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e-FOREX

transforming global foreign exchange markets

Winter 2016 Happy New Year! Three of the major topics we are covering in this edition revolve around the blockchain, impending new regulations facing the FX industry and the continuing growth story of the Renminbi. Hardly a day goes by nowadays without an annoucement that yet another bank is looking into how blockchain technology might be able to improve their trading operations. In this edition we have interviewed Charley Cooper, the Managing Director of R3, to talk about his firms distributed ledger initiative and what steps it is taking to develop new standards and protocols that will help drive the build and adoption of these new solutions across the global financial markets. Although he believes this technology has the potential to change financial services as profoundly as the Internet has changed media and entertainment, which is a pretty bold claim, he also recognises that financial services are one of the most highly regulated industries in the world, so any efforts to develop distributed ledger solutions must take into account the shape of current and future regulatory pressures from the very beginning.

Taking you from peak to peak

On the subject of regulation our leader article this time is looking at MiFID II and the impending January 2017 deadline that the industry is grappling with as it tries to get its systems in place for the big regulatory shake-up of the FX, derivatives and commodities markets. However, given the concerns expressed about the feasibility of having some IT systems necessary to implement certain MiFID II provisions ready by the deadline it is still possible that things may be delayed. Finally, recent news that the Renminbi is to be included in the IMF’s Special Drawing Rights basket has intensified expectation that the mainland Chinese currency will soon become a major feature of the e-trading landscape. With that in mind, much of our regional e-FX perspective article focuses on the RMB and why China is likely to remain the centre of attention for some time to come.

Risk Warning: Trading CFDs involves significant risk of loss.

As usual we hope you enjoy reading this edition.

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January 2016

CONTENTS INDUSTRY REPORT 36. Restoring trust in global FX markets Frances Faulds Leader MiFID II

William Essex Cryptocurrencies Exploiting the Blockchain

An exclusive report published by the LMAX Exchange takes a stance on the changes needed within the FX market in light of technology innovation, market sentiment and international regulation.

LEADER 44. Countdown to MiFID II - FX gears up for impending new regulation

Caroline Henshaw Regional FX providers A powerful mix

David Mercer The e-Forex interview LMAX Exchange

Frances Faulds reports on how the industry is grappling with a January 2017 deadline to get the systems in place for the big regulatory shake-up of the FX, derivatives and commodities markets.

CRYPTOCURRENCIES 56. Follow the money! How else can we exploit the full potential of the blockchain? William Essex believes that large parts of the FX industry have tried to disassociate the blockchain from Bitcoin but argues that ultimately this doesn’t matter as long as this potentially transformative technology is exploited to its full potential.

Richard Willsher Regional e-FX Perspective Spotlight on Asia

Nicholas Pratt Special Report FX Prime Brokerage

FX E-COMMERCE AND PLATFORMS 66. A powerful mix: regional FX providers combine high-tech trading with local currency expertise Caroline Henshaw investigates how sophisticated trading technology solutions and e-commerce toolsets are making regional FX providers more competitive at a time when clients are increasingly seeking local expertise and dedicated service.

Brandon Mulvihill Meet The Team FXCM

Heather McLean White Labelling Widening e-FX capabilities

LIQUIDITY MANAGEMENT 76. FX Liquidity – how do you find the right provider? Nicholas Pratt explores why liquidity has become such a big challenge across the FX market and what factors are now influencing how many trading firms go about choosing their liquidity providers.

Dan Barnes Trading ecosystems Exploring the benefits

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Buford Scott Tradertalk Stelrox Capital

THE e-FOREX INTERVIEW 90. Building the benchmark for global FX e-Forex talks with David Mercer, CEO of LMAX Exchange.

REGIONAL E-FX PERSPECTIVE ON ASIA 102. All eyes on the RMB

FX gears up for impending new regulation

Richard Willsher sets out to discover what factors are shaping the foreign exchange market across Asia and what further growth in e-FX we can expect to see taking place throughout the region.

SPECIAL REPORT 116. What’s causing the flight to quality in FX Prime Brokerage?

Follow the money to exploit the Blockchain

Nicholas Pratt examines how the FX Prime Brokerage landscape has dramatically changed over the past year as a number of major banks have pulled out of the space and the key issues that are now impacting on the choice of a suitable FXPB provider to partner with.

MEET THE TEAM 126. FXCM – poised for growth and focusing on core areas of strength in their Institutional services

COMPANIES IN THIS ISSUE

Financial trading ecosystems and FX A

CQG page 2& 3 Credit Agricole page 13 Currenex

ADS Securities Aphelion Avelacom

page 12 G page 86 Gain GTX page 10 Gold-i

Inside Back Cover D page 132 Devexperts

AxiTrader B Bats Global

Bloomberg Tradebook BMFN

E page 100 Ernst and Young page 79

Broadridge

page 133 F page 19 FCM360

BT

page 145 FXCM FXecosystem

C

FXPRIMUS

CFH Clearing CLS

page 114 FxPro page 20 FXSpotStream

CME Group

page 110

e-FOREX

page 59

page 105

I INTL FCStone IPC J JFD Brokers

L page 42 Linklaters page 126 LMAX Exchange page 85 Lucera page 34 Inside Front Cover M page 5 MahiFX Markit

Heather McLean discovers more about how white labelling solutions can assist retail FX brokers to quickly establish their online trading operations and why white label partnerships can prove a very attractive proposition.

NETWORKS, HOSTING & CONNECTIVITY 142. Minimising risks and maximising trading opportunities - exploring the benefits of financial trading ecosystems for FX Dan Barnes looks at how financial trading ecosystems have evolved, what services they can offer and the benefits they can deliver to a wide variety of FX market participants.

Saxo Markets | The Institutional Division of Saxo Bank Group

Technology-driven Prime Brokerage services DMA to multiple liquidity pools and ECNs Mid-sized funds, money managers, prop funds and retail brokers have seen their access to liquidity withdrawn by traditional prime brokers, while fees have gone up. Saxo Markets can service these mid-tier institutional clients in a viable way. Learn how Saxo Markets is a pacesetter in the PB industry by visiting www.primebrokerage.markets.saxo Contact Peter Plester, Head of FX Prime Brokerage on [email protected] | +44 207 151 2027

TRADERTALK 152. Stelrox Capital Management LLP e-Forex talks with Buford Scott, Managing Partner at Stelrox Capital Management LLP, an alternative asset manager, with a focus on foreign exchange markets.

O page 17 Oanda page 140

page 107

Azul

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e-Forex talks with Brandon Mulvihill, MD and Global Head of Institutional sales at FXCM.

FX BROKERAGE OPERATIONS 130. Widening your e-FX capabilities with a new generation of white labelling solutions

smartTrade Technologies page 14 Squared Financial Standard Bank

P Philip Futures page 11 Pragma page 149 Price Markets

Standard Chartered

page 83 page 123 page 73 page 103

page 15 Stelrox Capital Management page 152 page 20 Swissquote Bank

page 8

page 132 T

page 119

R

360T

page 106

R5

page 41 TF Global Markets

page 131

Redline Trading

page 35 Thomson Reuters

page 103

page 54 Regis TR Outside Back Cover Rochford Capital page 20 S Saxo Bank page 29 SEB Investment Bank page 12 Singapore Exchange

page 53 TRAction

page 14

page 111 U UnaVista

page 47

page 7 page 69 X page 104 XTX Markets

page 14

This material is produced for marketing purposes only. Trading in financial instruments carries some degree of risk, always ensure you fully understand all the risks before trading. Read Saxo Markets’ full disclaimer at http://www.markets.saxo/legal/disclaimer.

WWW.MARKETS.SAXO

“ Focus on your objectives and you will succeed.” Anthony Martial, Striker

Take the lead. Trade Forex on swissquotefx.com CFDs and Forex are leveraged products; trading on margin carries a high degree of risk and losses can exceed your deposits.

Swissquote Ltd is authorised and regulated in the UK by the Financial Conduct Authority: 562170.

NEWS

Saxo Markets rolls out SaxoTraderGO to other banks and brokers Saxo Markets, the Institutional Division of Saxo Bank Group, continues to enhance its institutional credentials by making its next generation multi-asset trading platform, SaxoTraderGO, available to its white label clients. Saxo’s Head of Platforms, Christian Hammer, says: “Our existing and new white label clients will benefit from over 20 years of innovation and experience in trading

Christian Hammer

infrastructure, allowing them to customise their client experience and create new revenue streams. This is both

Aphelion partners with Lynx Asset Management Lynx Asset Management have announced a partnership with FX technology vendor Aphelion. Lynx have deployed an FX Liquidity Management platform that include Aphelion’s aggregation services and algorithmic trading engine. This is made available through both API and GUI trading. Lynx Asset Management AB, a hedge fund manager with assets of around $6 billion, uses a fully systematic model-based investment approach with the objective to achieve a high risk-adjusted return. Magnus Jonson, Head of Trading at Lynx said: “With this new FX technology platform integrated into our organisation we are 10 | january 2016

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now able to expand our traded currency universe and source deeper liquidity within the currencies that Lynx already trade through the futures markets.”

Henrik Dubajic

Henrik Dubajic, Head of Sales at Aphelion, said: “We are very pleased to welcome Lynx Asset Management as a new user of our FX technology platforms.”

an opportunity to multiply trading volumes as well as protect their businesses from fast technological change. We believe that the combination of SaxoTraderGO which is built on an OpenAPI offers endless customisation opportunities which will change the way trading technology is white labelled in the future.”

Currenex launches new regional Matching Engine in NA As part of their ongoing efforts to offer faster access to regional liquidity over the Currenex platform, Currenex has moved its North American matching engine from Piscataway, NJ to NY6. This follows the recent launch of LDFX in London and the 2014 launch of TKFX in Tokyo. Based in the Equinix NY6 data center, this institutional matching engine is the primary production environment for their North American institutional client base. By reducing the physical distance between Currenex and their clients with data centers in North America, they have enabled the potential for faster access to regional liquidity over the Currenex platform.

NEWS

smartTrade enhances its FX platform smartTrade Technologies has announced the addition of a margin credit functionality to its end-to-end low latency FX trading platform, LiquidityFX. smartTrade’s LiquidityFX platform has seen increasing adoption by a large variety of clients looking to move from their incumbent platforms to a flexible non-volume based priced solution and has led to a growing demand for a margin credit extension. The margin credit extension is fully integrated in smartTrade’s LiquidityFX and complements its existing risk management features.

CQG launches Multi-Asset trading platform

CQG has unveiled a multiasset trading platform, CQG One, that allows traders to easily manage their portfolios; view real-market prices on forex, futures, and exchange-listed equities; and trade them seamlessly through one interface on any computer or mobile device. CQG One provides a single point of custom pre-trade risk management, tailored by asset class across accounts.

The platform is powered by agreements with DriveWealth Holdings, Inc. and its wholly owned subsidiaries DriveWealth, LLC and DriveWealth Technologies, LLC (collectively known as “DriveWealth”) and Direct FX. CQG One streams Direct FX’s rates, execution, and market information for its forex and futures feed, and DriveWealth provides the equity feed and clearing for the multiasset trading platform.

CLS and Markit extend FX settlement to cross currency swaps David Vincent

“Adding this feature is fully aligned with our strategy to provide our clients with a complete and advanced end-to-end FX solution which allows for a quick time to market while optimizing costs,” commented David Vincent, CEO of smartTrade Technologies. 12 | january 2016

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CLS Group (CLS), and Markit, have announced the launch of a new FX settlement service for the cross currency swaps market. The service provides a streamlined process for the payments related to these trades by incorporating them into CLS’s existing unique paymentversus-payment (PvP) settlement service. CLS receives settlement instructions from cross currency

swaps electronically confirmed using MarkitSERV, the OTC derivatives trade processing service from Markit. Brad Levy, managing director and head of Markit’s Processing division, said: “Working with CLS to streamline trade settlement for cross currency swaps demonstrates how service providers can work together to make swaps market operations more efficient.”

THE NEW WHITE LABEL TRADER PORTAL

ONE SMALL STEP FOR A BANK BUT A GIANT LEAP FOR FX TRADING BUSINESS The new improved white label trader portal offers aggregated liquidity from over 30 LP’s and ECN’s. It is a web application, requiring no install, based on Aphelion’s trusted solution Quasar eFX, a complete FX trading suite, that is ready to use out-of-the-box.

WHITE LABEL PORTAL

QUASAR EFX SUITE

FX Spot

Price Engine

Aggregation

FX Forward FX Swap

Rules and Decision Engine

Auto Hedge

FX Block

Credit Check

Smart Order Routing (SOR)

Non Deliverable Forwards (NDF’s) Prescious Metals (PM’s) Time Options/Window Forwards

Order Service

Algorithmic Trading

Limit Order Management

Best Executable Price Algorithm

Money Market Deposits (MM) Limit Orders configurable on individual customer basis

Margin and Audit Module

Internal Crossing

VISIT APHELIONFX.COM

NEWS

XTX Markets live on TraderTools XTX Markets has partnered with TraderTools as a streaming liquidity provider on its hosted FX trading platform. Jan Strømme, Head of e-FX sales at XTX Markets commented: “We are pleased to confirm this partnership with the TraderTools platform. It is an important step in our gaining access to select end-users via

liquidity aggregators such as TraderTools. We will continue to look into partnerships with platform aggregators which complement our business model as we grow organically over the coming years.” Yaacov Heidingsfeld, TraderTools CEO commented: “Adding XTX Jan Strømme Markets enhances both our solution, the key elements to alternative and relationshipour core strategy.” based liquidity aggregation

OANDA Europe partners with Seer Trading Systems OANDA Europe Limited has partnered with Seer Trading Systems, to provide OANDA client’s with an Institutionalgrade algorithmic backtesting and forward execution platform. Trevor Young, Vice President, Product Management, OANDA

commented, “The Seer Trading platform is one of the most quantitative trading platforms we have seen. Providing a powerful tool to allow them to develop, back-test and execute those strategies is a critical component for our traders and partnering with Seer provides them with these abilities”.

Trevor Young

TRAction launches Trade Reporting services to Australian FX brokers TRAction has launched trade reporting and monitoring services to margin foreign exchange (FX) and contracts for difference (CFD) providers. TRAction offers a holistic solution for Australian brokers to report their trades under the new OTC derivatives trade reporting legislation which commences for Phase 3B providers on Friday, 4 December 2015. 14 | january 2016

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The firm will simplify the Trade Reporting process according to Co Founder Quinn Perrott, “If a broker works on their own, they need to extract data from MT4 or other platforms and convert it into the format for the ADTR they are reporting to and interpret the legislation in the process. There are currently only two firms who have received an ADTR licence from ASIC, being

Quinn Perrott

a portal which receives trades from brokers, DTCC and CME.”

NEWS

Bank of TokyoMitsubishi UFJ goes live on FXSpotStream FXSpotStream LLC has announced that Bank of Tokyo-Mitsubishi UFJ went live in December as the 12th liquidity providing bank to its price aggregation service.

Alan Schwarz

Alan F. Schwarz, CEO, stated: “2015 was a year of significant growth and taking Bank of Tokyo-Mitsubishi UFJ live was a strong finish to the year where we have added three new Liquidity Providers, launched a new GUI, opened a London office, doubled the capacity of our infrastructure in all our sites and almost tripled the number of employees. The addition of BTMU provides a diverse addition to the liquidity pool we offer clients and will continue to accelerate our growth in client numbers and trading volume globally.” 16 | january 2016

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CFH Clearing wins best Liquidity Provider award For the second year in succession, CFH Clearing has been named Best Liquidity Provider at the Finance Magnates Awards 2015, voted for by over 1,500 of the world’s leading executives in the industry. The London-based organisation recently extended its market leading liquidity offering with a new service, ClearConnect, to enable institutional clients to easily ‘connect’ to a diverse pool of FX pricing via its Prime Broker and direct Liquidity Provider relationships. Lars Holst, CEO, CFH Clearing, commented, “We are thrilled to have been

Lars Holst

named Best Liquidity Provider for the second consecutive year. Winning an award which is voted for by the leading brokers in our industry is a huge endorsement of our liquidity offering and our reputation for excellence in the market.”

Spotex deploys Azul Zing Azul Systems (Azul), has announced that Spotex, the FX ECN has deployed Zing® within its trading infrastructure. Zing is Azul’s Java Virtual Machine (JVM) designed for Java-based applications and systems that require consistent low latency and high scalability. Since Zing has been integrated into Spotex’s infrastructure, Garbage Collection (GC) and other JVM-related pauses have been eradicated. Scott Sellers, CEO and President of Azul Systems, said: “Spotex’s decision to run its ECN on Zing highlights why it is so important to use the right JVM for Java applications that require low latency and

Scott Sellers

scalability. Trading is an ultracompetitive market, so using a technology like Zing, which removes the shortcomings of Java such as inconsistent response times and application jitter, quickly and easily gives emerging providers like Spotex a unique advantage.”

NEWS

Squared Financial launches new instrument suite Squared Financial Services Ltd (‘Squared’) has announced three new additions to its suite of instruments for professional multi asset traders and portfolio managers. The new instruments offer competitive, flexible, and cost effective access to CFD’s on Crude Oil, Hong Kong equity index, and USD Currency

Index. The company’s CEO, Youssef Barakat commented that, “Our new release is ideal for sophisticated investors and investment managers who are focused on high value, user friendly trading in a secure regulated environment. With our new CFDs, traders gain access to a range of new assets without

Youssef Barakat

the costs of Multi market Connectivity and Clearing.”

Gold-i partners with TradeCore Gold-i has joined forces with TradeCore to add an impressive customer onboarding, analytics and CRM tool to its product portfolio. Gold-i Broker 360, powered by TradeCore helps MT4 brokers gain more knowledge about their clients than ever before, enabling them to activate and retain customers far more effectively. Advanced trading statistics and reports can

be easily produced, providing valuable insight into client trading activities. Tom Higgins, CEO, Gold-i commented, “I was so impressed when I first saw TradeCore’s onboarding and CRM solution that I was keen to partner with them to fill a gap in our portfolio in this area. It offers the most all-encompassing client insight report I have ever seen for this

Tom Higgins

market and will be hugely valuable to MT4 brokers.”

