalisation and scaling
back of resources on the sell side, but a cut to ancillary
services has become apparent.
Core execution has not changed very much. We are
seeing some slimming down of the capabilities a number
of the banks have with regards to things like research and
providing market colour things that are deemed to be
perhaps slightly more peripheral rather than core to their
businesses, says Chappell.
As to the execution channel itself, C-View has for some
time been gravitating away from single-dealer platforms,
with a preference for liquidity aggregation technology and
multi-dealer platforms where prices can be sourced from
several providers and best execution can be proven.
We are making more extensive use of aggregators and
multibank venues as opposed to single-bank venues for
execution, because of improved net pricing and the onus
of responsibility on us to show best execution. If you want
to sharpen your competences, theres no question that
executing on an aggregator makes it easier to show that
you dealt at the best price available at the time.
BEWARE
A LIQUIDITY
CRUNCH IN FX
2014 Thomson Reuters.
Seek More.
Prot More.
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FX and cross-asset workow solution for
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offers an easy-to-use interface with accurate
real-time data. It is used in many of our daily
processes and is a key tool for our long-term
planning as well. It is one of my top resources
for managing our currency, commodity and
nancial risks.
Alberto S. Nunez CTP/CMA,
Treasurer IAMGOLD Corporation
For more information please visit us on:
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FXExchange2014
1
2014: FX under the microscope
The FX market is under the microscope like never before, as investigations
into the inner workings of the industry continue and market participants
prepare for the combined impact of the benchmark scandal and ongoing
implementation of new regulations.
At the same time, the FX market continues to serve well the needs of the
worlds real economy. In this inaugural edition of FXExchange, we focus
deliberately on the experience of FX end users banks, asset managers
and corporations that need continuous access to deep liquidity to get
their business done.
At Thomson Reuters, we are proud to have recently published a revised
rule book for the Matching platform, which encompasses new controls
to maintain a fair and orderly trading experience for all participants. It is
this kind of initiative that we believe will set the standard for the future
integrity of the industry.
As the evolution of the FX market continues, we hope you nd the
insights in FXExchange illuminating.
Phil Weisberg
Global Head, FX, Thomson Reuters
INDUSTRY INSIGHT
EDITORIAL
Joel Clark
Freelance Journalist
Anne Friberg
Senior Director, Peer Knowledge Exchange
The NeuGroup
Victoria Hood
Head of Marketing, FX and Fixed Income
Thomson Reuters, Financial & Risk
Ron Leven
Head of FX Pre-Trade Strategy
Thomson Reuters, Financial & Risk
David Wigan
Freelance Journalist
DESIGN AND DEVELOPMENT
Thomson Reuters
Global Creative Services
1 Beware A Liquidity Crunch in FX
2 Record Seeks Best Execution
3 Lenovo in a Hedging Conundrum
7 Technology Arms Race Accelerating
8 AXAs Tech Fast Forward
9 Knights Table Laid for Clients
4 Undercurrents of Change
10 Changing Nature of Corporate FX Management
Processes Due to Regulatory Change
12 In the Valley of the Vols
INDUSTRY INSIGHT
FEATURES
2014 Thomson Reuters 1006102/4-14
Content
Introduction
Contributions
2
THOMSONREUTERS FXExchange2014
3
DAMIAN GLENDINNING | GROUP TREASURER | LENOVO
LENOVO IN HEDGING
CONUNDRUM
Damian Glendinning, Singapore-based group Treasurer at
PC maker Lenovo, sees two-way volatility in the renminbi
(RMB) as a key hedging challenge for the company, and
for the market, in the coming period.
Lenovo is a signicant importer into China and sells in
renminbi, while most of its costs are in dollars, and stands
to gain from an appreciating Chinese currency. But as
China moves to currency liberalisation, he says short term
volatility will rise.
If you are a commercial company working in a low margin
business then you need to focus on short term currency
volatility and the Chinese government has made clear in
recent weeks it is happy to see a wider band of uctuation
for the RMB. In addition they have engineered a decline
in the currency, with the clear objective of sending the
message that, as they move toward liberalisation, you can
expect two-way movement.