FXecosystem provides faster connection between London and New York

James Banister

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FXecosystem can now provide an even faster connection between London and New York. As one of the first organisations to be upgraded onto Hibernia’s new Ultra 5 Express Circuit, the company can now offer clients a reduced RTD between London and New York of 63.36 milliseconds (previously 65.36 milliseconds). This drop in milliseconds in the roundtrip across the Atlantic

will result in even lower latency and faster execution, enabling clients to maximise the number of trades processed per millisecond. James Banister, CEO, FXecosystem comments, “Being one of the first companies to offer such ultraquick connectivity between London and New York is a huge advantage for us in terms of providing improved latency performance to clients.”

NEWS

Lucera partners with Perseus Lucera Financial Infrastructures and Perseus have partnered, creating the world’s largest on-demand Software Defined Network (SDN) exclusively for the capital markets industry, offering traders direct access to the industry’s largest network of global fiber dedicated to crossasset class trading. Providing traders with cross-connection points encompassing over 241 counterparties and 53 colocation centers across 24 cities, 15 countries and six continents, it combines the Perseus lowlatency, global, fiber network with Lucera’s Software-Defined Network (SDN).“Forget about dealing with bandwidth and expensive hardware – a thing of

Jacob Loveless

20 | january 2016

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CLS Group (CLS) and TriOptima have launched the triReduce CLS Forward FX Compression Service completing the first successful compression cycle for FX forwards and swaps transactions.

the past,” said Jacob Loveless, CEO of Lucera. “By creating the world’s largest SDN and devoting it exclusively to the financial markets, we’re game-changing the culture of connectivity that the industry hasn’t seen since the extranet arrived on the Street.”

Pragma and MarketFactory complete client integration Pragma Securities and MarketFactory have announced that they have completed an integration for a mutual global bank client of the two firms. “Many banks today are taking a best-of-breed approach to assembling an FX e-commerce technology platform, selecting the best providers for aggregation, algorithms, risk management, and price distribution, among other components,” said James Sinclair, CEO of MarketFactory. “We are pleased to be able to expand the ecosystem of

CLS and TriOptima launch new service

James Sinclair

services that integrate with MarketFactory low-latency services enabling customers to access the liquidity they need, when they need with the least market impact.”

David Puth

David Puth, CEO of CLS, comments: “Trade compression is a vital tool in managing risk, leading to strong market demand for a compression service for FX forwards and swaps. By combining CLS’s infrastructure, network and expertise in the FX market with TriOptima’s knowledge of the OTC derivatives environment and experience with compression in other asset classes, this new service enables institutions to efficiently reduce counterparty and credit exposure and to meet global regulatory requirements.”

RECENT EVENTS

Finance Magnates – London Summit The Brewery, London, November 2nd and 3rd, 2015 By Eddie Tofpik

I recently had the opportunity to attend the Finance Magnates London Conference (FMLC). This is a renaming of the former Forex Magnates London Conference (‘FMLC’) which changed its name to reflect the greater diversity the Forex diaspora had produced.

It is a great event with many international participants in the FX market and with a chance to meet, listen & learn about current and future political, economic, technical & financial situations affecting specifically the FX market. FMLC has stayed true to the Forex market but has also added Fintech companies, card payment operations, public relations & even a guest spot for a Facebook presentation on trading & marketing related matters. 22 | january 2016

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I can’t begin to emphasise how well I saw it received (with one minor exception). The organisers had moved the location about a mile (approx. 1.6 kms) north from the original site at The Grange Hotel to the The Brewery Conference Centre. A move I welcomed as last year it was evident from the number of people attending and the poor air-conditioning that FMLC was too big for that (former) venue. Speaking to the organisers, I

understood about 1600 people were registered to attend – assuming say a 20% drop out, then some 1200 – 1300 attending would be pushing the limits, even for The Brewery. All this with the backdrop of hits companies had taken following the SNBomb in January...it was quite amazing... I always note upon entering (apart from the numbers) where participants & firms originated from. Obviously a lot of UK & Europeans but

there were fewer Cypriots than before. There were seemingly more from the U.S. and China plus a significant new showing amongst African companies. Israelis were again in good evidence, mainly tech & service companies but there appeared to be less from Asian countries outside China, notably Japan & the Indian sub-continent. Next years event will be taking place on November 14-15th, 2016. Editors note – Eddie has indicated that he is happy to share his personal views and recollections from the event in more detail with any readers who would like to know more and he can be reached at: [email protected]

january 2016

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RECENT EVENTS

EM is all about Oil, China and the Fed TradeTechFX – London, September 16th-17th, 2015 By Jon Vollemaere, R5

This event has been getting better and better lately and I was quietly surprised and impressed by both the quality of speakers and attendees this year.

and it must be said achieved its goal. Was this in response to the IMF claiming that RMB didn’t have enough volatility in it or was it in response to jockeying in US markets?

OIL It was my pleasure again to host the EM panel for the third year running which included both bank and fund points of view. Our general view being that EM is all about Oil, China and the Fed.

Why not? That would give CNBC something to talk about for months. Perhaps even set a new level of fiscal and monetary policy. Whilst “fear drives the hike” we will have to wait and see.

THE FED

Some Central Banks may indeed be happy with the hike when it comes. Brasil started the term ‘currency war’ but this time its not 97. They’re not in the rosy position of 2004 but they also aren’t “looking down the back of the couch for dollars.”

Later that same day the FOMC was poised to raise rates.... Or was it? That didn’t stop us taking an audience poll by the raising of greenbacks for a hike and holding up redbacks for a ‘do nothing’ response. The response was a 50/50 vote and in the end the fed did nothing. Even at the time of writing. They’ve done nothing. Probably a good thing for most EM pairs but an annoyance for many central banks including India who would like the US to just get on with it. What if they raised by 12.5 points instead of 25?

CHINA “Like a teenager you can’t tell it to do anything,” the PBoC had recently shocked the market with its sudden devaluation. Whilst most central banks tend to announce big numbers on a given Tuesday at say 9am with plenty of warning the PBoC had caused shock and awe

There’s a funny old correlation between Oil and EM. Some countries are quite dependent on it while others produce a fair amount of it and some just need it to produce all those cheap goods and services. The recent drop in oil has been quite positive for India who consumes a lot of diesel and kerosene even if sometimes just to light the way forward. Iran has slowly been allowed back to the global party - perhaps not at the best time for price but a good one for diplomacy. EM is a commodity class currency set and lately when the dollar strengthens oil weakens. Unless you’re in Brazil - just when the global price has come down - Petrobas has put the price up. The other question is what happens when the US becomes a net Oil exporter?

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24 | january 2016

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RECENT EVENTS

CNH = Change Now Here

Narendra Modi - A Proper Brindian

Profit & Loss Conference, Shanghai, November 12th, 2015

Guildhall, London, November 12th, 2015

By Jon Vollemaere, R5

By Amar Vadher – R5

I’m reliably told Gai Bain 更改 is the Chinese word for change. It’s not so much the concept of change that’s so apparent in RMB markets these days – but more the speed of it. Like the Shanghai sky line – its moving on up fast.

In November it was my great pleasure to receive an invitation by the Lord Mayor and City of London to an address given by Prime Ministers Narendra Modi and David Cameron.

We all know the RMB is becoming more mainstream in everyone’s trading activity - well on its way to challenge EUR and GBP for their spot and knocking out JPY entirely. But when I asked the audience the question. “Will CNH become the CNY or will CNY become CNH?” I got about an 50/50 raise of hands. Every currency has two uses. Firstly as the domestic unit of exchange but also ( and probably the bit we’re most concerned with ) is its use internationally. CNH has been the experiment. The stepping stone to opening the market. The NDF like currency unit –

26 | january 2016

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but with more flexibility and better oversight by its owner. Certainly the future model for any currently restricted economy to follow. The battle for who is - The Big Swinging 迪克 in CNH - however, is being played right now. The Top 5 Chinese Banks looking to control the pair rather than allowing the top 5 US and Europeans to take that spot. Not surprising when you think about it – the DEM was dominated by the German banks – and why shouldn’t Chinese Banks be the CNH money centre? The technical ability of Chinese Banks however is still nascent

and Shanghai as an FX city is still in its early days – but this is changing and changing fast. One of the more interesting discussion points was the balance between Deutsche who sees 50-60% of their CNH business being Algo traded ( via Autobahn presumably) and EBS who see 80% manual trading. This number surprised me. Wasn’t it too soon for CNH to be so actively etraded ? The story of RMB is very much a story of who is in ‘control’ and the PBoC keeps a very tight rein on proceedings as a good central bank should. But once the HFT gang have you in their grasp – the computer is in control and who controls the computer? A moot question perhaps – but when you look at what are the main questions for the G10 right now: Bank v Non Bank, Regulation Change, Computer v Man, Rise of the Exchange. It would appear the same is true for RMB. The future of the FX market is the Future of the RMB or rather RMB is the Future of the FX Market.

One in six people in the world are Indian, and 1.5 million live in Britian. So its perhaps no surprize that when Narendra Modi came to visit David Cameron to talk about, among other things, GBP/ INR he got a big reception. The visit from the Chinese Premier weeks before ended with Dave and Xi down the pub for a pint and fish and chips. Sadly it doesn’t appear that Dave and Magic Modi popped out for a curry but they did exchange £9bn in trade deals.

as being like bride and groom but I’m not sure who’s the bride and who’s the groom. On the face of it – you’d think that Dave is the Groom. - The UK is 3rd largest foreign European investor in India. - 800+ Indian companies operate in UK more than any other Eurozone country - 250 foreign banks live in London and provide 4 of out 10 global transactions.

Modi spoke of unleashing Digital India in partnership with London being the tech capital of Europe. All the while working towards liberalisation of financial markets.

- IMF declared India as fastest growing economy at 7.3% growth - India has moved up 12 places in the economic rank of states - Reforms to make India most attractive investment destination according to Ernst young

There in lies the difficulty. India has a closed financial marketplace. The frog remains within the well. Technology may break down the barriers but Indian Finance ministers hold great power state by state. The Rupee is an NDF currency and whilst many UK banks run a GBP/INR book it doesn’t get the attention that the RMB does. Nor did Modi get to stay at Buckingham Palace unlike his Chinese counterparts!

UK FinTech services have had £1 Billion of investor money poured into them lately, and whilst large parts of that technology is written and built inside India,

The groom may have arrived on a horse and is heading in the right direction. But we’re all keeping our fingers crossed that it doesn’t become a white elephant.

BUT MODI HAS QUITE THE DOWRY

The meeting described the two

One in six people in the world are Indian

a lot of its future use also lies there. Millions of unbanked, English speaking, FinTech customers all with a smartphone are an attractive prospect for both bride and groom.

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RECENT EVENTS

CNY = Change Not Yet Profit & Loss Conference, Singapore, November 19th, 2015 By Jon Vollemaere, R5

A lot gets said about China joining the Special Drawing Rights – will they, won’t they? More likely when will they? With many pundits adding colour or distraction to the debate. The words ‘natural’ and ‘inevitable’ get used liberally and by the time this goes to print the answer or rather date may well have come and gone. But like any good Chinese restaurant gaining its first Michelin star it is indeed inevitable that this will be the first of many more to come. From a purely economic point of view however – entry into the SDR has very little real direct economic value – other than to continue to establish China on its path of economic powerhouse. Yes – it will help concentrate western confidence and yes it will put further pressure on the USD. Room will need to be made for China in the SDR and that means others need to make space – especially the US who accounts for 60% of it. But one can’t help think 28 | january 2016

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that this is on Beijing’s big ‘to do‘ list for 2015 given the amount of attention it receives. From our discussion on the conference panel there was the suggestion that the next real series of change would need to be political ones in conjunction with economic reforms. We live in a US centric global financial system. The general assumption to date is that China will join that system and take the necessary steps to do so. But why should they? Perhaps bold of me to suggest that if I put myself into Chinese shoes – it is only now that the rest of the world has begun to realise that the Middle Kingdom is indeed the center of the world and that China will not become more Western – but the World will become more Chinese.

China has had the largest economy for 18 of the last 20 centuries, and now back to work after a short ‘staycation’ will set about evolving the dynamics of the International Monetary system to be based in the East not the West. CNY joining ISDA, CLS, SWIFT may not be fully on the cards. But the world joining CFETS, CIPS and IXIM might just be. Such is the fun of panel discussions…. It’s the other way to become a reserve currency. Do you need to run a deficit to do that? Why join your opponent in the game when you can change the game. The previous week I had suggested that CNH = Change Now Here Bernard from Global Marco Concepts beautifully kicked that forward with the quip that this also means the CNY = Change Not Yet.

AUD: Navigating the China slowdown By Bryan Lum, Forex dealer at Phillip Futures, Singapore When the Chinese economy roared out of the gates and onto the global stage, its major trading partners were the envy of the world. Australia, with approximately a quarter of its total exports going to China, was one of the lucky few. However, as the initial Chinese sprint slows to a trot, the close trading ties Australia boasts have turned from an advantage into the country’s Achilles heel. Among the industries hardest hit in this economic slump is the mining sector. Iron ore

makes up the bulk of total exports in goods and services at 20%, with coal a close second (11.6%). Both commodities have seen tightening margins as prices dip in response to falling China construction activity. The near future is set to get worse still. The World Steel Association forecasts for Chinese steel consumption in 2016 to dampen further by an additional 2%. Investment spending by mining companies paints a similar picture, with capital

Spotlight on the ECB Yann Quelenn is Market Analyst at Swissquote Bank SA We expected some market volatility with the ECB meeting in December. There were significant expectations concerning how far President Mario Draghi will expand the QE programme. The inflation target of 2% has been said to be the primary objective of the central bank and Draghi mentioned that he will do whatever it takes to boost Eurozone inflation -and growth - in the near future. It turned out that markets had finally overpriced the likelihood of Draghi’s action. At the press 30 | january 2016

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conference that was held following the announcement that the ECB deposit facility rate had been lowered to -0.3%, Draghi announced that the QE will continue up to March 2017. He has then confirmed his good hopes in the inflation reaching the target. We believe that a six-month extension until March 2017 only represents a trade-off. Announcing an expansion of the QE up to September 2017 would have, clearly, affected

Source: Bloomberg

CURRENCY CLIPS

CURRENCY CLIPS

BRIEF NEWS AND ANALYSIS FROM AROUND THE WORLD OF FX exports in the 2014 – 2015 period. Education-related travel services and personal travel services, two of the largest segments, grew 14.5% and 6.4% respectively.

expenditure falling 10% in Q3.

On the domestic front, household consumption also looks to be contributing to the recovery effort, increasing 2.7% from the previous year.

In view of its heavy reliance on resource exports, the economy has attempted to diversify into a broader base of non-mining sectors. Services, manufacturing and rural exports have come to account for a larger proportion of total

The willingness to spend has perhaps been fuelled by confidence in improved employment data. Australia’s unemployment rate saw a surprise decline in October, falling to a 5-month low of 5.9%.

the central bank’s credibility. Mario Draghi has preferred to announce a 6-month extension that may be continued as long as it will be needed. Otherwise its monetary policy efficiency would be brought into question. As a result, we firmly believe that the QE will continue beyond 2017 but that was impossible to admit. Another strong point is that there is the widespread belief that an easing monetary policy is the only way to get the crisis away. When using both U.S. and Japanese QE programmes as a yardstick, we know that the overall concept of QE efficiency

still has to be proven. The question would be how the ECB would succeed where the Bank of Japan and the Federal Reserve are still struggling. The Swiss National Bank looked closely at Draghi’s conference as the Swiss economy is largely dependent on the European economy and the EURCHF has remained stable.

In light of recent stability, the Reserve Bank of Australia (RBA) has been content to take a measured approach with its monetary policy. However, strengthening economic conditions so far have come on the back of accommodative Australian Dollar exchange rates. Caution should hence be exercised as fluctuations of late have driven divergences between the currency and the RBA Index of Commodity Prices.

remains very much pegged to its resource exports. A drop in commodity prices should thereby see the AUD follow lower. Prolonged deviation could see the RBA step in to right the currency’s path or risk back-pedalling of its economy.

While development of the non-mining sector has sparked progress in the correct direction, change of such magnitude will take time. For now, the health of the Australian economy

We think that it is due to the Swiss safe haven status which offsets the EUR strengthening. In the near future, downside pressures on the pair are set to continue as European uncertainties - both economic and political - persist. For the time being, it leaves some room to the SNB to act in case the Swiss Franc strengthen. And we think that this is going to happen as the current European monetary policy won’t create any growth.

Bryan Lum

Only countries’ debt will go much higher as what is currently happening in US and Japan. Consequently, we await a further action from the SNB to prevent the fatal strengthening of the Swiss Franc.

Yann Quelenn

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Brazil – the year ahead By Simon Smith, Chief Economist at FxPro Last time, I looked at the impact of events in China on LATAM currencies, but as we enter a new year and a likely Fed tightening, it’s worth taking a step back and a look at what the coming year may hold. There are two things to know about the impending Fed tightening. Firstly, it’s the most trailed and anticipated tightening move by any central bank in modern history. The market has been pricing it at the beginning of each of the past four years but it has never materialised. Secondly, its

impact on emerging markets has also been the most profound of any tightening. Recall the so-called ‘taper tantrum’ of 2013, when the

Fed had to do loads of ground work as emerging markets wobbled just at the thought of coming off the drip-feed of Fed quantitative easing. As always with EM, one has to distinguish between the systematic and non-systematic

Firstly, growth is likely to remain weak next year; indeed another year of contraction is on the cards, coupled with above target inflation and a central bank chasing its tail to try and keep on top of it. This is never a comfortable combination for

Middle East update

However, in Q3 the long contracts increased significantly. Looking at volumes across dollar pairs, the flow from Middle East investors has been, and continues to be, heavily weighted to buying USD.