The Peoples Bank of China (PBOC) in mid-March
announced that effective March 17, the exchange rate will
be allowed to rise or fall 2 percent from a daily midpoint
rate set each morning by the central bank. The central
bank previously doubled the trading band to 1 percent
from 0.5 percent in April 2012.
Lenovo prefers the forward market for hedging its
currencies exposures, because it is simpler than the
alternatives and less expensive than options.
The main challenge we face is that we have the onshore
and offshore markets, which dont always trade at the
same price, so you can end up with conicts in terms of
which one you trade in. To the extent you use the onshore
market the existence of exchange controls makes life quite
challenging.
Under Chinese exchange controls rms must produce
documentary evidence of an underlying physical import
and there can be a timing mismatch.
When you are doing hedging you are planning a future
date but there may be all sorts of reasons why you wont
pay your supplier on that date.
At the same time using the offshore market can lead to
timing issues, with settlement in Hong Kong and cash still
in China.
At the moment there is very little competitive bidding of
FX in China. However, as currency liberalisation proceeds
Glendinning expects that to change, though exchange
controls must be loosened rst.
You cant have a whole paper trail if you are likely to
switch between bids, so all of these administrative
challenges need to be removed. And Chinese banks are
not yet accustomed to competing in this area.
Another hedging option for Lenovo, and widely used
by Asia corporates, is non-deliverable forwards (NDFs).
However, with NDFs set to be traded on electronic venues
under derivatives regulation, Glenndinning sees the
market being severely disrupted.
One of the issues with the NDF market is that its not very
liquid. Now when we trade, the bank takes a position and
warehouses that position. But their ability to do that is
being challenged by the Volcker Rule, plus if these things
are traded on an exchange there is likely to be a liquidity
issue which will make it difcult to close.
Already in Asia there are several currencies for which the
xing rates on the off-shore NDF market are no longer
being published, after regulators took the view that they
are too open to manipulation. In January 2013, internal
reviews by banks in Singapore found evidence that traders
colluded to manipulate rates in the offshore foreign
exchange market.
What all this means is that if I want to hedge the
Indonesian rupiah I can jump through the hoops in
Indonesia or do it in the NDF market in Singapore, where
I no longer have a benchmark rate to settle against. So
that means you are using the offshore rate, which is not
optimal and increases your basis risk.
What regulation means is that you take away all this
exibility and you have a market which is clear and
transparent but it may be a market that no longer
exists!
James Wood-Collins, London-based CEO of Record
Currency Management, says the expansion of the FX
market, which hit average daily volumes of $5.3 trillion
in 2013, is a boost to alpha-seeking funds. However, as
dealer participation has stagnated, it has also created
challenges.
We have seen bank market share remain stable at around
39%, while other nancial institutions such as asset
managers have increased their market share, he says.
However, prot-seeking nancial institutions continue to
represent a minority, which suggests that there is still a
good opportunity for those with alpha-type skills.
Increased liquidity has led to spread compression in
major currency pairs to around 1 basis point, compared
with 2 basis points ve years ago. One of the reasons for
that is the proliferation of e-trading platforms, which have
been presented as a solution to issues of compliance and
transparency.
E-trading is particularly useful for spot transactions,
accounting for around 64% of transactions, says Wood-
Collins. In forwards, swaps and options e-trading it is
used in about 45% to 52% of trades, and overall our
e-trading volume is about 40% of our business,
compared to 10% in late 2012.
The e-trading universe can be broadly divided into three
categories: single-dealer platforms, electronic communication
networks (ECNs) and multi-dealer platforms.
Single-dealer platforms, which are run on a request-for-
quote basis, do not inspire condence in terms of achieving
best execution, but they can offer a quick comparison
tool for other prices offered, Wood-Collins says. ECNs
meanwhile offer streaming pricing from multiple sources,
and are most useful for spot markets. But for hedging we
use forwards and banks are understandably less willing to
offer streaming prices on forwards because of the credit
risk involved.