By Noureldeen Al Hammoury, Chief Market Strategist at ADS Securities Investors in the Middle East are looking for further weakness in the Euro against the major currencies and especially against the US Dollar (USD). Although it has been a choppy ride, the consensus, looking at the open positions, is for further declines towards the parity with the USD.

to their asset purchases program, short contracts have increased significantly.

The latest commitment of trader’s reports by the CFTC In the past few weeks, especially showed a notable spike in short after the European Central Bank positions to the highest level (ECB) December meeting which since May of this year, while the resulted in only slight changes Net Long/Short dipped to the 32 | january 2016

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influences. To what extent is any particular currency or country being influenced by the pressure on the asset class in general, or the country specifics? I touched on the Chilean Peso last time, carrying on my words of caution from June. This time, it’s worth thinking about Brazil, where the problems the country is facing are fairly clear.

lowest level since June. This accurately reflects the moves we are seeing. Traders in the Middle East have been buying USD from the beginning of the year.

This is at odds with the CFTC commitment of traders report in the US, which shows that US Dollar Index longs contracts have decreased since the beginning of the year, despite the fact that the US Dollar has been on a bull run since the start of the year. The NonCommercial Longs decreased by almost 40% since January until October, before rising again in December by 10% before the

a currency, even with the carry available with rates above 14%. The second factor is the balance of growth, with investment still lacking in infrastructure, in stark contrast to what we’ve seen in China in recent years. There are also fiscal risks, as the government finances tumble further into deficit on the back of the contracting economy. On top of this, there is the global backdrop, which has not been kind to emerging market currencies over the past 2.5 years. Those less favoured have been those more reliant on dollar financing, running twin deficits and more reliant on short-term financing. This

means that we could easily see USDBRL push to the 4.50 level before any signs of stability start to come through. Many think the worst is over for EM and that will be true for some in 2015, but it won’t include Brazil.

Simon Smith

Fed’s decision in December.

all the talks of easing as the economy slides back in to a One of the reasons for this has recession. However, regional been the notable decline in the investors have been very happy MENA region equities and crude trading the Yen’s tight range oil prices. Investors have moved and ignoring some of the more into the USD as a safe haven volatile pairs. asset which, for many, was the right decision. The US Dollar Index advanced to the highest level since 12 years, rising above 100.0 barrier which was good news for the bulls. Moreover, traders decided to diversify their safe haven assets, buying into the Japanese Yen. In Q3 we saw significant trading volumes heading to the Yen which has continued through Q4. This is despite

Noureldeen Al Hammoury

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Market themes for 2016 By Marshall Gittler, Head of Investment Research at FXPRIMUS Thinking about the direction of currencies in 2016, we have to start with the question: what will be the main themes likely to persist throughout the year? The past year was dominated by fears about global growth, particularly China; the decline in commodity prices, particularly oil; and the dénouement of policy divergence between the US and the rest of the world, particularly the EU. The global economy doesn’t hit a reset button on 1 January and so I expect these trends to continue at least into the first half of the year and probably longer. Specifically, I expect Chinese growth to slow further as the government continues its multi-year effort to restructure the economy. That means the price of commodities used for capital investment, such as iron ore and copper, are likely to remain under pressure for longer than those for day-to-day use, such as oil. The oil-sensitive currencies (CAD, NOK, MXN, RUB) may therefore recover visà-vis the AUD, CLP and ZAR.

One side-effect is that EM countries, particularly China and the oil producers, may continue to run down their FX reserves. Their sale of US bonds should keep US interest rates well above those of other countries and support the dollar. Slower Chinese growth and weak commodity prices also imply no quick return to inflation. The ECB and BoJ are therefore likely to ease further. I expect the BoJ to follow the lead of the ECB and SNB and to lower rates into negative territory for the first time in that country. That would probably propel USD/JPY higher still. At the same time, the FOMC thinks rates will rise much more quickly than the market does. Assuming the Committee is even only half correct, that means further monetary policy divergence and a lower EUR/ USD. As for new trends, watch the refugee crisis in Europe. This issue will add to the pressure

Marshall Gittler

on the EUR as the institutional foundations of the EU starts to crumble: first the Schengen Agreement, then the debt limits, and then what? Furthermore, political disarray and high levels of immigration on the continent increase the possibility that the UK votes for a Brexit – another big uncertainty for the market, and one that is liable to weigh on the pound. The US would seem to be an island of stability in this uncertain world. However, the impact of higher US rates and the Presidential election in November is likely to add to the global uncertainty. Still, the economics and the politics favor the dollar in 2016, in my view.

Marshall Gittler is a renowned expert in the field of fundamental analysis, with over 30 years’ experience undertaking top level research of the financial markets. His career spans a range of elite investment banks and international securities firms including UBS, Merrill Lynch, Bank of America and Deutsche Bank. Marshall has most recently established himself as global thought leader for clients of FXPRIMUS – a global provider of online forex trading – educating and delivering insightful FX research, helping traders to make the best trading decisions.

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INDUSTRY REPORT

INDUSTRY REPORT

Restoring trust in global FX markets An exclusive report and survey carried out by LMAX Exchange goes right to the heart of what is wrong with the FX market and what needs to be done if it is to regain the trust it has lost among customers. e-Forex summarises some of the findings. There can be no doubt that the global FX market is undergoing a period of unprecedented change and with the overriding push by regulators to bring greater visibility to the overthe-counter markets and get as many standardised instruments into regulated trading venues as possible, in the wake of several serious misconduct cases in recent years, it is likely that much more change is to come. What shape these changes should take, and how it can be achieved, has prompted a thought-provoking report and one of the first polls 36 | january 2016

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of its kind in the industry from LMAX Exchange. In a bid to move the debate around fairness and transparency in the FX market forward, the report, ‘Restoring trust in global FX markets’, takes a stance on the changes needed within the FX market in light of technology innovation, market sentiment and international regulation. The report seeks to answer three burning questions facing the FX market, which need to

be addressed if the market is to move forward. They are:

• Will the over-the-counter (OTC) trading model continue to dominate an industry which is increasingly subject to demands for greater accountability and certainty of execution? • Can the modern technology introduced by recently emerged FX venues enhance transparency in the FX market? • To what extent can regulation and standardisation of FX market practices improve fairness?

The FX market has already undergone significant structural change with the rapid growth of electronic trading, nonbank market participants and exchange-style execution, and the report argues whether, in a market where the burden of accountability has risen and technology has made a fairer trading environment possible, the OTC model continues to dominate. It concludes that while it seems inconceivable that OTC will be eclipsed as the dominant style of FX trading, it is equally unlikely that it will carry on without changes. The most likely outcome is that it will be altered and become more rules-based, adapting to the changing needs and demands of market participants. The report and survey reveal, for the first time, that across the board the industry agrees that greater transparency is desirable and that the technology exists to enable it. However, it will come at a price and preservation of liquidity is central to sustaining a healthy FX eco-system. The report veers towards the need for a balance to be struck between increasing transparency of execution for end-users, and protecting liquidity. Transparent price discovery and firm liquidity will come at a cost that customers will need to pay. Fair execution must come at a fair price, and transparency cannot come at the cost of destroying liquidity provision.

Arguably, steps towards greater transparency, such as removing one-way pricing optionality from LPs, must be counterbalanced to de-risk the provision of firm liquidity and ensure sufficient liquidity for the wider marketplace. According to the report, this will require customers to adapt their expectations of artificially narrow spreads and accept that higher fees are a price that must be paid for transparency.

ANONYMOUS SURVEY To support its investigation into the future of the FX market, LMAX Exchange conducted an

The survey was distributed to institutional industry participants and canvases the views of 450 respondents, ranging from banks, brokers, funds, asset managers, industry experts and technology providers. The key findings clearly suggest that a widespread sentiment in the market is that change is needed, despite the fact the results show that there is only limited agreement on how FX market practices need to change. While 80% of respondents said they thought the FX market should be more transparent (fig.1), only 60%

Figure 1

anonymous survey to obtain a representative view from industry participants about the transparency and fairness of FX market practices today.

agreed with the need for a global code of conduct overall in contrast to the majority of the non-bank respondents being in favour of having one (fig.2);

Figure 2

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INDUSTRY REPORT

INDUSTRY REPORT

and while 85% of respondents considered ‘last look’ to be open to abuse (fig.3), only 65% thought it should be abolished outright (fig. 4). The analysis of the results by segment revealed some divergence in views. Banks indicated the strongest support that ‘last look’ is open to abuse. At the same time, banks expressed mixed views, relative to other segments, that both relationship pricing and bi-lateral trading are open to abuse (fig. 5). Qualitative feedback from some respondents indicated concern over loss of client trust, with one asset manager commenting that “Everything can be manipulated by market makers.”

Figure 3

Figure 6

BEST EXECUTION AND TCA Figure 4

However, the survey also revealed that more than one fifth of respondents were unaware of ‘last look’, and some respondents, notably asset managers, suggested they did not understand the correlation between ‘last look’ and higher total cost of trading (fig.6). Respondents strongly supported the benefits of introducing trading practices from the exchange world, and agreed that trading practices prevalent in the OTC marketplace are open to abuse, with asset managers leading the support for FX to be traded on exchange (fig.7). Widespread agreement was indicated 38 | january 2016

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that market practices drawn from exchange trading, such as ‘one public rulebook’, no ‘last look’ and ‘price/time priority order matching’ could increase transparency (fig.8) but the analysis of the results by segment revealed some divergence in views among banks, as they indicated that the top priority for enhancing transparency is the introduction of ‘one public rulebook’ (fig.9), although the strong support for ‘one public rulebook’ was counterbalanced by disagreement over whether FX should be traded on exchange, with just 33% of bank respondents in agreement.

Figure 7

Figure 5

Figure 8

The survey also quizzed respondents on their perceptions around best execution and the use of transaction cost analysis (TCA). For the vast majority (83%), the overall cost of trade (transparent price discovery, no ‘last look’ execution and post-trade transparency) mattered more in assessing best execution than a tight spread. There was a similarly broad consensus, of 81% overall, on the usefulness of TCA in assessing best execution but by contrast, there was some disagreement on whether FX would benefit from a single source of reference price for the industry, with just 29% of banks and 74% of the nonbank respondents in agreement that it would be beneficial.

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INDUSTRY REPORT

impaired and public trust has been severely damaged.” It has recommended the creation of a new global code of conduct for FX, for market practices that are open to abuse to be reviewed and the development of standardisations in trading practice that are long overdue – such as on the time stamping of orders. Figure 9

Many of the questions addressed by the LMAX Exchange report have arisen from the increased regulatory scrutiny of the FX market.

The Fair and Effective Markets Review (FEMR), conducted over the last year by UK regulators, concluded in its final report that “market effectiveness has been

To download a copy of the full report please visit: www.lmax.com/restoring-trust-report

The report concludes that, “the FX industry needs to look ahead to the challenges it will face and develop regulation accordingly, not simply solving those faced by the market today.”

LEADER

LEADER

Countdown to MiFID II

MiFID II/MIFIR introduces changes that will have a huge impact on the EU’s financial markets. These include transparency requirements for a broader range of asset classes; the obligation to trade derivatives on-exchange; requirements on algorithmic and high-frequencytrading and new supervisory tools for commodity derivatives.

FX gears up for impending new regulation EMIR

MIFIR ARM

Whether or not MiFID II/MIFIR is delayed remains to be seen, but as Frances Faulds reports, the industry is still grappling with a January 2017 deadline to get the systems in place for the biggest regulatory shake-up of the FX, derivatives and commodities markets.

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It will also strengthen protection for retail investors through limits on the use of commissions; conditions for the provision of independent investment advice; stricter organisational requirements for product design and distribution; product intervention powers; and the disclosure of costs and charges. However, on 2 October 2015, the European Securities and Markets Authority (ESMA) wrote to the European Commission advising that it would not be feasible to have some IT systems necessary to implement certain MiFID II provisions ready for 3 January 2017, which has given rise to the discussions of a delay by the European Commission and Parliament. The key technical challenges are those described by ESMA in its letter to the Commission in relation to designing resource-intensive IT systems in a very short time frame. A spokesman for ESMA says that position reporting systems for commodity derivatives have to be built from scratch by national competent authorities, and market participants have to build their own systems to be able to comply with the requirements established. ESMA has started a massive project

to establish a centralised solution for reference data and transparency calculations, which will be of real benefit to investors in Europe, but it will require an appropriate amount of time to be implemented. Addressing MEPs in November, ESMA chairman Steven Maijoor said that the Regulatory Technical Standards (RTS) would not be finalised until 2016. He said: “The building of some complex IT systems can only really take off when the final details are firmly set in the RTS and some of the most complex IT systems would need at least a year to be built.” For this reason, ESMA has raised the possibility of a legislative response with delaying certain parts of MiFID II, mainly related to transparency, transaction and position reporting.

ADDITIONAL REPORTING MiFIR will expand firms’ transaction reporting obligations by increasing the scope of products - now almost all financial instruments have to be reported, whereas, only equities and bonds had to be reported under MiFID I. In general, MiFIR requires that all instruments traded, admitted to trading or requested to be admitted on a trading venue; all instruments with underlying traded on a trading venue and all instruments with underlying index or basket composed of instruments traded on a trading venue are reported. But John Kernan, SVP, Head of Product Management at trade repository REGIS-TR, says that some of the newly added reportable data represent new challenges for market participants as difficulties

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Countdown to MiFID II it would be hard to effectuate a joint reporting as it was initially planned because not all information required under EMIR can be reported under MIFIR, as there are not enough derivatives mandated to clearing relevant fields. under EMIR and which are sufficiently liquid, to be traded “Firms will need to navigate exclusively on RMs, MTFs, their way through the various OTFs or non-EU trading venues reporting obligations and deemed equivalent by the their technical differences European Commission. which will be complex task for many. Choosing an ARM Kernan says: “By comparing who is already a licensed trade MiFID I and MIFIR, we can see repository will help negate the a trend towards harmonisation need to double report some of transaction reporting of the data under MIFIR article requirements across the 26.7. Market participants should Member States as currently consider a single reporting there is a considerable amount solution which covers this, and of divergence between how other, data requirements.” Member States implemented the NEW TRADING FACILITY transaction reporting obligations under MiFID I. In relation to other One of the most important changes that MiFID II will reporting regimes, for example bring is the introduction of a EMIR, certain realignment new type of trading facility works have been made by regulators and as we can notify a – the Organised Trading convergence in terms of reporting Facility (OTF), which will exist alongside regulated markets formats, technical processes and and multilateral trading facilities required data fields as many (MTFs). Kernan says: “OTFs will pieces of information are the same across different regulations capture multilateral trading in (e.g. client data, instrument data, non-equity instruments, which have not been covered before, broker data, UTI, LEI etc.).” increase investor protection and break up monopolistic positions However, Kernan believes it of regulated markets. Beside is impossible to completely the increase of the number harmonise the requirements of types of trading venues, given that the different existing infrastructure will also reporting regimes exist for different purposes. For instance, be applied more broadly as for instance, MTFs can accept given different nature of EMIR with the entry of MiFID II more and MIFIR reporting, the fields instrument types.” are quite different and he says

“OTFs will capture multilateral trading in nonequity instruments, which have not been covered before, increase investor protection and break up monopolistic positions of regulated markets.”

John Kernan

exist in gathering/identifying that information, especially the new requirement to report information (ID, date of birth etc.) on natural persons (e.g. broker, and even end-client). Investment firms must undertake all trades including trades dealt on own account and trades dealt when executing client orders on a regulated market, an MTF, a systemic internaliser (SI) or an equivalent third-country trading venue. An investment firm may execute a trade elsewhere but only if the trade is nonsystematic, ad hoc, irregular and infrequent, or if it is carried out between eligible and/or professional counterparties and does not contribute to the price discovery process. A similar obligation now also applies to the trading of standardised 46 | january 2016

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LEADER

LEADER

Countdown to MiFID II MiFID II extends the SI regime so that it applies not just to equities but also equitylike instruments and nonequity instruments, such as derivatives, bonds, structured finance products and emission allowances. MiFID II also introduces a new definition for an SI, which is based on quantitative criteria, requiring investment firms to undertake complex assessments in order to calculate if they are below/or above certain thresholds. Furthermore, Kernan adds, the new legislation imposes an entirely new transparency regime, which has led to the introduction of new data reporting service providers, APA and CTP, an expansion of transaction reporting

obligations to equity-like and non-equity instruments and the enhancement of pre and post trade transparency requirements, introducing also the need to undertake complex assessments of whether an instrument is below certain thresholds in order to check if a pre-trade transparency waiver could be granted and/ or deferred publication of post trade might be possible. MiFID II also adds extensive requirements for firms engaging in algorithmic trading to ensure they have effective systems and risk controls in place. Kernan believes that there is an overarching need for more information and stricter governance. He says: “IT and organisations need to cater for

all relevant instruments. Then there is the need to identify all situations when reportable instruments need to be reported, for example, for transmitted orders, executed transactions, aggregated transactions, etc, as well as the need to either identify IT systems that record the information to be reported, as often there is a very dispersed IT landscape, or modify systems to capture certain information, for example, the new requirement to capture the investment decision maker.

the collection and storage of that data ensure governance and compliance teams are equipped to meet their new responsibilities. Furthermore, firms will encounter a lot of additional reporting types: transaction reporting, client reporting (i.e. costs and charges) and post-trade transparency requirements.”

IDENTIFYING REPORTABLE TRADES For Kernan, the major challenges ahead in complying with the transaction data reportable under MiFIR, include the identification of all instruments that need to be reported, as there is no golden source of all reportable instruments and each firm needs to ensure that it reports Source: BNY Mellon

Transparency and Reporting

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He adds that additional challenges might include the fact a LEI must be used instead of BIC for legal entities, as well as the need to capture the full identification of buyer and seller. This will mean collecting the LEI for firms and passport / personal data for natural persons. There is also the new requirement that firms must indicate whether the transaction is a short sale and whether it falls under an exemption as well as the need to link the transaction with the pre-trade transparency waivers and strict formatting rules regarding price, quantity, currency, instrument identification and dates. Kernan also adds that formalisation, regular review and monitoring of quality of execution will play a much greater role compared to today. He says: “Under MiFID I, firms were obliged to take ‘all

reasonable steps’ to achieve the best possible results for their clients. Under MiFID II, firms will instead be required to take ‘all sufficient steps’. This slight change in the wording implies that firms may have to make changes to current practices and policies.”

ONE-STOP SHOP Acting as an Approved Reporting Mechanism (ARM) under MIFIR, REGIS-TR in collaboration with Deutsche Börse’s Market Data + Services will address all major customer challenges by offering a strategic solution and topedge technology hub setup. By offering a one-stop shop to meet trade reporting requirements for all relevant regulations and deliver solutions for data, interface and system mutualisation, Kernan says REGIS-TR can offer a flexible, modular offering geared

towards specific customer requirements, efficient implementation, with selfservicing and tools, in order to reduce cost and complexity. He says: “In order support customers in their compliance obligations, our solution will offer full transparency and control over reporting process, alert/notification services, various quality assurance features, such as validation, enrichment, etc.” Customers can use REGIS-TR products and services – like EMIR TR, Phase 1 or Phase 2 of REMIT or MiFID II ARM services on a modular basis – either the core regulatory interface and reporting mechanism for any/ each of these on a standalone basis, or through the one-stopshop hub, which can include additional data management services, bespoke compliance reporting etc provided by

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Source: BNY Mellon

LEADER

LEADER

Countdown to MiFID II that are now covered by the directive – extending from the current securities-related instruments (equity and debt) of MiFID I to the range of FX, interest-rate and commodity related instruments now give market participants the included. Also, the legislation opportunity to ask specific not only covers EEA-regulated questions to both our team of markets but now all financial experts and also the expert from instruments, traded on any the National regulator. These “Trading Venue”, will become working groups will continue reportable. He says: “This and market participants also captures all the EEA-regulated have the opportunity to discuss markets but in addition, their requirements in more the Multi-lateral Trading detail on a bilateral basis. Facilities (MTFs) and the newly Indeed, we have also conducted established Organised Trading many of these discussions Facilities (OTFs) now come into with tier 1 clients who are scope. We expect that a lot of well advanced in their analysis what we now consider to be and selection of a preferred OTC derivatives will migrate provider.” onto OTFs for trading.”

“Assigning ISINs to OTC instruments will be a bit of a game changer. Although we at the London Stock Exchange already assign ISINs to some OTC derivatives, it is currently more of an exception rather than the rule.”

David Nowell

Deutsche Börse Group. “It is intended to be a flexible offering to suit the needs of different clients,” he adds. In addition to the group’s MiFID II Transaction Reporting Service, Deutsche Börse supports clients with its MiFID II OTC Trade Reporting Service, an efficient and straightforward option to meet the transparency requirements for OTC transactions under the new directive.

DATA PROTECTION ISSUES David Nowell, head of regulatory compliance and industry relations, at UnaVista, London Stock Exchange Group’s EMIR trade repository and MiFID Approved Reporting Mechanism, says that as transaction reporting for firms is set to become significantly more onerous for firms with the implementation of MiFID II. As the new reporting requirements come under the regulation, MiFIR, at least there is one set of harmonised reporting requirements across the whole of the EEA countries.

Throughout 2015, REGIS-TR has already been participating in a number of client working groups in major European locations led by Deutsche Börse Market Data + Services and attended by the corresponding National Competent Authorities. For Nowell, MiFID II brings a number of key changes, starting Says Kernan: “These have with the number of instruments been very well received and 50 | january 2016

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But the regulation will go much further than simply including all the asset classes when MiFID II replaces MiFID I, it is also dramatically expanding the amount of information that needs to be reported, drilling down to a much deeper level. A Market Data Reporting Working Group has been set up by ESMA and the National Competent Authorities to examine all the new trading scenarios that will be covered, and to write guidance documents, based on the scenarios identified. At the end of September, ESMA published what it hopes will be the final draft of its regulatory technical standards (RTS) for

Pre/post Trade Potential Flow

MiFID II and it is hoped that these will be finalised in early January 2016. The RTS for MiFIR transaction reporting sets out a total of 65 fields for information across all the asset classes covered – a significant increase from the 23/24 fields that were required by MiFID I. This is expected to require a major rewrite of the systems used to populate transactional reports and ESMA is understood to be looking at trying to converge the standards between the two reporting regimes. Nowell says there is also a demand for much more

information on the individuals, either those who are clients or the individual traders executing the transaction, as well as the individual responsible for the decision for the transaction. Individuals will now have to be identified by a meaningful national identifier, rather than an internal identifier within the company as used under EMIR. In the UK, this will be the individual’s national insurance number. Furthermore, it does not stop with the identifier; the new regulations will require the names and dates of birth of the individuals involved.

Says Nowell: “This is going to present huge data protection issues for the entire industry so the Commission is trying to reassure firms that the confidentiality of the data will be assured. However, disclosing this kind of information about non-EEA individuals can lead to a breach of local laws. This presents a major concern for the industry, but one where UnaVista may be able to help ameliorate.”

MANDATORY LEIS Already, differences between MiFID II transaction reporting and EMIR trade reporting,

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Countdown to MiFID II which will run alongside MiFID II, are apparent. Apart from the different product identification methods, EMIR has 85 fields so there is going to a mismatch of the field between EMIR and the 65 field required by MiFID II/MiFIR. There are some consistencies, which Nowell says could be built upon, for example the legal entity identifiers (LEIs) will be the same for both regimes, but thousands more new LEIs will be required as it will not just be for the reporting firm but also for the counterparty where there is a legal entity under MiFID II. “ESMA has taken a very strong position on this, saying firms should not be dealing with legal entity counterparties that do not have LEIs. While many organisations needed LEIs for EMIR reporting, it is new to MiFIR reporting, so some FX firms will be impacted by this. It may have a greater impact on the equities market, moving from MiFID I to MiFID II, as many firms aren’t caught by EMIR reporting as they only trade cash instruments.”

There is no golden source of all reportable instruments

inconsistency with EMIR, which uses the ISIN but also uses the Alternative Instrument Identifier (Aii) for certain exchange traded derivatives and ESMA’s own interim identifier for OTC derivatives.

Trading venues, including the MTFs, OTFs and systematic internalisers will have to adopt the ISIN. A lot of the current OTC derivatives will migrate onto OTFs and into systematic internalisers so these trading venues will have to supply reference data to their local national competent authority But global developments in on a daily basis, which will product identification mean that be a huge task, and one there is further complication Nowell believes will impact ahead. Under MiFIR, the FX derivatives in particular, if regulators insist that the only they are brought onto OTFs as identifier to be used will be expected. “Assigning ISINs to the International Securities OTC instruments will be a bit of Identification Number (ISIN). a game changer. Although we While the ISIN is well-known at the London Stock Exchange, and well-liked in the securities as the UK national numbering industry it is less commonly used agency, already assign ISINs for derivatives. This is another to some OTC derivatives, it is

currently more of an exception rather than the rule. However, we already have the experience and this is a challenge we will look to embrace” Nowell adds.

‘GOLDEN’ SOURCE There are concerns about getting a ‘golden’ source of all this reference data. To facilitate transaction reporting, firms need to know what instruments are reportable because going forward, not only will it be a breach to under- report, it also looks as though it is going to be a breach to over-report. Firms need to know what is reportable – which trades to send to the trade repository for EMIR and which trades to report through the approved reporting mechanism for MiFIR. Nowell says that UnaVista currently provides this golden source of data for MiFID and will look to do so for MiFIR. He adds: “MiFIR will bring in the new asset classes of FX,

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REGIS -TR, the European Trade Repository, brings visibility and clarity into your world. We offer flexible access and connectivity models so you can meet your reporting obligations with the minimum of fuss.

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Source: BNY Mellon

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Countdown to MiFID II but in recasting MiFID they have actually split it into a directive and a regulation so there certain obligations which come under the directive and others are in the regulation, and therefore directly implemented.” In the past, this has also meant there could be a gradual roll-out, across the different countries although nowadays Eddis expects that all countries will be aiming for the date MiFID II will come into force, originally January 2017, but possibly now a year later.

Organizational Requirements

commodities and interest-rates but it actually goes further than this as well; it also captures financial instruments where the underlying is a financial instrument traded on a trading venue. So if there were OTC instruments that didn’t migrate onto a trading venue, or derivatives on third country exchanges, then firms still need to look at the underlying instrument and determine whether it is a financial instrument traded on a trading venue. It really is incredibly difficult for firms to work this out unless they have got this ‘golden’ source of data.”

all the cash instruments, and EMIR will continue to capture derivatives that are not traded on a trading venues or where the underlying is not traded on a trading venue.

Using its experience as an EMIR trade repository UnaVista has predicted what validations will be required and UnaVista’s MiFIR Accelerator Programme now provides firms with the tools needed to get data and personnel ready in time for MiFIR reporting. The 65 fields for MiFIR have been built-in, along with all the LEIs needed, allowing participants to upload different sources of data and The only area where the turn and off certain fields to reportable instrument set for check whether that data source MiFIR and EMIR overlaps is on has the correct information and the derivatives that are admitted whether it passes validation. for trading on trading venues, “Step-by-step, market or where the underlying is a participants can check each data financial instrument, traded on source that will need to feed a trading venue. This means into the different reports, and MiFIR will include instruments test its readiness well before that are not in EMIR, including the go live date. As we learn 54 | january 2016

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more about the regulation, the validation will be updated and firms can adapt their processes accordingly,” Nowell says. UnaVista will also be reaching out to firms to explain the reporting requirements as well as offering new MiFIR training next year.

FINAL DETAILS NEEDED Harry Eddis, Partner in the Financial Regulatory Group at Linklaters, says that while the regulation will be directly implemented into all Member States, the directive needs to be formally implemented by all the countries, which can lead to differential implementation as some countries will simply rewrite the text of directive into their own law; others will do what they call an ‘intelligent copy-out’; while others seek effectively to rewrite the directive to try and make the same points. He says: “MiFID I was a directive

With regards to trading FX instruments going forward, Eddis says there is a mandatory trading obligation in Article 28 of MiFIR that is cast in very similar terms to the mandatory clearing obligation, and affects the same class of financial counterparties.

“Financial instruments have to be subject to a mandatory clearing obligation before they can be subject to a mandatory trading obligation; ESMA will go through all those instruments subject to mandatory clearing and then decide whether they will be subject to a mandatory trading obligation as well,” Eddis adds.

the scope of regulation, as MiFID II takes away many of the exemptions that applied in MiFID I – for example, commodities traders trading on their own account, as well as algo and high frequency traders may need to become authorised and will likely now be subject to much greater amounts of regulation.

The main impact of MiFID II will be in the changes that will be introduced to market infrastructure, particularly in the obligations that will apply to systematic internalisers, MTFs and OTFs. For example, pre-and post-trade transparency requirements in conjunction with restrictions in how systematic internalisers and MTFs/OTFs may interact are likely to lead to a dramatic change to the way in which investment firms conduct their businesses - equities trading in dark pools will likely be problematic and trading in the fixed income market will be radically different. While FX spot trading is unaffected, FX derivatives will be subject to the same pre-trade transparency and market infrastructure changes.

DELAY OF UP TO A YEAR

Additionally, Eddis says that more entities will come within Harry Eddis

“They are giving the industry very little time to make changes, given that a lot of this will require new systems to be built and this takes time.”

In terms of implementation, Eddis says one of the key difficulties is that industry is still waiting for finalisation of the level two texts – the delegated acts and regulatory technical standards are still in draft-form and it is not clear when and in what form they will be adopted. In addition, a lot of the rules are difficult to interpret and it is proving difficult to get certainty and clarity from the regulators. Eddis says: “They are giving the industry very little time to make changes, given that a lot of this will require new systems to be built and this takes time. The industry is struggling with how much needs to be done.” That is the reason, Eddis says, for recent calls for a delay in implementation; the latest appears to suggest there is a one year delay to MiFID II coming into force. If so, Eddis says that he hopes the regulators make use of the time productively and finalise the detail quickly to enable the industry to implement the requirements more easily.

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We’re talking here about cryptocurrencies. In the past, that term has referred to Bitcoin and a collection of more-or-less wacky sub-Bitcoin clones. Then everybody started talking about the “underlying technology”, while not mentioning the cryptocurrency, and then we worked out how the blockchain actually operates. For a while, distributed architectures seemed to dispense with any need to trust each other (or mention Bitcoin), but then reality (and inconveniently well-founded regulatory obligations) kicked in, and we moved on to a distinction between the “permissionless” Bitcoin blockchain, in which everybody can join in, and “permissioned” blockchains, which are closed groups (see the box Who gave you permission?).

Follow the money! How else can we exploit the full potential of the blockchain? Although William Essex believes that large parts of the FX industry have tried to disassociate the blockchain from Bitcoin he argues that ultimately this doesn’t matter as long as this potentially transformative technology is exploited to its full potential.

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Now we’ve moved on again. Today’s innovation is still focused on the blockchain, but in at least one current initiative, Bitcoin is being brought back into the mix – to good effect. We may need the “overlying” cryptocurrency after all, and (at last) that may have significant implications for FX trading.

BUILDING A BETTER LEDGER First things first. The idea of the “permissioned” blockchain is that we can build blockchain-style distributed architectures that are distributed across groups of “permissioned” entities that might include, let’s say, exchanges, clearing houses, banks, maybe trading desks, corporates – and we can do that without provoking regulatory outrage. Only regulated entities are eligible for permission, and within the permission boundary, everything happens

blockchain-style (more on what that means later). Take for example the widely publicised initiative by the “financial innovation firm” R3 to “design and deliver advanced distributed-ledger technologies to global financial markets in partnership with its consortium of member banks”. It’s big, and because every press release seems to bring news of more banks joining the consortium, let’s just say that at least thirty banks are participating already (see also the boxed interview Leveraging the network effect). David Rutter, CEO, R3, points to the “diverse global footprint” that member banks represent. As that implies, distributed architectures will potentially operate globally, and may thus comprise entities from a variety of regulatory regimes – permission is a step further than authorisation. Where does Bitcoin fit into all this, and where’s the FX angle? Before we get to that, we have to take the necessary step of establishing whether there might be a role – any role – for a crypto-currency – any crypto-currency – in a wave of innovation centred around a technology with apparent potential for building a better record-keeping system. We have to do this because the striking feature of much (not all) bank-led innovation in the recent past has been that apparent unwillingness to acknowledge Bitcoin. This is understandable (see the box Reputation, again, and the “underlying” obstacle), but to a cynical observer, the analogy might

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Follow the money! be that our efforts to build a high-performance car are hampered by our inability to mention the road. We can get all our luggage in the back and I love the glove box … uh, do we need these wheels? This is not an absolute denial, but it’s conspicuous. The blockchain was invented to enable a currency. Almost twenty years ago. That currency is compatible with mobile phones, and on the retail side (for example) handles remittances at low cost. It’s not that we’re obligated to work with crypto-currencies, but large sections of the industry seem deliberately to have changed the subject away from the blockchain’s first (and for a long time only) use case. Maybe it’s time to re-route history. Is it possible that blockchains and cryptocurrencies, the blockchain and Bitcoin, go together like fast cars and fast roads?

STRIKING CRYPTO-OIL We have already (in, for example, e-Forex July 2015) discussed the notion that a crypto-currency can work as a form of “crypto-fuel” for some blockchain-based structures. Such a fuel may not be required for wholly static data-centric applications, but where there is any “movement” there may be a need for some form of high-octane, high-performance – no, wait a minute; the better term might be lubrication. You need your crypto-fuel/lubricant 58 | january 2016

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Any colour so long as it’s open? “Think of Bitcoin as paper,” says Richard Olsen, founder, Lykke. The Bitcoin blockchain is a global notary service; individual bitcoins are the recordkeeping mechanism – the paper – underpinning that service. Olsen says: “I can buy a fraction of an existing bitcoin, and then use the Open Asset Protocol to add text to it, like writing Richard Olsen on a piece of paper.” The Open Asset Protocol has evolved from the “coloured coins” concept, whereby metadata can be added to a bitcoin’s code, for example to add value to it – a bitcoin can become a theatre ticket, a bearer bond, the deed to a house. If a bitcoin is a piece of paper, the Open Asset Protocol enables writing on that piece of paper; Olsen accepts the suggested term “enhanced banknote”. Indeed, the process on writing on a bitcoin (or on a number of satoshi, which are the minimum transferable fractions of a bitcoin) is strangely similar to the process of printing a dollar bill. You think 3D printing was a good idea? Wait until you see what we can do with no-D crypto-printing. “We can use this for any type of IOU,” says Olsen.

to keep the “engine” running smoothly. [Note that the neutral word “movement” at least avoids any potentially false distinction between supposedly static data and, say, transactional activity. Innovators tend not to recognise such distinctions.] Here’s the awkward fact. For

data to be moved from one column to another, so to speak, in a distributed ledger system requires an alteration to be made. To a certain point, that’s fine. The record just gets changed. Beyond that point, it might strike the same cynical observer we met earlier that, this time, the analogy he needs

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Follow the money! is approximate to, say, passing notes from desk to desk. Those notes would by definition be, er, bank notes. [Now note a slight blurring of the static/ transactional distinction; see also the box Any colour so long as it’s open?] The awkward fact is not so much that we might need to pass notes around, but that we could significantly increase our ledger system’s usefulness by doing so. Obvious, right?