Multi-dealer platforms offer and compare both spot and
forward prices from multiple banks, and usually operate
on a request for quote basis.
A multi-dealer platform is the most comprehensive
option, and almost 40% of our transaction volume is
executed on this basis, a little bit below the average
for non-bank nancial institutions. The percentage is
not subject to a hard and fast rule but is the outcome of
our trading team seeking the best execution venue for
each and every trade, and the proportion tends to vary
over time.
The introduction of swaps functionality on e-trading
platforms over the past two years was the direct cause
of Records increased use of the platforms, Wood-
Collins says.
Still, he says e-trading is not the be all and end all and
there are plenty of scenarios in which alternatives are a
better bet, and when Record went through a period of
growth in its passive hedging business it turned to the
swaps space.
As passive hedging grew, we relied more on FX
swaps, with two linked transactions closing out a spot
transaction and opening up a forward. Its critical that
you link those transactions so that effectively the spot
price embedded in the forward contract, the far leg, is
exactly the same as the spot price at which you are doing
the near leg, because we dont want to be paying a spot
spread. So there are two linked transactions and up
until quite recently the platform we were using could not
accommodate that.
There are additional reasons why e-trading would not be
the optimal solution, Wood-Collins says.
The best price for large transactions will often be found
by dealing on the phone. Also many of our clients expect
us to manage their credit risk actively and therefore we
often need to tailor the allocation of transactions to t
their parameters, and you can only get a limited amount
of banks to quote at the same time on an RFQ platform,
which is a constraint.
Perhaps most importantly, currency market conditions
vary from day to day and therefore it is essential if you
want the best possible price to maintain both e-trading
and phone dealing infrastructure.
JAMES WOOD-COLLINS | CEO | RECORD CURRENCY MANAGEMENT
RECORD SEEKS BEST
EXECUTION
INDUSTRY INSIGHT INDUSTRY INSIGHT
UNDERCURRENTS
OF CHANGE
The foreign exchange market has been through some fairly seismic
structural shifts in its time, from the birth of the European single currency
to the advent of electronic trading platforms. The exact nature of the
next shift cannot be known with any certainty, but the market faces
some strong regulatory and technological headwinds in 2014 that will
ultimately cause fundamental changes to the way currencies are traded.
A high-prole investigation into market manipula-
tion has heralded increased scrutiny of FX trading
practices and could see major changes to the way
the industry operates. But scratch below the surface
and the tide may be turning towards a healthier
market structure, writes Joel Clark
4
THOMSONREUTERS FXExchange2014
5
Up until recently, the market
appeared to have survived the
nancial crisis in fairly good shape.
Having sailed through the upheaval
of 2008 without missing so much
as a heartbeat largely thanks
to the resilience of the industrys
infrastructure it consequently
escaped the most punitive elements
of post-crisis regulations, with an
exemption from mandatory central
clearing and electronic trading for FX
spot, swaps and forwards in the US.
Then in 2013, details began to
emerge of a regulatory probe into
alleged manipulation of benchmark
exchange rates. Dealers, it was
claimed, had shared condential
client information in online chat
rooms and colluded to trade large
orders in such a way as to inuence
a popular and widely traded
benchmark known as the WM/
Reuters 4pm x. By April 2014,
numerous regulators had announced
they were investigating the
allegations, well over 20 traders had
been suspended or dismissed from
banks, and the Bank of England had
been caught right at the centre of the
scandal amid allegations its ofcials
may have ignored or even condoned
market manipulation.
Very little is known about exactly
what market malfeasance has so far
been unearthed, and it could still
be months or even years before the
full ramications are known. But
however serious or trivial it all turns
out to be, some believe the increased
scrutiny will inevitably mean a
clamp-down on certain parts of the
market that had not previously been
subject to stringent oversight.
There are unwritten mechanics
of how the FX market works, and
certain practices that are legal but
may not look very sensible when
you put them under the microscope,
says Phil Weisberg, global head
of foreign exchange at Thomson
Reuters. That will have to change
and FX will gravitate towards being
a more operations and technology
oriented business, with clear rules of
engagement and more explicit fees
for individual services.
The role and sophistication of
technology in foreign exchange has
evolved at a rapid pace in recent
years, to the extent that retaining
a lead as a market maker now
requires substantial investment
in risk management and price
distribution technology, as well as
single-dealer portals and algorithmic
execution tools.
But in an environment in which
banks are required to hold much
more capital and devote far
greater resources to compliance
costs, technology budgets are
under pressure, and many expect
concentration on the sell side as a
decreasing number of banks have
the resources to dominate the
market in the way they once did.
The biggest disruption in FX at the
moment is the changing role of the
sell side and the ability of banks to
act as market makers, says Rupert
Bull, managing partner of Expand
Research, a subsidiary of the Boston
Consulting Group. Relatively few
banks in the future will be able to be
all things to all people and the focus
will shift from market share
to protability.
The way in which banks trade
currencies for clients is also likely
to change, and a well-documented
shift from traditional risk-taking to
an execution model where banks
act as agents rather than principals
is continuing to play out in the FX
market. As banks use of balance
sheet comes under pressure, the
agency model offers a way for them
to remain active in the market while
taking less proprietary risk.
The shift to agency is largely a
response to regulatory constraints
but it could ultimately make banks
more protable in the FX market
as they could theoretically take on
larger client orders than if they were
warehousing the risk on their own
books. For corporations and asset
managers, it should also mean more
transparency on how the bank is
trading its orders.
There werent very clear lines in
the past to delineate where banks
were principals and where they were
agents, but those lines will have to
be drawn in future. While it will still
be possible for banks to be both,
they will have to be much more
explicit with the client about how
they are trading their orders, says
Phil Weisberg.
The nature of bank liquidity provision
may be changing, but the rise of
non-bank market makers, including
high-frequency traders (HFTs), has
also been a recurring theme in
There werent
very clear lines
in the past to
delineate where
banks were
principals and
where they were
agents, but those
lines will have
to be drawn in
future.
Phil Weisberg, Global Head, FX,
Thomson Reuters
FEATURE
6
THOMSONREUTERS FXExchange2014
7
INDUSTRY INSIGHT
RICHARD ANTHONY | GLOBAL HEAD OF FX ELECTRONIC RISK | HSBC
Progressive investment in trading technology over the
past decade has pitched banks aggressively against one
another in an intensifying arms race to offer the best
access to FX liquidity. Its a race that shows no sign of
abating any time soon.
Anyone who participates in this market has to
participate in the technology arms race to some degree,
and there is clearly a cost associated with that, says
Richard Anthony, global head of FX electronic risk at
HSBC. I do think that if spreads continue to become
more compressed and volume continues to decline, not
least because of lower volatility, we may see a reduction
in the number of market makers.
That reduction could be good news for the likes of HSBC,
which has long been one of the largest banks in the FX
market, with a vast global footprint. But like all banks,
HSBC faces its own challenges in navigating the increasing
complexity of the market structure. A rising number of
trading venues and execution channels means provision
of liquidity is becoming a far more costly and resource-
intensive business in which to compete.
One of the biggest risks for a market maker is not
having access to liquidity, so as liquidity becomes more
fragmented and more and more trading venues appear,
we need to connect to those venues. Connectivity is an
expensive process to set up and maintain, says Anthony.
But given the number of new trading venues that have
sought to enter the FX market in recent years, banks have
had to be discerning about whether there is sufcient
unique liquidity to justify the connectivity costs. HSBC is
no exception, having so far backed some new ventures
but kept a watching brief on others.
If a new venue has exactly the same participants and
architecture as an existing platform, the chances of
success are fairly low. What attracts us to support a
venue is if the rules of engagement or policing are slightly
different or the proposed participants of that venue are
different, thereby giving access to genuine liquidity that
doesnt exist elsewhere, Anthony explains.