CRYPTO-CURRENCIES AND CENTRAL BANKS So that’s it? That’s the case for the crypto-currency? Wait – there’s more. We all know that Andy Haldane, chief economist, Bank of England, made a speech on 18th September 2015 (titled How low can you go? and delivered in Northern Ireland; it’s worth reading), in which he discussed both the future of money and the future of monetary policy in the extended aftermath of the global financial crisis. Arguing that interest rates may remain low for some time yet, Haldane pointed to the ZLB (Zero Lower Bound) problem: interest rates cannot be cut to below zero by conventional means. “The probability of policymakers needing 3 percentage points of interest-rate headroom comfortably exceeds the likelihood of this headroom being available,” said Haldane, who then suggested that the way forward might be to allow 60 | january 2016

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currently “unconventional” monetary measures to become “conventional”. Long-term quantitative easing would be one option. “A more radical

proposal still would be to remove the ZLB constraint entirely by abolishing paper currency,” said Haldane, adding that such a move would have

Who gave you permission? Scroll down to the conclusion of Satoshi Nakamoto’s original white paper (Bitcoin, A Peer-to-Peer Electronic Cash System; look for it at at www.bitcoin.org), and you find this sentence: “We have proposed a system for electronic transactions without relying on trust.” Read the whole thing, and you detect a preoccupation with the untrustworthiness and/or unreliability of just about any person or entity acting on a stand-alone basis within the financial system. The elusive Mr Nakamoto presupposes, in effect, that just about anything can go wrong. Trust can’t be trusted. By this logic, the late Sam Goldwyn was correct when he famously said: “A verbal contract isn’t worth the paper it’s written on.” Satoshi Nakamoto might have added: “Neither is a written contract.” The solution for Nakamoto is distribution so widespread that it doesn’t matter whether any single individual (or group of individuals) is not trustworthy (the paper does discuss the feasibility of a concerted attack on the distributed network). In today’s terminology, this is the “permissionless” blockchain: any new entrant or participant is so vastly outnumbered that his/her trustworthiness is not an issue. But this is not a solution that can be adopted by banks; they work within a regulated environment where trust is at once a requirement and an obligation. So we move to the “permissioned” blockchain, within which each participant is a regulated entity, compliant with all the AML/KYC checks applied by the other participants, and thus “permissioned” to participate. It’s a neat solution to a currently intractable problem, although, as Nakamoto might point out, it does rely on each participant trusting every other participant, and being trustworthy in return. We have, in short, come up with an electronic system that relies on trust. Is that innovation?

“the added advantage of taxing illicit activities undertaken using paper currency, such as drugdealing, at source”. This is the argument for (fiat) crypto-currencies to replace traditional fiat currencies. “One interesting solution … would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form,” said Haldane, pointing out that central-bank deposits are already digital, and that technology development in this field is wholly attributable to Bitcoin. We’ve been here before. The influential blogger J P Koning’s proposal for Fedcoin was discussed in e-Forex October 2015 [Haldane’s notional crypto-Sterling is discussed online as “BoEcoin”], as was Magnus Lind’s perception that currencies need renewal. “One of the assets you can transport [via a blockchain] is a currency,” said Lind, who is founder and treasurer of the Treasury Peer network. But let’s stop for a moment. Haldane’s speech was a discussion of monetary policy and the likelihood that today’s challenges will endure; the abolition of paper money was cited as one possible tactical move to enable an interest-rate drop (see the box Bitcoin and the central-bank dilemma). The speech (probably) wasn’t a hint that the bank is planning a move away from paper.

THE BANKS ARE OUTSIDE THE BOX TOO We should acknowledge that banks are also thinking unconventionally. Many of them spent 2015 either

working on or studying the blockchain, motivated at least in part by a concern for selfpreservation. Michael Harte, chief operations and technology officer, Barclays Bank, was

Reputation, again, and the “underlying” obstacle Bitcoin has a bad reputation. In its early days, it proved to be a useful facilitator for drug smuggling and other illicit trade. The points have been made before (and will no doubt be made again) that, first, the US dollar has facilitated (and been the cause of) far more crime than Bitcoin, and secondly, more importantly, that an unequivocal proof of utility will tend to be negative but carry a positive implication. Criminals only care about what works. If they use an instrument – it works. The early internet – but we all know how that example goes. With Bitcoin, the quirky part has been the distinction between the thing itself and the underlying technology. Banks can’t readily jump into something that’s most closely associated with the so-called Dark Web, but they can – completely separately – build blockchains. Not to overstate this, but the whole “We can build a blockchain and we don’t need Bitcoin” thing is a side-issue, as is “We’re developing a coin but it isn’t Bitcoin.” Understandable, but still – a side issue, and one that needs to be set aside. This is not because we’ve already invented the wheel, nor indeed because we’re okay with our current mousetraps. No. The issue is: only banks worry about this. They’re regulated entities. There are boxes outside of which they can’t think. They can offer scale, funding, innovative talent of their own. But an outsider can, for example, pick up one useful tool (Bitcoin and with it the blockchain), combine it with another useful tool (mobile telephony), and save the world (the unbanked) – more easily and faster than a regulated entity can. Until Bitcoin loses its negative associations, the clever people outside banks will retain a slight advantage in their efforts to innovate.

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Follow the money! quoted in the Financial Times in early December, saying that: “We could go the way that file transfer technology changed music, allowing new businesses like iTunes to emerge.” At roughly the same time, Deutsche Bank

was widely reported to have developed a blockchain-based corporate bond platform. UBS, meanwhile, has been running a “Future of Finance Challenge” through Q3/Q4 2015, and a by-product of this has been discussion of a

Bitcoin and the centralbank dilemma Here’s a neat trick. Faced with the intractability of the Zero Lower Bound (ZLB) problem, which is that in the conventional world, negative interest rates aren’t achievable, the Bank of England’s chief economist, Andy Haldane, considered his unconventional options. One of these was to use digital currency. Paper currency could be abolished, suggested Haldane, adding: “A third option is to set an explicit exchange rate between paper currency and electronic or bank money. Having paper currency steadily depreciate relative to digital money effectively generates a negative interest rate on currency, provided electronic money is accepted by the public as the unit of account rather than currency.” Think of the impact on demand, if there was an explicit interest-rate differential between paper and digital currency. Haldane went on to discuss Bitcoin and the blockchain. “Whether a variant of this technology could support central bank-issued digital currency is very much an open question. So too is whether the public would accept it as a substitute for paper currency,” said Haldane.

“utility settlement coin” that might (difficult to say anything final about an innovation-inprogress) serve as a common unit of exchange within a permissioned blockchain. Like, you know, a unit of something not unlike a currency brought into being by a process that we might just as well call cryptography. Bitcoin just won’t go away, will it? We could get into so-called smart contracts here, which are conditional little cryptocontracts capable of linking “bank notes” (as defined above) to real-world assets and being carried around on a blockchain (as also mentioned briefly in eForex October 2015), but let’s not. We’ve talked about the blockchain, and we’ve discussed its use as a permissioned ledger system. So far, so settlement. All very back office. We’ve heard a central banker refer to the awfully bad reputation of paper currencies such as Sterling – associated with drug trafficking, you know – and we’ve come close to a use case for cryptocurrencies as instruments of central-bank policy. Not quite all the way – but close.

It is conceivable that today’s tech-savvy consumer might prefer to know that the credit card she’s using to shop online is backed by green paper rectangles and little metal discs, just as they’re backed in turn by gold, ha ha, but technology is contagious and perhaps FX desks have a role to play in spreading the contagion.

So let’s indulge ourselves. The next section of this article is devoted to another initiative currently under way that is developing an explicit link between Bitcoin and the FX market.

Oh, and forget digital “wallets”; it’s all about cards, surely?

AS YOU LYKKE IT “We see an opportunity to

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rewire the foreign-exchange Is it possible that blockchains market and make it much and crypto-currencies, the more efficient,” says Richard blockchain and Bitcoin, go Olsen, founder, Lykke. In mid2015, the company launched together like fast cars and a competition “to design an fast roads? innovative FX matching engine integrated with the blockchain”. The competition ran through its early stages, and then it dawned on everybody involved that they weren’t running a competition any more – they were building an innovative FX matching engine integrated with the blockchain. “After two rounds, we discovered that we have a perfect team in place – teams that were participating; they were covering different aspects of the whole project. So we’re moving forward and plan a first release for the end of Q1 this for FX, whether retail or asset classes and all instruments, institutional, but in the long 2016,” says Olsen. every one attached to a term, what we’re really talking coloured coin, with immediate about here is a global matching settlement,” says Olsen. The thinking is – the future engine for your house, your is going to happen quickly You caught the repetition of car, your financial assets, your now. “The essence of modern “immediate”, right? “Because contracts … your everything. business is viral. Let’s start of the immediacy, it’s possibly to In the terms of this article so simple, and from that it will have an intra-day yield curve,” far, Lykke is starting where the spread,” says Olsen. “We’re Olsen continues. Today, we blockchain started, with the starting with instruments that can’t pay interest intra-day. are easy, such as FX. Let’s rewire currency. And yet FX is a liquid market in the whole financial system.” which 98% (Olsen) of positions But, as any fat-fingered deskEasy? In explaining what it is are opened and closed within warrior knows, FX isn’t that that Lykke is actually releasing, twenty-four hours. “So now, for hard to trade. If it ain’t broke, Olsen sidesteps the retail/ operational reasons, no interestwhy fix it? institutional divide. Using the rate differentials are payable. Open Asset Protocol (see the Interest rates compensate for Ain’t broke? “The beauty of box Any colour so long as it’s the different risks of different open?), Lykke will enable assets this is that we can build a assets. If, intra-day, no interestmarketplace with immediate to be attached to “coloured rate differentials can be paid, settlement, where any asset coins” (existing bitcoins; see this effectively subsidises market can be directly exchanged into the box) so that passing the participants to do the reverse any other asset. The dream is to of what interest rates are there coins will achieve the transfer have a global marketplace for all to achieve. If I short a highof the assets. It’s easiest to do

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Follow the money! interest-rate currency overnight, I have to pay interest. If I do so intra-day, I don’t.” Discuss. Write your conclusions on one side of the bitcoin only.

NO CURRENCY DOES IT BETTER In an architecture where everything happens blockchainstyle (to pick up the phrase used earlier), ownership records are robust against fraud, asset transfers are immediate, and there is transparency. Everything is the same as it is now, except that it’s faster, and you can’t fake it. The blockchain, that famously “underlying” technology, has all the characteristics of a much more effective ledger system than either a big fat leatherbound book or several acres of server farm spread across enough geography to achieve redundancy. Is it unfair to suggest, as this article does, that large parts of the industry have tried to disassociate blockchain technology from Bitcoin? If it is, that would be because the blockchain really does convince as the basis for a better ledger. And because Bitcoin does come with “baggage”. But in the final analysis, none of that matters. What does matter is that this potentially transformative technology is exploited to its full potential. It’s not just about currency. It’s not just about accurate records. Potentially, it’s about everything.

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Leveraging the network effect Many banks have joined the consortium around R3’s initiative to design and deliver advanced distributedledger technologies to global financial markets. Charley Cooper, managing director, R3, spoke to William Essex about the way forward. William Essex: How many shared ledgers are we likely to need? Is the long-term vision for a single shared ledger across the industry? Charley Cooper: As few as possible. The potential benefits of distributed ledger technology grow exponentially as the number of such ledgers decreases. Their power comes in large part from the network effect: the more market participants that use the same shared ledger, the more effective and efficient the solution becomes. We hope to move as close as possible towards one global ledger. WE: You have a lot of banks signed up now. I wonder if

you’re evolving new ways of sharing and/or co-operating between banks, alongside potential new solutions? Is there a cultural angle to innovation? CC: We believe the R3 distributed ledger initiative is the largest such consortium ever assembled, and as part of that effort, our members work together across technology, product development, legal & regulatory and various use cases. The power of this technology is found in its network effect, and our members agree that active participation and collaboration are essential to the success of the overall effort. It’s very exciting to have the backing

Global financial markets have to be secure and scalable

of so many smart, innovative and experienced people and organizations. WE: As a follow-up to that, are there new standards and protocols being evolved that any bank should know, regardless of how they’re getting along with this new technology? CC: Part of our work will focus on the development of new standards that will help drive the build and adoption of these new solutions, although the majority of our focus is on the technology development side. We’re a fintech company, so our efforts to develop standards and protocols are taken with that in mind. To the extent our work helps inform others that utilize them, we see that as an benefit for the industry. WE: How many times have you heard the word ‘legacy’ in the last six months? Seriously – do you meet resistance based on banks already operating their own ledgers? Does a bank’s signup indicate a complete, in-depth understanding of the technology and what it offers? CC: Quite a few, but in this context: when we discuss legacy systems, our members don’t see them as a reason to resist technological innovation, but rather to embrace it. The potential applications of distributed ledger solutions extend from how market participants interact with each other all the way to how

they conduct their business internally. The successful design and build of this technology will help save enormous costs by replacing old, slow and inefficient legacy systems. WE: To what extent can this be customer-driven? Will the ‘shape’ of any ledger project be defined by the participant banks, and/ or by customer demand (what is that demand for, exactly?) and/or by regulatory pressure? CC: Frankly, our entire approach to the development of these technologies is to include customer input from the beginning. We realised that the key to developing these technologies in a way that would be meaningful and efficient was to work in collaboration with the industry to develop a single solution, pooling resources rather than spending time focusing on individual projects that would then effectively require to be duplicated across institutions. Our design and build process starts with input from our members as to what they and their customers hope to see in the end product. It is a common mistake with emerging technology to build and launch it to the market in isolation, hoping it will be effectively adopted and used. That will not work for global financial markets, which have to be secure and scalable to meet the high security standards for the transfer of money and other valuable assets.

Charley Cooper

We’re also taking regulatory pressures into account from the very beginning, and that work falls to our Legal & Regulatory Working Group, whose efforts are aligned with all of our business and technology teams. Financial services is one of the most highly regulated industries in the world, so any distributed ledger solutions have to account for those variables and diligently seek to address them. WE: What question do you wish somebody would ask you at this at this stage, and how would you answer it? CC: I’d welcome the question: how big a deal is this? The answer is that we believe this technology has the potential to change financial services as profoundly as the Internet has changed media and entertainment. That’s a big claim, but we believe it’s true. We at R3 want to be in the vanguard of that change. WE: Charley Cooper, thank you very much.

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FX E-COMMERCE & PLATFORMS

market between 2010-2013, and that trend has continued in recent years. JOHANNESBURG

STOCKHOLM

MEXICO CITY

SYDNEY

A powerful mix:

regional FX providers combine high-tech trading with local currency expertise Regional eFX providers are making a comeback in currency markets long dominated by the majors, as the myriad new, sophisticated technology solutions available has made them more competitive at a time when clients are increasingly seeking local expertise and dedicated service.

For years a handful of global banks have run the lion’s share of the world’s currency markets, between them managing more than half of all global flows worth more than $5 trillion a day, as the rise of proprietary risk-taking and electronic trading have seen them take ground from smaller local banks. But the upheaval of the global financial crisis has been

prompting a sea-change in the makeup of global FX trading as clients have turned to regional banks for their in-depth insights and broad local networks in the face of uncertain and volatile trading conditions.

costs rise. At the same time, the new rules have made it often simpler for participants to deal with counterparties at a national rather than an international level, leaving regional banks well-positioned.

Heightened regulation since the global financial crisis and subdued market conditions have seen investment banking revenues decline and trading

Figures from the Bank of International Settlements showed smaller banks were among one of the fastestgrowing segments of the

“We have noticed that local customers have in cases stopped trading with global banks due to regional regulations in other countries,” said Patrik Nilsson, Head of FX Liquid Trading Risk Management at SEB, which specialises in Nordic currencies such as the Swedish krona and Norwegian krone. “For example the Dodd-Frank regulation have caused some local customers in other parts of the world to stop trading with US banks. We also see there is a clear trend that the market recognises the advantages in bilateral trading relationships with a specialist such as ourselves.” Tim Hutchinson, Head of eFX at pan-African bank Standard Bank, agreed: “It is very clear that there has been a significant pull back in major players in their market making desks. The pull back has seen the growth in the non-bank market makers and many of them are building out their solutions and offering. However the investment and roll out is still dominated in the major pairs. Emerging Markets remain a focus for a wide variety of counter parties and whilst this has slowed, that interest is still very much real. Business will

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“We have seen a new trend in major platforms that offer liquidity on a one to one basis where volumes and interest are at an all time high” carry on and as such clients will need liquidity providers to service them.”

LEVELLING THE PLAYING FIELD Driving this trend has been the rapid growth in widely available FX trading technology, which has levelled the playing field for regional banks by making them more competitive when compared to their global peers. The growth of electronic trading in the global forex markets, driven by the regulatory push to see more trading done on exchanges, and the broad range of solutions has brought down costs for smaller banks at a time when their global peers have been feeling the pinch. Where once only the behemoth banks (flow monsters) with huge investment budgets could offer their clients sophisticated trading solutions, the growth of good white-label systems means regional banks can buy in technology that mimics the offerings of their tier one competitors and rebrand it as their own.

Tim Hutchinson

to improve their e-commerce FX offerings. “The commoditizing of FX trading technology has allowed regional banks to close an important portion of the technology gap,” said Felipe Alanís Suárez, Head of E-FX Markets at Mexican Bank Banorte.

“Until now it was very expensive to build a priceengine, aggregator, etc in-house, along with all the communication infrastructure it requires. So expensive that even global players have started joining forces to reduce the cost of maintaining the distribution channels for their financial Regional banks have also started services electronic platforms. hiring experienced staff from the top ten global banks and Software as a service and cloud establishing partnerships with computing that we have seen third-party technology vendors disrupting almost every area of

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A powerful mix software technology are coming to the trading desks as well and are drastically improving the ability to develop new business areas.” With an increasing amount of trading done by banks with local franchinese, FX trading is starting to look more like it did in the 1990s, when regional banks with commerical flows played a significant role and investment banks were much smaller players. That shift has been spread across varied sectors of the market. Regional banks have seen their client base grow dramatically in recent years as large corporates, institutional clients and even rival banks – both local and global – have started to turn to them for liquidity and a personalised service they cannot find elsewhere.

Felipe Alanís Suárez

Rapid growth in banking technology has levelled the playing field for regional providers

“Given the current state of liquidity counter parties are looking to a provider who is able to satisfy their needs in a massively shifted market,” said Hutchinson at Standard Bank. “Whilst volumes in most of the platforms remain subdued, we have seen a new trend in major platforms that offer liquidity on a one to one basis where volumes and interest are at an all time high. The clients we see approaching us are looking for consistency in offering and only those who exist in those markets and have a vested interest in ensuring long-term sustainability in those markets are able to offer that. Very simply it boils down to clients who have natural interest are looking for True Best Execution.”

“The commoditizing of FX trading technology has allowed regional banks to close an important portion of the technology gap,”

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GROWING INFLUENCE Local banks are wielding growing influence over markets once seen as marginal by FX traders but now increasingly drawing in a wider range of investors, both in less liquid developed country currencies such as the Swedish kroner, and emerging market units like the South African rand and the Mexican peso. Many regional banks have succeeded in becoming the main market-makers in their respective currencies by connecting their liquidity to major financial centers and trading venues. But they are not only aggregating liquidity to resell it to their customers – they have also started using their local knowledge to provide pricing to the rest of the world. “We clearly see a that there is a growing demand for our expertise in the Scandinavian currencies,” said SEB’s Nilsson.

Stocky, Nokky, Copey – let’s talk Scandies. Together.

Talking Scandies? We speak your language. SEB is at the heart of Scandinavian finance, and also has a strong presence in financial centres worldwide. We offer the highest-ranked research in the Nordic region, which means you can always be confident of the best possible deal. With the power of our e-trading platform at your service, the Scandies have never been closer. Discover more at sebgroup.com/fx

FX E-COMMERCE & PLATFORMS

FX E-COMMERCE & PLATFORMS

A powerful mix “We know that the demand for Scandinavian currency trading commonly exceeds the supply, and our unique local client franchise and local connections helps us to deliver consistent service to our clients. As any regional bank with a solid franchise of core clients, the depth of our Scandies franchise gives us a competitive advantage as a market-maker. The regional bank often knows the local market best; SEB knows the Scandinavian markets and can offer a wide selection of ways of hedging, combined with local cash management services, where we leverage our local franchise and unique blend of trading relationships.” In a bid to capitalise on these changing trends, regional banks have also reconsidered their approach to FX trading and sought to differentiate their services rather than chasing volumes. Today, making markets in EUR/USD is no longer a differentiator, so banks are increasingly aware that concentrating on areas where they have specialist expertise and reach is more valuable than trying to compete in the commoditised liquidity space. Instead of trying to offer all services to every customer, they have started to leverage their specalist knowledge and the

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dedicated service to woo clients. That can range from everything from the quality of the research provided to the mere fact that a particular salesperson speaks the local language. “Our clients tell us they are looking for a genuine knowledge of local markets and for a discreet output for their flows” said Alanís of Banorte. “But mainly, they say they feel very comfortable with the idea that we are growing together, so we will be open to adapting our offerings to their requests. We offer a close relation with the team that can take decisions and coordinate an holistic approach to client’s needs. With us, for example, it’s easy to set up configurations in response to a specific client request, or we can work with them in particular projects to leverage functionality.

Hutchinson said that, as Africa’s largest bank by assets, customers know Standard Bank has a vested interest in safeguarding the markets in which they operate. “At Standard Bank our goal remains to be the number one market maker in both ZAR and our other African currency pairs in the markets we choose to operate. We can stand behind this statement due to the fact that we have a vested interest in ensuring the long-term sustainability and growth of the African continent,” he said.

The brutal market conditions of the financial crisis and the subsequent revelations of interest rate rigging have also left another hangover for today’s currency markets: clients are looking for banks they can trust.

“As a market maker we are out there every day putting risk on our balance sheet in order to support this. We also are focused on our core currencies meaning we spend our resources becoming specialists in our pairs rather than having to be able to provide coverage and service in all markets. Lastly our presence in the local markets means we are best placed to know exactly what is happening in the market across all facets. Naturally clients who partner with us receive that benefit.”

With liquidity tight and market conditions still constrained, clients are not only seeking out

Some regional banks have also benefitted from growing demand for emerging market

In the end, it is based in our ability to work with them as partners and not treat them as just another client.”

BUILDING TRUST

Each customer and market has its own particular quirks, requiring tailored solutions and advice. What is consistent for these banks though, is the focus that they put on their local markets and that technology is changing how they access FX liquidity.

banks with an in-depth local understanding – they also want them to have an interest in ensuring longer-term stability of the markets in which they trade.

Nilsson said that as a regional bank, SEB has an unparalleled understanding of the particular conditions in the Scandinavian currency markets and how best to handle them.

Regional banks are establishing partnerships to improve their e-FX offerings currencies since the onslaught of the 2007-09 financial crisis. Encouraged by the rise of China and India in the past decade, many investors have turned to emerging markets in search of profits at a time when interest rates and growth in the developed world were languishing in the doldrums. Offshore trading of emerging market currencies has surged, mirroring the growth in crossborder financial flows, and driving a significant increase in foreign exchange turnover ratios. Of the five main types of derivatives, research from IMF economists has found the strongest growth has been in FX derivatives in recent years as foreign investors have sought to both speculate and hedge their currency risks from local investments.

He explained: “Regional knowledge and leveraging our local franchise is key here. Very few other banks have the same mix of network, risk appetite, technology and relationship in Scandinavian products as we do.

Alanís said that Banorte, as a Mexican bank, has benefitted from the surge in trading in the Mexican peso. Global volumes have risen almost 270% between 2010 and 2013 to become the world’s 8th mostThese currencies require special traded currency, according to the attention and are unusual in Bank of International settlements. G10 pairs in as much as they can undergo short bursts of “The demand for liquidity from extreme volatility, which can financial institutions as well as be challenging to handle to international corporates from the uninitiated. In order to around the world is increasing maintain risk appetite in these day by day,” he said. pairs, it is essential that they receive undivided attention SPECIALIST MARKETS and management. We also As investors have plunged work hard to minimize market into new markets, they have impact and spend a lot of time also needed more guidance. to improve our internal netting Trading illiquid or highly volatile through active market making. currencies is a different world to more traditional pairs and Few other players will have a regional banks have the specialist similar approach as, simply put, experience and knowledge to Scandinavian pairs are not part navigate those markets. of their core offering.”

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A powerful mix Hutchinson said Standard Bank offers investors a nuanced understading of how to operate effectively in less liquid markets that can be a key differeniator when trading emerging market currencies. “Standard Bank is a specialist African bank with presence in 19 different countries on the African continent,” he said. “In each of our markets we have dedicated market making desks who are focused on price making in their core competency. We also have on the ground markets people who are at clients disposal in terms of understanding the risk and being available to help facilitate all aspects of the foreign exchange life cycle. We believe we are in a unique position as a result of our footprint and clients are utilizing that in order to manage their risk effectively on the African continent.”

COMPETITIVE PRICING Meanwhile new technology, including the ready availability of price engines and distribution hubs, has made regional banks increasingly competitive in terms of pricing with their larger peers. While large global players have cut costs as low margins, increasingly heavy regulatory burdens and rising capital costs hit profits, declining technology costs have helped smaller banks 72 | january 2016

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“The regional bank often knows the local market best and SEB knows the Scandinavian markets” to trade more effectively and broaden their offerings. The Single Dealer Platforms that were once the preserve of the global top-tier banks such as Deutsche, Citi, Barclays and UBS, which spent billions developing them over many years, are now widely available as adaptable white label solutions. “We have focused on leveraging on technology between other asset classes within the bank and have a highly competitive FX market making and hedging product. A fast and modern platform provides confidence when we price our customers,” said Nilsson. “SEB’s Trading Station is an important distribution tool to local and global clients. The flexibility and functions it offers, tuned after years of innovation and feedback, are developed based on our clients’ needs. Combined they all make the platform an invaluable tool for our core clients where they can trade, view and confirm trades. Functions like pre & post allocations, batch trading and integration to a wide range of Treasury systems are key. “Clients can also integrate with our FIX API which enables SEB

Patrik Nilsson

to engage with the smartest and fastest category of market participants and the success of this segment within SEB re-enforces our confidence that great technology combined with local knowledge and smart trading makes all the difference to our clients.” Some experts estimate the price of aggregation services has dropped by as much as 80% in recent years, while more complete suites of solutions, for example having hedge matching as well as the price engine, have become more readily available. At the same time, regional banks can now readily access technology and algorithms that allow them to form prices, dynamically adjust their positions based on their P&L, and turn flows into twoway prices to show to their customers.

FX E-COMMERCE & PLATFORMS

FX E-COMMERCE & PLATFORMS

A powerful mix “FX trading technology has really started to converge which allows consumers of that technology to benefit from enhanced offering and reduced price,” explained Hutchinson. “In Africa the single biggest challenge remains how much liquidity is available and our SDP is the perfect avenue for us to show our true interest.” Banorte’s Alanís said regional banks also have different intentions, when it comes to technology, to their global peers. “An SDP from a global bank aims to give access to its clients to international and more sophisticated markets,” he said. “For a regional bank, it is more about helping our clients’ treasuries to have an easy workflow, so our main focus is on the ease of use and the interaction with cash management services. To improve its SDP, a regional bank must work in functionalities involving its core banking system – a thing that, by definition, is impossible to commoditize – even if the price engines, for example, could be leveraged by the expertise of third-party providers.”

RISING INVESTMENT The increasing availability of aggregation services, and FX market data in general, has however put some regional banks under greater pressure 74 | january 2016

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to provide better prices to their clients as the market has become more transparent. As clients have become more demanding, many regional banks have been investing in their own electronic trading and SDP distribution capabilities, as the business justification and ROI for these investments has grown. Such investment is improving access to currency markets in the developing world, where weak infrastructure has been a major hindering factor to growth over the years. Hutchinson said Standard Bank is seeking to expand its offerings to give clients greater access to the pre and post trade services they need, while adapting to the peculiarity of the African markets. “As a regional player, our single biggest focus area (and take up) is our SDP. In Africa the single biggest challenge remains how much liquidity is available and our SDP is the perfect avenue for us to show our true interest,” he said. “For us market impact remains one of the single biggest challenges and having a place that clients can access which satisfies their requirement for automation, but protects the market and its participants, is first prize. We see going forward this trend to continue and more

of our spend being direct to market specific pre and post trade services that will allow the client to navigate through the complexities of doing business on the African continent.” One side effect of this intense pricing pressure has been to drive more tie-ups between banks – these days it is no surprise to have regional banks act as partners to their global peers in one market, and their competitors in another.

LEVERAGING PARTNERSHIPS

production cost for market making in their local currencies, so it makes sense to build such networks to ensure we can tap into the principal market-makers directly as opposed to via intermediaries.” Pressure from clients means regional banks have also looked to find better ways to get better access to better prices rather than themselves relying on other banks or other international banks. Some have started using multi-bank portals, expanding the brokers that they use and having better technology infrastructure to give them better access to the platforms that they’re actually trading on.

For larger banks without a presence in some markets, it increasingly makes sense to co-operate with the local banks there. That also gives regional lenders acess to the benefit of larger customer flows and a larger distribution network – almost like a reverse prime.

“As we are specialized in managing FX transactions in our own currency, our pricing is very competitive,” said Suarez.

“As a bank we also try to identify super-regionals like ourselves in other regional markets,” said Nilsson.

Hutchinson said Standard Bank is constantly interrogating its stats, ranking and data to ensure that the bank is offering competitive pricing to its customers, and working to ensure it offers unrivalled liquidity in the currencies it offers.

“In selected currencies where we know we do not have a competitive advantage we seek trading arrangements with other best-of-breed providers; in doing so, we ensure that our clients get the best possible service whatever the currency or product. A local bank with a good franchise and a strong delivery platform will often have lower

“We know the natural flows from that currency and we are very focus in handling the risk derived from its currency pairs. That allows us to narrow the spreads and keep our prices at the top of the book.”

“In a very liquid pair, the starting point of the equation is price and as a market maker you focus your efforts on ensuring you can provide your liquidity in the fastest and cheapest means. In an emerging markets pair however that equation is reversed and the starting point starts with liquidity. “Our goal not only is to be competitive in our pricing, but truly to be consistent in our liquidity provisioning into our chosen market segments.”

LIQUIDITY MANAGEMENT

LIQUIDITY MANAGEMENT

FX Liquidity –

how do you find the right provider? networks and multi-dealer platforms led to the need for liquidity aggregators and more advanced technology to navigate through a sea of recycled liquidity. And then, transparency and a strong following the Swiss National suspicion of being taken for a Bank (SNB) event in January ride but it was much easier to 2015, when the central bank pick a provider. And there was removed its currency peg and no liquidity mirage. unleashed chaos in the FX market, the uncertainty around The advent of electronic trading, liquidity provision became all electronic communication too apparent.

Nicholas Pratt examines the growing challenge of sourcing liquidity in today’s FX market and what steps trading firms can take to select the right providers. Selecting the right liquidity provider in the FX market has never been entirely straight forward but it is doubtful that it has ever been as challenging as it is currently. The interbank market of yesteryear may have offered less choice, little 76 | january 2016

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For the various vendors operating in the liquidity management space, it has been an important 12 months in which they have had to prove the reliability of their services and the ability to help their clients manage the liquidity challenge.

RELATIONSHIPS As a vendor working with both liquidity providers and liquidity takers, smartTrade Technologies

has observed the changes in liquidity provision, especially the fact that liquidity providers are becoming more discerning about who they have as clients now that regulations like EMIR, Dodd Frank and MiFID II have reduced the profits available. And according to founder and chief executive David Vincent, these trends have underlined the importance of ensuring a good relationship between liquidity providers and takers.

In addition to the greater reticence of liquidity providers, there is also the persistent problem of the liquidity mirage, whereby the same liquidity is displayed in multiple locations only to disappear when someone wants to trade it. “The real question that traders want an answer to is where the ‘real’ liquidity lies,” says Vincent. “Every day you have new and different liquidity

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FX Liquidity – how do you find the right provider? providers entering the market, all with different business logic and this helps to perpetuate the liquidity mirage. Liquidity providers are also imposing more controls on how their liquidity is accessed with mechanisms like ‘last look’ which give them the ability to withdraw offers if the market conditions have gone against them. So if the provider is ‘last looking’ you, is that real liquidity?” Last look is a practice that has divided the market – those that support the right for liquidity providers to have a measure of protection against predatory traders and those that see it as an obstacle to fair and transparent markets. smartTrade does allow last look but Vincent says he is not an advocate of the mission to prohibit the practice. “Last look does generate some scepticism among traders as to whether they are getting fair liquidity but I am in the neutral camp. I think liquidity providers should have some protection against execution but it should be fair and reasonable.” More and more clients are asking the likes of smartTrade to help them assess what is ‘real’ liquidity by providing data about their liquidity, says Vincent. “We use algorithms that are able to detect recycled liquidity. If you are using a mixture of single banks and ECNs as your liquidity providers, it is likely that some of that liquidity will

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be recycled so it is crucial that you have that detection ability within your trading algorithms or your aggregation service and that you have the technology that allows you to see how the liquidity providers execute your orders and how they behave. The key to managing your liquidity is to have a good relationship between liquidity takers and liquidity providers.” smartTrade does not charge on a volume basis. Nor does it charge the liquidity providers. The rationale is that by providing a fully transparent execution reporting service to liquidity takers, they will be willing to pay the price for it, says Vincent. “We provide full transparency because that is what consumers want. If you go with a liquidity aggregator who charges by volume and who charges the liquidity provider, you can’t be sure if you are getting real liquidity. To solve the liquidity challenge you need to get rid of those intermediaries that sit between the liquidity providers and the liquidity takers.”

Incidents like the SNB event have demonstrated that some liquidity providers will happily provide liquidity in benign market conditions but at a time of market stress, they may remove liquidity, just when traders desperately need it. The conundrum for trading firms though is that they will never know if their liquidity providers are going to engage in the same practice until the market event actually happens. So how can they be sure of the reliability of their liquidity providers? “It all goes back to the relationship,” says Vincent. “It helps to remove any intermediaries because they all take a share that adds to the spread, and that spread will widen in volatile times.” In addition to the constant threat of market volatility, there are also a number of

VOLATILITY The liquidity issues have been exacerbated by recent market dynamics whereby volatility has been heightened as trading volumes have decreased.

David Vincent

“It helps to remove any intermediaries because they all take a share that adds to the spread, and that spread will widen in volatile times.”

LIQUIDITY MANAGEMENT

LIQUIDITY MANAGEMENT

FX Liquidity – how do you find the right provider? such as circuit breakers to ensure that an algo will not go out of control and keep trading at a time of acute volatility as was the case in the SNB event. Similarly it is important to choose service providers with banks are not really adding to an international capability and the market and the provision broad coverage of currencies. of fair liquidity. “A number of But, says Vincent, the most them are effectively acting as important quality in a liquidity brokers or intermediaries. They management service is to be create their own prices based on able to provide reports on the liquidity in the market and rejection rates and last look ensure that they pass on the times. spreads to their clients and they also retain last look. So it is not “All of these tools allow you really contributing to the pursuit to analyse your execution and of simplicity and transparency of discuss them with your liquidity liquidity.” provider because most of the time the liquidity provider is not In light of all of these liquidity aware that they are not treating challenges, trading firms their traders appropriately. There are increasingly turning to are a lot of parties all providing technology vendors and execution services but without specialist liquidity service that data you are not able to providers, says Vincent. “We properly assess the behaviour of take the burden of technology your liquidity providers and that away from our clients so that is essential in selecting a diverse they can concentrate on their range of liquidity providers that core business.” It is a familiar are not too correlated so that argument made by vendors they will not all act in the same but one that Vincent believes way the next time there is a is more compelling than ever major market event.” in the current environment. SINGLE POINT OF ACCESS “There are more and more In November, Thomson Reuters liquidity providers entering launched a new service called the market every week so it FX Trading that linked all of its is more important than ever various FX transaction venues to pick the right ones and to into a single point of access, use technology to detect bad creating what Thomson Reuters pricing or recycled liquidity.” claims is the largest collective independent pool of FX liquidity. There are other important “The market is changing trading tools that any trading and our clients need greater firm should be able to access

“Those alternative market-makers that are committed to the market add top of the book liquidity to the market, some are a straight replacement. Others are not quite there or else do not have the will to be there.”