But it is not all about external liquidity, and banks have
invested increasingly in their own technology in recent
years, including single-dealer platforms and algorithmic
execution, which is an area Anthony believes is poised for
growth in the coming years.
Internalisation of ow is also an increasingly attractive
way for banks to match buyers and sellers without having
to take an order to the broader market, thereby offering
better execution to the client. As HSBC has invested in
its risk management and pricing models, and market
volatility has declined over the past two years, meaning
there is less urgency to clear risk in real time, the banks
internalisation ratios have increased substantially.
Matching off client ows internally is the most efcient
way of managing the risk. This has always happened,
but with automated risk management processes and the
electronic distribution of prices, we can now manage the
internalisation process more efciently. Thats positive for
clients because they get tighter spreads, says Anthony.
TECHNOLOGY ARMS
RACE ACCELERATING
recent years. Such rms may provide
valuable liquidity, but questions have
been raised about whether their
commitment to the market would
endure during times of stress.
Meanwhile the proliferation of
trading venues in recent years
many of which have still to show
signs of gaining real traction has
been predicated on a move to answer
the needs of an increasingly diverse
market ecology. For example, it was
a collision of cultures between banks
and HFTs on primary platforms that
led to the creation of new venues
such as ParFX, which brought fresh
rules and functionality to the market
to discourage disruptive behaviour.
A lot of the innovation in FX is
focused on client segmentation,
and trying to deliver functionality
that appeals to particular groups
of customers. Many venues have
segmented their pools to attract
different types of participants and
protect users that may not want to
interact with certain types of ow,
observes Sang Lee, managing
partner at Aite Group, a research
and advisory rm.
For the buy side, the increasing
complexity of the market structure
and the growing number of execution
options that are available from both
banks and third parties means the
priority in the coming years will be to
more explicitly measure and prove
best execution.
Sophisticated use of transaction
cost analysis (TCA) technology has
developed in the equity market over a
period of many years, and FX traders
are increasingly now also looking to
TCA as a means of benchmarking
execution quality. But TCA is more
complex in FX, largely due to the
higher volume of trades and lack of
central data sources.
FX is a fragmented over-the-
counter market and trying to
aggregate separate data feeds to
create a holistic view of the market
is exceptionally difcult. TCA has
been one of the biggest drivers of
investment from an IT and research
perspective and I expect it to be a
major focus in the next few years,
says Sang Lee.
The FX market will clearly face some
big challenges in the years to come,
but there are also some bright spots
on the horizon. Foreign exchange
remains, for the most part, a deep
and liquid market, which will be less
affected by onerous regulations than
other OTC asset classes.
There will also be major growth
opportunities in emerging markets.
The Mexican peso and Chinese
renminbi, for example, are now the
eighth and ninth most actively traded
currencies, according to the 2013
triennial turnover survey by the Bank
for International Settlements. As the
renminbi continues its path towards
full convertibility and greater offshore
trading, many market participants
are positioning themselves to benet
from its growth.
And some believe even the
potentially more damaging
developments could turn out to be
positive in the long term. Whenever
people fundamentally re-examine
their business, good things happen,
says Phil Weisberg. We may not
necessarily be spending time on the
most important problems rst, but
when people know and understand
better the cost of doing business and
the way FX is traded, that can only be
a good thing.
FX is a fragmented over-the-counter
market and trying to aggregate separate
data feeds to create a holistic view of the
market is exceptionally difcult.
Sang Lee, Managing partner, Aite Group
8
THOMSONREUTERS FXExchange2014
9
INDUSTRY INSIGHT INDUSTRY INSIGHT
In seeking the most efcient route to market, Axa
Investment Managers has made the decision to focus
on new trading protocols on an execution management
system (EMS).
The thinking behind the move was to create greater
exibility, says Lee Sanders, Axa IMs London-based head
of FX/MM and UK and Asia xed income trading.
In FX we decided to move away from the established
ECN market to an EMS, which gives a lot more access to
innovation and versatility in the market, Sanders says. It
means we can hook into the same system and take prices
from any of the 15 banks with which we want to deal,
which is better from our perspective than the request for
quote protocol that dominated previously.
The difference between OMS and EMS is that the latter
enables direct market access, as opposed to facilitating
trades through an intermediary, and while OMS excels
at portfolio accounting, analytics, and compliance, EMS
offers higher levels of granularity in execution control. An
example is in algo trading, Sanders says.
We can use the EMS to connect to anyones algo,
releasing it from the staging area on the EMS straight to
a banks algo suite, rather than releasing via the OMS. I
can send an RFQ order, resting order, xed order or limit
order; so I get all of that versatility, depending on the
counterparties API.
AXA IM will be looking at tailor-making its trading algos,
working with banks, Sanders says.
The rm executes around 75% of its tickets electronically,
and the rest by voice. However, voice still accounts
for 40% of volumes, as bigger tickets are more often
executed on the phone.
Still, EMS brings with it some key advantages, Sanders
says, including its anonymity and its ability to select
execution venues, including algos.
We can use the algo to execute in a way that reects the
particular investment driver, Sanders says. If we want
to be aggressive we can keep lifting the offers until we
are done, or we can be more selective and passive and
sit back and be the offer or the bid, which may potentially
give us a better ll. On the other hand if its one minute
before non-farm payrolls you can go all out with a big
order and while you might get some slippage you should
be able to get it done.
The other thing we like about our EMS use is as a
clearer and in providing better transaction cost analysis.
This is not just a box-ticking exercise for us; its a post-
trade functionality that goes a long way to help us
gain more efciency and has proved useful for our pre
trade analysis.
AXA IM uses TCA to evaluate its trading performance
against three benchmarks: the WM/Reuters foreign
exchange xing, creation time and execution time.
Those are what we use to analyse where we are adding
value. For example would it be better doing everything
at the (WM) x, or are we losing value in the time it
takes to get from the fund managers request to
executing in the market, or at execution are we getting
the best price possible?
Use of TCA functionality has had real impacts on the
AXA IM business.
We run through all the currency pairs and see if there
is anything we can do better, and we analyse all the
funds and the trades that have been executed on their
behalf. We look to identify weakness caused by order
creation time, lack of documentation and risk constraints,
executing away from prime liquidity points and lack of
liquidity through restricted execution venues.
AXA IM also uses TCA to evaluate counterparties, creating
peer groups and calculating average levels of added
value before pinpointing where each counterpartys
strengths or weaknesses lie.
LEE SANDERS | TSF HEAD OF EXECUTION FX/MM, UK & ASIA FI | AXA INVESTMENT MANAGERS
AXAS TECH FAST
FORWARD
KNIGHTS TABLE LAID
FOR CLIENTS
As the platform revolution sweeps through the foreign
exchange markets, some banks have taken a contrarian
view of the implications. Chris Knight, head of e-FX
trading at Standard Chartered, says that while electronic
execution has become a vital market cog, client relations
remain paramount.
When e-commerce came in people started hiding
behind their machines and it became all about best
price being hit, he says. The best price still gets hit but
people are coming back to relationship banking.
If banks focus solely on price, they miss out on
understanding the wider picture of what the client
needs, and the part that FX may play in other client-
related activities.
What is equally as important as price is building a long-
term relationship. But from a client point of view it is not
just about having numerous price makers and from the
bank point of view there is much more you can do than
simply provide execution. So more counterparties are not
necessarily better.
Standard Chartered has seen some clients rationalise
their bank panels and use favoured bank platforms
to cater to all of their needs, sometimes through
partnerships if the bank does not retain a particular
specialty in-house.
If a client wants to invest in Asia, Africa or the Middle
East we would want to own that and to be everything to
that person, but we may reach out to partners for some
aspects of other projects.
One product for which Standard Chartered has seen
increasing demand is its central treasury centre offering,
a centralised solution through which a corporate can
manage its FX exposure, probably based in its home
market but servicing jurisdictions around the globe.
The centralisation process creates efciencies and saves
costs, says Knight.