Phil Weisberg

new practices among liquidity providers that are creating more challenges for liquidity takers. One of these is the internalising of liquidity by banks, because it means trading firms are unable to benchmark their execution against the market. While internalised trades or so-called dark pools may help to reduce market impact for traders, the flip-side is a lack of transparency. A more recent development in the market has been the emergence of alternative, nonbank market makers. While it could be argued that they have helped to fill a void left by the banks that have either withdrawn from the market or become more selective about their liquidity provision, Vincent says that many of these non80 | january 2016

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optionality when trading,” says Phil Weisberg, global head of FX at Thomson Reuters. “This new service gives them the ability to execute any way that they want but also to keep their pre and post trade processes clean.”

liquidity takers because in today’s market where the lines between different client types are constantly changing, they both have similar needs, says Weisberg. “For both regional and top tier banks, the issue of how you execute trades Many institutions are looking for and source liquidity or transfer a consolidated liquidity offering risk are increasingly similar. to provide to their clients, says It is about recognising which Weisberg. “Buyside traders like corporations and asset managers are facing a greater cost of capital and more onerous risk requirements so they need more functionality. Fortunately while the cost of risk transfer is going up, the cost of technology is going down so that gives them more trading options.”

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single point of access, does seem like a response to the rise of the independent liquidity aggregation services over recent years. But Weisberg says that there will still be a use for aggregation, depending on the execution strategies involved. “Some trading firms may prefer to transfer their risk to their favourite bank. Others may say that they have new choices now so do they still need to transfer all of the risk or can they take some of the risk themselves. The risk/reward equation is changing for both banks and their customers. Not all banks will choose to internalise and not all customers will choose to transfer all of their risk.”

A major feature of today’s FX market The objective for is that there has It’s important to ensure a good relationship Thomson Reuters been a repricing between liquidity providers and takers is to provide a fair of the factors and neutral trading in mitigating FX environment. “We have been liquidity provider is best at risk, says Weisberg. This has developing this service for some providing which pairs. If you consequently led to a withdrawal time and have been piloting it are a trader on today’s market, or partial retreat form some with a number of select user you need access to all of this liquidity providers and led to groups,” says Weisberg. “Now information.” uncertainty from participants we have figured out how to about accessing liquidity. scale the service, we can make The launch of services like “Regulations and the higher cost it available on a fully commercial Thomson Reuters FX Trading, of capital resulting from new basis.” whereby multiple sources of controls has impacted the market liquidity previously available only structure, participants’ conduct FX Trading is aimed at both through single dealer platforms and the ability to operate. These the liquidity providers and become accessible through a are the new market realities.

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FX Liquidity – how do you find the right provider?

A big challenge in managing liquidity has been the reduction of credit

As a consequence the liquidity functions have changed. This has led many banks to make decisions on whether or not they still want to operate in the FX market. We want to provide answers to those customers that have questions about what they should do and do not have the sufficient tools.” The profile of liquidity providers has also changed with a number of alternative market makers now operating alongside top tier banks, albeit in different ways and with different objectives. “Those two groups do very different things,” says Weisberg. “Those alternative market-makers that are committed to the market add top of the book liquidity to the market, some are a straight replacement. Others are not quite there or else do not have the will to be there. The ability to call on those liquidity sources for on-demand liquidity will 82 | january 2016

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have to be managed. But as a customer and as a trading participant, you have to be able to access all of those sources.”

CREDIT REDUCTION In the view of Nick Mortimer, head of Prime Brokerage and Clearing at CFH Clearing,

Nick Mortimer

an STP venue for tier one liquidity, the biggest challenge in managing liquidity has been the reduction of credit. This has been as a result of prime brokers increasing fees, reducing credit or ceasing relationships as well as banks reducing trading lines or increasing margins on a direct basis. “Both these factors have led to reduced liquidity and caused spreads to widen. In addition, the latest challenge we face is the regulators scrutinising the use of ‘last look’. Spreads and maybe the amount of liquidity offered will be affected if ‘last look’ is restricted or abolished,” he says. The key to dealing with such a liquidity challenge is to work with

“The latest challenge we face is the regulators scrutinising the use of ‘last look’. Spreads and maybe the amount of liquidity offered will be affected if ‘last look’ is restricted or abolished.”

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RETAIL e-FX – CLIENT FX Liquidity how do

you find the

right provider? How do you see the future of FX broking? FX broking hasliquidity developedproviders to a very diverse and minimum a core of and with sophisticated level, with continually aggregation, saysclients Mortimer. Liquidity providers demanding more from their providers. The ability to such trading an approach been offerthat bothhave onlinetaken and offline facilitieshave such as able to prevent clients experiencing the widening desk dealing, is becoming more and more important to clients as they seekwhich a complete trading service via “We’ve spreads from others are suffering. one provider. Despite extreme market volatility in selected a handful of partners rather than going recent times, algorithmic trading strategies continue mass andsell weside work closely with to dofor well – onaggregation both the buy and – and I think fund partners managers and will continue to these on ainvestors daily basis.” enhance or add these strategies to their investment mix. Therefore algorithmic trading as an execution other key ingredient is technology, and The risk management tool will continue to evolve. says Mortimer. “Technology is very in important Clients are also becoming more selective terms of in the provider and the product they use,asoclient a regulated terms of being able to give the ability environment has and will continue to play an to customise liquidity feeds to optimise their important role.

trading experience.” To this end it has recently

Is market growtha slowing now? Which regions developed new service, ClearConnect, that and enables markets its are clients driving to theaccess future growth of buy a diverse pool of side FX? FX liquidity thatliquidity can beand tailored Despite less available fewer according to their trading style, says Mortimer. Meanwhile, participants in the market, recent FX volumes announced show volumes continue to rise, offers another onethat of FX its services, ClearControl, albeit at a much slower rate than in previous years. clients a range of functions designed to enable Statistics produced by the UK’s Foreign Exchange them to manage and aggregate their preferred Joint Standing Committee show that overall trading volumes for 2008They increased by 21% with price liquidity streams. can also manage spotgroups trading up by 40% toterms $182 billion. Similarmargins or account and define statistics in the US show an overall increase of and9% notifications. “We’ve always believed almost with spot trading increasing by 27% withit’s Singapore and Canada the flexibility pattern to important to give following clients the of falling optionstobut rising spot. Socustomer tailorswaps theirand liquidity suit different although the market conditions may be difficult at requirements trading says the moment, FX stilland continues to styles,” grow.

Mortimer.

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How is the market changing? How do you see the FX market forging ahead in the next two to three Mortimer believes that the main priorities years? forcurrent trading firms choosing liquidity In the economic climate it istheir difficult to predict what theare market will be like in two or three providers the competitive spreads, the yearsability time. However for 2009 I would sayneeded, that we the to customise feeds when will see a ‘back to basics’ approach where investors of the liquidity will reputation think more about what they areprovider investingand in the provide. “Following and overall will staytransparency much closer to they their investments. This will on benefit thethe FX SNB and commodities market from events, trading firms are far because of the simplicity of the underlying assets: more concerned than before about selecting vanilla and low-complexity products will become liquiditywith provider withinvestors, a track as record morea popular clients and well asin the corporates for hedging. As cost and efficiency industry. I think trading firms can see the continue to remain focus, the role technology benefits they again from the of strength of the will be essential in 2009 and the challenge for banks relationships with prime brokers and and providers will be to deliver superior productsliquidity really can’t and providers. service with You competitive pricingunderestimate that meet the needs of importance clients. Squared is well placed tohe the ofFinancial these relationships,” build on its current success and our offering concludes. continues to evolve in tune with our clients needs.

FXecosystem plans further expansion in 2016 FXecosystem, the leading provider of outsourced connectivity services to the FX market, experienced significant growth over the last year with the introduction of new products and further investment in its network infrastructure. James Banister, CEO, FXecosystem talks to us about the organisation’s plans for 2016.

What strategies do you have in place to remain a market leader? Over the last five years we have developed a reputation for excellence in outsourced FX connectivity services and have continued to invest in our people and products in order to lead the market. For example, Matt Dangerfield has been appointed Interim CTO and brings a wealth of experience to the organisation. In addition, we have recently upgraded onto Hibernia Network’s Ultra 5 Express Circuit for even faster connection between London and New York, enabling clients to maximise the number of trades processed per millisecond. We will continue to focus on our connectivity services in 2016 and are in a strong position with a presence in key data centres such as LD4 and NY4, and our Meet Meet Rooms™(MMR) which provide a single point of entry to connect multiple market participants on a global

scale. We have extended our product range with monitoring services and this has helped us to differentiate ourselves from other connectivity providers. FXeco-Eye has opened up opportunities for us to broaden our client base as the product is ideally suited for brokers and banks who manage their own networks. It monitors networks across multiple asset classes, not just FX, and therefore appeals to a wider audience. We see our growth coming from organic clients and new asset classes in 2016. Tell us more about Fxeco-Eye. FXeco-Eye is a unique real-time performance monitoring and analytics tool to help business units and network/trading system support teams with planning and troubleshooting. It helps them to speed up the process of establishing the root cause of any network and trading issues and gain an indepth understanding of all their Capital Markets connectivity

James Banister

links and business flows. The information is presented in a very clear, visual display, making the data very accessible and easy to interpret. What are your plans for the year ahead? We plan to establish a Point of Presence in Asia and will look at other new markets according to client demand. Our geographical expansion will be client-led and we have a successful formula for setting up quickly to provide the same levels of speed, reliability, security and monitoring which we offer from other data centres. We will also be extending our connectivity and hosting services to a new asset class as well as growing our team with another significant appointment to head up our sales function in EMEA. It will certainly be an exciting year ahead. FXecosystem offers low latency network connectivity, co-location/proximity hosting and fully-managed services. For further information or to request a demo of FXecoEye, please visit www.fxecosystem.com

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Crédit Agricole Corporate and Investment Bank Delivering high quality FX execution and very competitive pricing

Stamos Fokianos

Crédit Agricole CIB is a leading market maker on the foreign exchange and precious metals market and offers a full range of spot, forward, option-based and derivative foreign exchange and precious metal products. e-Forex talks with Stamos Fokianos, Global Head of eBusiness, about the range of FX services the bank now offers, its growing electronic trading product suite and future plans for building on its comprehensive FX e-commerce capabilities. Stamos, please can you give us an idea about the size and scope of the FX business at Crédit Agricole CIB such as the range of currencies you cover, where your major liquidity centres are located and the types of client you cater for? Crédit Agricole CIB (CACIB) has a long history in FX, both in Major and EM currencies. In 2014 we consolidated all Global Markets digital products under one umbrella, which we call eBusiness. Our strategic ambition is to become a top 10 FX bank through a client-centric value proposition. We have a wide range of electronically provided currencies, from G10/Majors, to EM Latam, Eastern Europe, Asia, and Gulf as well as Precious Metals. 86 | january 2016

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We have a number of key liquidity centres around the world that include London, Paris, New York, Hong Kong, Singapore, Tokyo, Dubai amongst others. Thanks to our durable commitment to FX markets, our client base is very diverse, ranging from Corporates, to Real Money Managers and Insurance, Hedge Funds and Banks. We also have a significant Crédit Agricole Group network of businesses to which we provide liquidity to support their own client base in their own region and market. What direct and indirect options are available to clients who wish to trade FX electronically with Crédit Agricole CIB? Our clients can reach our

liquidity electronically through a variety of channels. In the multibank space, we contribute prices in all major platforms, including FXALL, Currenex, 360T, Bloomberg, FX Connect, Integral and Trading Screen. For clients that prefer the convenience of a single dealer platform, we offer Jetstream which began from eFX. Within FX in Jetstream, we offer not just cash (Spot, Forward Outrights, Swaps, Forward Forwards) but also FX Options and NDFs. We offer direct API connectivity for clients that prefer to aggregate pricing in their own order management systems and execute directly from there using their own algorithms and strategies, with immediate STP to their own systems.

Jetstream is Crédit Agricole CIB’s electronic FX trading platform. Can you summarise some of the key features that it now offers? We offer a full range of Cash and Derivatives FX products as well as Money Markets and Limit Orders. We have an ambitious and fully funded plan to add fixed income cash and derivatives, as well as structured products and additional FX Options products. Our technology architecture is based on the principle of building backbone services and abstracting them from the actual distribution channel(s). Thus, we optimise our technology spend by

not replicating the same development for each category of platforms, helping us to rollout new products much faster across all client touchpoints. The risk management of positions and the dynamic price construction that follows is also a clear beneficiary of this architecture.

principle has been applied in our focus of constructing, distributing and risk managing our pricing process. The development of the single dealer platform for wider distribution will come into play starting 2016, as we wanted to focus first on the integrity and consistency of our offering.

To what extent can your e-trading platform and various e-FX toolsets be customised to meet the specific needs of different users?

This being now achieved, we are moving towards the innovation that is allowed to us through managing the development of our own electronic channel, away from the fixed boundaries of third party platforms. It is our opportunity to differentiate ourselves and it is very exciting to us that we will be able to present something “fresh” to our clients.

The core technology of our platform has been built initially in a way that focuses significantly more on performance. The same

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Crédit Agricole Corporate and Investment Bank Many banks have been trying to improve the user experience of their trading platforms and electronic offerings. What factors influenced the design of Jetstream and how has it been engineered to make it easier for clients to engage with Crédit Agricole CIB? The Crédit Agricole Group has a strong cross product user base both internally and externally of internal and external client users. The fluidity and flexibility of the FX product means that the end user has many different ways of looking at the live data and executing in a manner that is suitable to them. Jetstream was therefore developed to satisfy different balance points between speed and pricing. Some users prefer more time to digest the transaction before executing while others are happy to operate in a lowlatency environment as their execution style and goals are completely different. Jetstream caters for both ends of the spectrum, while providing the client with a positive digital experience. Another very important current focus for banks and sell side FX providers is on improving their post-trade capabilities. What work has Crédit Agricole CIB been doing in this area? In an environment that sees continuously increasing

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transparency and spread compression, seamless postexecution processes provide ground for differentiation. Technology investment used to be applied mostly to frontoffice applications, seen as the primary source of revenues but now the benefits can be reaped by investing in each step of the trading process. To achieve this goal, CACIB Operations are fully included in the eBusiness decision-making process to ensure alignment between pre and post execution and an optimal allocation of resources. Our roadmap includes the creation of post execution tools, especially for clients that are not connected to SWIFT or other automated post-execution systems. In terms of payments, we are working closely with our cash management colleagues to bring our digital CACIB services even closer together for the benefit of our clients. How has Crédit Agricole CIB been gearing up to meet the challenges of regulatory reform in FX and in what ways does it represent an opportunity for the bank to provide enhanced value to clients on the eBusiness side? CACIB remains on top of the regulatory changes. These changes create a number of opportunities in a very competitive landscape, fostering transparency and opening up

further the flow of information within the industry. The MTF concept of the electronic process for flow instruments is clear and transparent, increasing the confidence of all stakeholders to transact. The clearing element creates a level playing field allowing more competition and ultimately a better deal for the customer. Uncertainty remains though, due to the different approaches taken by the main regulatory bodies of work, i.e. Dodd-Frank and EMIR/MIFID and extraterritoriality implications. In a nutshell, new regulations are good for clients and for competition, but they need further harmonisation to achieve their initial goals. Looking back, do you think the value proposition of electronic trading in FX has strengthened from what it was a few years ago and what do you see as the most important benefits that e-FX now brings to your clients? The value proposition for eFX has been very strong for many years. However, its execution protocol has significantly evolved over time. What started with a Spot RFQ (as opposed to an RFS, an RFQ is a static price for a number of seconds) then was enhanced with Forward Outrights, Swaps & Forward Forwards, and then moved to RFS with prices refreshing every minute, then in real-time and with one-click dealing. The original idea of fixing FX rates

business efficiently. Finally, we have solid plans to electronify certain Structured Products that are very relevant to certain segments, in particular Wealth Management and Private Banks. Efficiency is also a significant part of our product plan, with allocations and other post execution facilities as part of our core offering. What is the easiest way to contact the eBusiness team at Crédit Agricole CIB for companies and institutions that would like to know more about your services? at a specific moment in time later evolved to a process of VWAP, TWAP or TCA algorithms transacting significant volumes without moving the market. Intelligent order management systems with execution strategies have contributed to the reduction of individual ticket amounts and transformed risk management techniques. The commoditisation of technology has reduced the costs and created a level playing field for all participants. All in all, the value proposition in an immensely competitive and open environment has never been better.

CACIB plans new developments that will sharpen the eFX offering further and allow us to achieve our strategic goals and stay ahead of the competition. We will complete our colocation globally, to deliver fast and tight pricing for all FX cash and derivatives. We will introduce a client algo execution product on Jetstream and through the multi-dealer platforms that provide this facility, increasing the competition of programmatic execution of orders.

We will also release a brand new FX Options pricer, compete in multi-dealer platforms for flow FXO and industrialise Looking ahead, what plans our Forwards offering. We does Crédit Agricole CIB will build on our tradition of have for rolling out new e-FX Emerging Markets to redefine functionality and further our NDF pricing, as well as all the enhancing your suite of FX deliverable EM currencies that e-commerce solutions? our clients need to conduct their

We have a global eSales team in London, New York, Hong Kong and Tokyo that are dedicated to handling all client enquiries and providing a seamless service to get our customers online. America: Edward Lavelle [email protected] Cecilia Mignucci [email protected] Asia ex-Japan: Lisa Lee [email protected] EMEA: Cathryn Allen [email protected] Camille Irens [email protected] Japan: Hiromasa Hayashi [email protected]

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Building the benchmark for global FX e-Forex talks with David Mercer, CEO of LMAX Exchange David Mercer

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LMAX Exchange – Building the benchmark for global FX David, it’s two years since you last did a major interview with e-Forex. You said at the time that LMAX Exchange was playing to win and had some very ambitious growth targets. Has everything been going according to plan since then?

and 2017. Corporates and real money is a bit more difficult to target or to attract – they’re pretty set in their ways. But I think longer term we will operate in that space. Certainly moving up the value chain in the institutional segment is an ongoing focus for us.