Through technology they can literally tick a box and
deal through their regional ofces, and we have worked
hard to help clients set these up, including different legal
agreements covering each country.
It makes sense to have a group of specialists in head
ofce be able to log in, monitor and trade on behalf of
their regional entities.
The key driver for Standard Chartereds increased focus
on harmonised services is client convenience.
If a client can see his cash ow that makes it easier for
him to make decisions on FX, Knight says. People want
that level of service, though of course they are still pretty
price sensitive.
In addition clients can trade more currency pairs by
coming direct, Knight says.
We have over 130 currencies electronically tradeable 24
hours; that kind of depth is unusual in the multi-dealer
environment.
Following a period of low volatility, business still remains
tough and banks are looking for efciencies wherever
they can nd them.
One area of focus for Standard Chartered in the recent
period is proof of underlying reason to trade. Many Asia
markets, for example, require that FX transactions must
be directly tied to real-world sales or purchases, and the
bank has worked with regulators and local authorities to
service that need electronically.
We have designed our system to be tailored to the
environment in each country so that the client can easily
pick an underlying reason for the trade, simply by clicking
on an option. We have spent a lot of time on that. So its
still very technology-focused, to cut costs and build scale
and efciencies.
CHRIS KNIGHT | HEAD OF E-FX TRADING | STANDARD CHARTERED
In a survey leading up to this years FX Managers Peer Group 2 meeting, The
NeuGroup asked its members how their internal processes for trading in FX
markets have changed since the advent of increased regulation (in line with the
Thomson Reuters Euromoney poll). About 93 percent of their members said that
trading processes had become at least slightly more onerous, with 27 percent
saying much more onerous and this is before the bulk of new regulations has
kicked in. For example, MNCs that conduct FX trading outside of the EU, e.g.,
Switzerland, still did not know what rules they will need to follow.
10
THOMSONREUTERS FXExchange2014
11
Indeed, the extent of new regulation
and its impact on corporate FX
management was cited as the
number one area of uncertainty
causing FX managers concern (60
percent cited it as a top concern),
topping market concerns like
emerging market political uncertainty
and its resulting volatility (20 percent)
and pricing/liquidity (13 percent).
More than one member also
tied the regulatory impact to
pricing/liquidity concerns, noting
between Basel III and other Credit
Charges we are seeing huge price
differentials on trades out beyond
a year. Accordingly, one of the
takeaways for the FX sell side is
that their customers might seek
more tangible explanations for the
pricing discrepancies they see across
derivatives trading partners on
longer-dated transactions. This will
be all the more true as collateral,
margining and clearinghouses are
understood to harmonize credit/
counterparty risk.
The trend toward e-trading will
continue, even if the transition, for
those concerned, to fully functioning,
compliant SEFs has created some
hiccups. Among these hiccups are the
new challenges for trading options
and NDFs on electronic platforms
and the clarications needed
between details in corporate ISDA
agreements with banks and SEF
rules, which have left some major FX
banks on the SEF sidelines, initially.
The number one driver of e-trading is
that it is just more efcient with the
limited treasury headcount available
to most corporates (and some
members report being asked to
cut staff further).
In response, more corporates will
increase spending on IT/systems.
Regulations only help justify it: 80
percent expect to increase IT spending
due to regulation in the coming year.
End-user exemption or not, credit
charges and collateralization coupled
with market liquidity moving to SEF
venues should prompt corporates
to prepare to manage the growing
range of contracts made available
for trade on a SEF along with
reporting and other compliance
burdens imposed by Dodd-Frank,
EMIR and the rest of the G20 rules
to follow.
However, looking at the bigger
picture, MNCs also undertake
spend on IT/systems to gain a better
understanding of their exposures so
that they might cut back on hedge
contracts that regulators are making
more onerous to trade. MNCs with
FX hedging programs that rely
heavily on options, in particular, are
taking a more strategic view on both
their cash ow and balance sheet
exposures. Accordingly, efforts are
underway to nd natural offsets,
reduce notional amounts hedged,
ne-tune tenor and strike selection
and generally become more efcient
with regulated hedge contracts.
Thomson Reuters participated in a meeting of US multi-
national corporate FX managers March 2014, facilitated by
The NeuGroup, a leader in peer knowledge exchange for
treasury and nance professionals. One of the goals was to
get a read on just how regulatory change in FX markets was
impacting corporate FX management processes.
CHANGING NATURE OF CORPORATE
FX MANAGEMENT PROCESSES
DUE TO REGULATORY CHANGE
For 20 years, The NeuGroup
has been a trusted thought
leader and respected
advocate for global nance
and treasury professionals.
The NeuGroup leads the
way in peer knowledge
exchange through the peer
groups of The NeuGroup
Network and in intelligence
for treasurers through the
publication iTreasurer. For
more information please
visit us on: neugroup.com
FEATURE
12
Ron Leven, PhD, Head of FX Pre-Trade Strategy, offers
thoughts on the trends in vols and their effects
USD implied vols nearing all-time lows: The second half
of the last decade saw an almost unremitting downtrend
in broad currency volatility. Figure 1 shows this was
broadly true for the USD with vols for both the EUR and
JPY hitting record lows on the eve of the nancial crisis.
Along with other markets, volatility for currencies surged
during the crisis but the downtrend since reemerged. EUR
vols are nearing the 2007 lows; JPY vols have been slower
to decline reecting the seachange in BoJ monetary
policy. While we are not of the view that reaching the
2007 lows bodes that another crisis is looming we do
believe vols are not apt to go much lower and the seeds
of a fundamental turn are germinating.
The decline in USD volatility (gure 2) the average of
EUR and JPY vol has not been in isolation but closely
tracked vol trends in xed-income and equities. We would
posit that it is the decline in vols in these major asset
classes that has been a major source of lower volatility
in the USD market. We would also posit that the broad
decline in asset market volatility is tied to low rate
targets and quantitative ease by the major central
banks. Indeed, QE is inherently bearish for bond volatility;
while early redemptions associated with declining rates
can rm vols, ultimately, volatility will be compressed as
rates become trapped in a narrowing range dened by
central bank imposed cap and the zero boundary.
Quantitative ease is also weighing on implied volatility
in the equity markets. A primary avenue for QE to
stimulate the economy is via asset appreciation so, by
intent, it is supportive for equity prices. As shown in gure
3, there is a strong directional link between equities and
the VIX specically, a rally equity market is negative for
implied volatility.
The Feds decision to taper is perceived as the beginning
of the end for quantitative ease. Indeed, 10 year Treasury
rates are roughly 25 basis points higher than last October
and a full percentage point above last years low. As long
as the tapering continues and ultimately leads to higher
rates we believe volatility will rm across asset markets.
Diverging central banks are another plus for FX vols. As
shown in gure 4, the aggressive ease by central banks
pushed rates towards zero largely eliminating interest
rate spreads. The alignment of macroeconomic policy
across borders has been another reason that currency
volatility has been depressed. But the Fed move toward
tapering is not being mirrored abroad. Indeed, the Bank
of Japan is still aggressively easing while the ECB is
sending mixed signals on its policy intent. We believe
divergent trends in central bank policy should gradually
be reected in widening yield spreads and a pickup in
exchange rate volatility.
The Fed is still early in the process of reversing course
and may yet switch back to an easing bias if US economic
growth falters. If this were to occur then the low volatility
environment is apt to persist. But if, as we expect, the
economy continues to improve and the Fed gradually
tightens then a more volatile world is likely ahead.
THOMSONREUTERS
IN THE
VALLEY OF
THE VOLS
3-MONTH IMPLIED VOLATILITY Figure 1
3-MONTH IMPLIED VOLATILITY Figure 2
THE SPX AND THE VIX Figure 3
Source: Thomson Reuters Eikon
2-YEAR GOVERNMENT BOND RATES Figure 4
THE EFFECTS OF VOLATILITY ON
LIQUIDITY IN FX AND FIXED INCOME
FEATURE
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