We’ve had a busy two years. After being ranked the number one fastest growing technology firm in the UK in 2014, we established a significant presence in Asia-Pacific: a fully regulated broker in Hong Kong, office in Singapore, focused on institutional relationships and a matching engine in Tokyo. In 2015 we’ve also launched our prime-of-prime service and I’m happy to say that we’re making significant headway in the institutional space with 30% growth in give-up volumes. That said, you can’t get away from 2015 having been a difficult year for everyone in FX after the market dislocation, caused by the SNB removing their currency peg. But with that in mind, I’d say that our business has held up well. In 2015 we are probably one of the few venues to show volume growth.

Let’s talk about ‘last look’ in FX. After the FEMR report was published, your position was clear that this practice was no longer required given the advances in trading technology. Are you confident of winning that argument and what steps would you encourage regulators to take in terms of engaging with the industry that might strengthen your case?

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It’s a tricky one. The short answer to your question - I’m not confident at all that we’ll win the argument. There seems a good number. We’re still predominantly spot foreign exchange, with over 80 currency pairs offered. But our metals and indices business is growing nicely, currently accounting for around 10% of our monthly volumes. Our target is to grow that to around 20% over 2016. The growth will be driven predominantly by European indices, led by the DAX, and metals, led by gold. Both metals and indices products are close to industryleading in terms of spread and

depth. You’ve got to sell your customer what they demand. There’s a lot of demand in Asia for metals and commodities in general. Certainly we see a lot of demand for gold in particular from Asia-Pacific. That’s been a lot of our growth and we have big hopes for that in 2016, but our core product remains foreign exchange. You operate a B-to-B model rather than B-to-C and traditionally have been mainly servicing

broker-dealers, money managers and boutique fund managers. Does LMAX Exchange intend to attract larger institutions and perhaps broaden the existing target client segments in the future? I think we need to do better in the institutional segment and potentially go after corporates and real money. We have a lot of interest from funds in North America, so that’s a good growth area for us in 2016

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LMAX Exchange – Building the benchmark for global FX to be an awful lot of resistance from the wider marketplace and people protecting their own position. Our stance is pretty simple and two-fold. The second bit is probably less well publicised. The first bit is clear: ‘last look’ is a practice open to abuse and it should be abolished on anonymous multi-dealer platforms, where the customer is unsure of the liquidity they’re accessing. We’re pretty clear on that, it shouldn’t exist on any multidealer venue, any ECN, any MTF or any exchange. It doesn’t occur in other asset classes, and we don’t think it belongs in FX. To press that point, 85% of respondents in our last survey said ‘last look’ was a practice open to abuse. It’s pretty evident to

me, in the wake of the fines and investigations that we’ve seen over the last year or two, we can remove this one-way optionality and it would be a big step in helping to restore trust and faith in the FX market. The second bit: there are bilateral relationships in FX and they can be exactly what they say they are. If a bank or a nonbank agree certain execution tolerances with their customers on a bilateral basis, which may or may not include ‘last look’, that should be permissible in an OTC marketplace. In short, we don’t believe in ‘last look’ on anonymous venues, whether they are exchanges, MTFs or ECNs. But it may exist in bilateral relationships, between a bank or a non-bank and their customer.

My fear is that everyone’s putting ‘last look’ in one basket. The various working groups, I think, are taking a complete wrong turn by trying to standardise something which is by definition entirely nonstandard, depending on who your customer and who your liquidity provider is. I’m not confident that we’ll win the argument in the short term. I am confident that the market will exist without ‘last look’ in a longer time horizon, be that five or 10 years. Our view is that ‘last look’ should be ended now and that would be a big step in restoring trust in the market. You have been saying that what LMAX Exchange has created is not just a company that is profitable and rapidly growing, but a blueprint for global transparency that is driving long term disruption in the largest asset class in the world. What did you mean by that? There are some fundamental pillars to that. We have a public rulebook; everyone has the same rules applied to them. There is open access to the marketplace. There is truly a level playing field for all our market participants, regardless of status, size or activity levels. It’s purely firm liquidity, i.e. no ‘last look’ liquidity; this ensures certainty and consistency of execution. And market data expensive in this day and age and relatively hard to access for

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“We invest nearly 60% of all our costs every year in technology”

everyone - on LMAX Exchange is firm, fast and it’s free. But probably most important, in terms of the disruption, is that we do this within an existing marketplace with a lot of legacy plumbing but we do it with the support of all the major players. Twenty-five of the world’s top tier banks and nine of the world’s largest non-banks are providing liquidity and are effectively partnering with LMAX Exchange; this demonstrates that this new way of trading in an OTC marketplace can be efficient for all market participants. The FX market does not need to be opaque.

Part of the disruption is the investment in technology. We invest nearly 60% of all our costs every year in technology. We develop our software in house and with those pillars that we set down we create challenges for ourselves. And we overcome those challenges by harnessing world-leading technology. We build our own market surveillance tool, our own credit monitoring tool; we focus a lot on allowing liquidity providers to price precisely. They can cancel and update an order in 80 microseconds to protect themselves from dealing on stale prices. All of those things

together can help to disrupt capital markets and basically move us away from the status quo of the last 20 years. We spent much of 2015 talking about the SNB debacle. What long term impact do you think this extraordinary event will have on the wider FX market and what might that mean for LMAX Exchange? Overall, I think it was a bad thing. There was short-term volatility, which produced higher volumes but at a price. I wouldn’t even call it volatility, I’d call it a market dislocation, the like of which we haven’t

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LMAX Exchange – Building the benchmark for global FX Last year you launched LMAX Prime, a prime-ofprime (PoP) service. In what ways have you set out to differentiate this offering from others and why is demand for it so strong? I’d say our real differentiator is the investment in technology. We’ve built our own pre-trade risk model so we can use that for every non-margin customer. We credit check every customer before they trade with any of the LPs or any of the venues in the offering. That gives us – and it gives the market – comfort. We’re not introducing any additional risk for us, or for a prime-of-prime provider, than we would have with a regular margin customer. seen. I was in the markets when the UK removed sterling from the ERM in 1992. The SNB event surpassed that in terms of shock. Certainly it surpassed the shocks we saw in the Asian crisis in 1997, the Russian rouble crisis in 1998 and even the one most recently, the credit crunch in 2008. It was a short-term massive gap in the market place for about 15 minutes that will have reverberations for perhaps the next 15 months. A lot of people left the market, or were forced out of the market, due to the losses they made. And I think overall there’s been a tightening of credit, which affected people’s ability to trade and had

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a knock-on effect throughout the marketplace. Likewise on liquidity: liquidity providers were perhaps a bit more reticent to provide the same levels of liquidity after that event. I certainly think 2015 has been characterised by people being wary of the market. One thing the SNB event really highlighted - when is liquidity real liquidity? The answer is when it’s firm liquidity like on LMAX Exchange. We saw a lot of ‘liquidity’ disappear on January 15th. That’s because a lot of the ‘liquidity’ is just revended indicative quotes. I think that’s something which will come to the fore in the times ahead.

Harnessing that technology, again we’ve been able to give the customer a choice of single bank liquidity, other ECN liquidity or our own LMAX Exchange liquidity, and probably most importantly, a mix of all three, which is unique. It’s that flexibility, added to our technology, which is increasing demand for the offering. We will do better, we can do better. We’re probably averaging only around half a billion a day in prime-of-prime, but that’s from a starting point of zero nine months ago. It’s going well and I expect the volumes to be a multiple of the current ones in 12 months’ time.

With a growing international client base operating in 90 countries, LMAX Exchange now has an extensive global reach. What steps have you recently been taking to further expand client access to your liquidity around the world? In terms of our presence in Asia-Pacific, that’s been a big part of our growth strategy in the last 12-18 months. We have a fully regulated broker in Hong Kong, a matching engine in Tokyo, a small office in Singapore and even a SWAT technology team down in New Zealand. Our offering, sales & marketing, websites are in all the local languages. That’s been the big push, as well as adding products that are interesting for that marketplace, such as CNH. Growth in Asia is work in progress, but the region already represents over a third of all our daily volume and we see that just growing from here.

That’s very much a work in progress. We led our global expansion in Asia, we’re going to follow that in North America. For the last three years LMAX Exchange has been ranked as one of the UK’s fastest growing technology companies by Sunday Times Tech Track 100 league table, so IT is clearly a core competency of the company. What prompted you to become a member of the Linux Foundation and what do you like about the power of open source technology, especially in the financial services?

all the key players, including Linus Torvalds himself. We’ve been involved in various initiatives this year; most recently we contributed to the core infrastructure initiative - a Linux Foundation project which invests in the core parts of the infrastructure, all the unsexy stuff which is key to everyone in this space. It’s vital that we have a voice and that we contribute to that by supporting the Linux Foundation. That membership gives us access to people who develop right at the core of Linux, and we’re able to benefit from that, and, as we did this year, recommend changes and have them implemented.

Linux is the key operating system for all low-latency exchanges. It’s a critical component of building a reliable low latency exchange. So membership gives us a voice in a foundation that includes

More generally, we believe in open source for a couple of reasons. One, we like to innovate and give back to the marketplace that we learn from. We use a lot of open source technology ourselves, so it’s

North America is an area we need to look at. We’ve seeded our growth strategy in North America during 2015 and now have a team of two in Chicago. In 2016 we’re looking to expand further in Chicago and New York. We have a lot of interest from larger fund-type clients in that region. A lot of our liquidity providers are based in New York and Chicago, so it’s important that we move towards them and then also attract buy-side customers.

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LMAX Exchange – Building the benchmark for global FX That plumbing is quite dated within all capital markets and certainly within FX. I think there’s a big change coming and that’s where the revolution will start. Everyone’s looking at the products traded, whether it be Ripple or Bitcoin, but it’s really harnessing the technology behind all of that. The change will start in the back office and it will start with settlement and everything entailed there. That’s the revolution I see happening in the next 10 years and certainly we want to be a part of it.

“At LMAX Exchange, we strongly believe we can create extraordinary results in what is a huge marketplace.” good to put something back. And two, on a people front, it’s a good way for us to attract and keep talent. Technologists these days like to be involved in the projects that go outside of their niche area, financial technology, and where they can contribute outside of their normal realm. I think it is pretty key and it has served as a good tool for marketing our products, our expertise and for attracting new talent to LMAX Exchange. We are intrigued that some of the world’s largest banks have joined a partnership to develop financial market applications based around distributed ledger technologies, whilst at 98 | january 2016

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least one firm is looking to leverage the same technology to build an innovative FX matching engine and platform. How are you positioning LMAX Exchange to capture the opportunities presented by cryptocurrencies and the technologies that power them such as the Blockchain?

partnership. Irrespective of how that plays out, I think we’ll be very much involved in distributed ledger technology in the coming years.

From a personal standpoint, I believe there’s a revolution in capital markets coming: the Blockchain distributed ledger technology or derivatives thereof will lead the way. It’s a very interesting space. We want to be part of that We’ve had many conversations revolution, and we’ve certainly this year and I have got our irons in the fire and conversations most weeks about we’re keeping abreast of it, cryptocurrencies and distributed so that when the revolution ledger technology. It may be comes we can play a big a little too early for me to say part. I think the most obvious anything but I’d definitely say place for it to be used is in watch this space. I’m currently settlement, payments and all looking at a significant potential the reconciliation that it entails.

LMAX Exchange is sponsoring a team in the biennial Clipper Round the World Yacht Race, which, incidentally, was the first to reach Rio de Janeiro and win the opening leg. In what ways are very tough and demanding events like this symbolic for you and in what ways do they provide a source of motivation for the firm? guys – whether they be firemen, dentists, doctors, lawyers, The world’s oceans are vast and PR people – are on the boat pretty unforgiving, as is the and they’re circumnavigating capital markets space when you around the world in 11 months, come into it. It’s a pretty tough something which they couldn’t environment. But we believe have seen from their desks 12 that with modern technology months ago. If they can do it, no company is too small to then we can do it. succeed. The Clipper race is all about ordinary people doing A final question. You have extraordinary things. At LMAX put a great deal of effort Exchange, we strongly believe into making the LMAX we can create extraordinary Exchange business model results in what is a huge work and have achieved very marketplace. The Clipper race significant traction in FX. is very much aligned with our What’s your ultimate goal for ethos: we see that all these the business?

We’ve only just started. For me, we’ve proved the concept that exchange style trading and level playing field trading environment can work in FX. We’ve proved the concept and we now need to kick on. We are building the benchmark for global FX. Of course we aim to win. By aiming to win, we want to be number one in the marketplace. It’s a big market and I know it’s tough to do. But that has to be our goal. We have to be in it to win it.

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We will continue to run a separate New York matching engine and there isn’t any linkage between the two matching engines/order books. They operate as separate and distinct marketplaces and will continue to do so. That said, starting in January 2016, we will start to provide a premium connectivity service for customers located in either London or New York to allow them to access the partner matching engines.

Hotspot’s London matching engine In September 2015 Hotspot announced the successful launch of its new London FX matching engine. e-Forex caught up with Bill Goodbody, Head of FX at BATS Global Markets and asked him to tell us a little more about the venture.

Bill, why did Hotspot launch this service and who are you targeting with it? Europe is home to more than 50% of currency trading globally and London sits at the heart of FX price discovery. With Hotspot now under the BATS Global Markets umbrella, the timing is ideal to launch into that market centre and leverage what BATS brings to the combination in terms of relationships, infrastructure and support as the operator of Europe’s largest stock exchange, BATS Chi-X Europe, and Europe’s largest trade reporting facility, BXTR. It remains the case – not unsurprisingly – that some pairs are particularly liquid 100 | january 2016

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during Asia and Europe trading. In turn, market participants themselves often differ to those we see in New York. We want to serve what is a huge portion of the market more competitively and more effectively by opening in London.

Bill Goodbody

equities trading markets and participants, including our largest competitors. That makes for a unique and highly efficient trading centre for our many shared customers who can harness both operational and cost benefits.

We want to make life easy for customers who want to The matching engine is connect in London, and so far located in the London Slough the approach is working exactly Campus data centers. What as we intended: we have new advantages does that have? customers in the region who are looking to start trading – It was a very purposeful decision some for the first time ever – on on our part to locate the new Hotspot. London Matching Engine in Slough. All four of the BATS You already operate a Chi-X Europe order books – matching engine in the New two displayed exchanges and York area. Will this be run two dark pools – are located separately from the London there, as are many key FX and operation?

How are you encouraging and incentivising trading firms to use the London facility?

The FX market needs shaking up. Much like the European equities market in the mid2000s, the cost of trading needs to come down and operational and technological efficiency (as well as customer service) needs to come right up. The industry also needs to show leadership

To that end, we’ve announced a string of pricing initiatives, and will continue to incentivise customers so as to create a very healthy, orderly and liquid platform in London. Moreover, the London matching engine has so far got rave reviews from new users who have been impressed by the enhanced functionality and quality of the technology platform in London. Add that to our long history of great customer service, and our announcement on nonfirm liquidity standards and what we expect of our participants and you can see how we plan to disrupt what has become a very static marketplace.

We plan to be the most aggressive venue on price while building a market with deep, What’s the best consistent and stable way for firms with liquidity. BATS has connectivity or other There’s a huge opportunity for London a long history of enquiries about the to become both the global trading and bringing extraordinarily new matching engine matching centre of the FX market. compelling competition to make contact with to dominant players in your London team? around topics like non-firm Europe – low prices are a tried, liquidity. Further - while tested and proven tactic to In the first instance, we’d London reigns supreme as the establishing vibrant and robust encourage all firms looking to primary centre for FX trading, pools of liquidity. connect to contact our Londontraditionally most FX platforms based sales team. have been New York centric. In what ways do you think the London matching engine You can send an email So there’s a huge opportunity will inject more competition through our website at for London to become both the www.hotspotfx.com or call into the FX market and may lead to significant changes to global trading and matching the office directly at +44 (0)207 centre of the FX market. the market? 131 3450.

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currency in Asia and especially in North Asia,” says 360T’s COO Asia Pacific and Head of Liquidity, Client Services & Operations, Jamie Salamon. “[Our] client base in Hong Kong and Taiwan especially, trade more CNH than G3 and so across the region it is certainly a top five pair on 360T.”

Regional e-FX perspective on Asia All eyes on the RMB By Richard Willsher

The Chinese currency is the main subject of discussion among those involved in e-FX trading in the Far East.

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the e-trading landscape. At the beginning of October the People’s Republic launched its China International Payment System (CIPS) as an interface between its domestic clearing and settlement system China National Advanced Payment

System (CNAPS) and SWIFT. This has fuelled speculation about an increase in the pace towards full liberalisation. Meanwhile statistics released by SWIFT at the end of October showed that

though it has slipped one place, it remains the 5th most popular currency for international payments. For the time being however unrestricted international trading is limited to the Chinese proxy CNH, but activity in it is booming. “RMB is the big issue that everyone is looking at the moment. Everybody wants to know what the RMB’s reserve currency status will mean to them,” explains Mark Webster, Global Head of FX Sales at Standard Chartered in Singapore. “We have to keep in mind that we are heading towards a complete liberalisation of the currency at some point. That’s the way that the authorities are

guiding us but we have to deal with each step as we get to it. Trading in CNH has grown tremendously and the trend will only continue to grow. CNH is catching up to where the majors are and the demand for transacting via e-commerce is growing at a faster pace. People want to see larger transaction amounts flowing through the e-commerce platforms.”

Thomson Reuters agrees. “In September 2014 Thomson Reuters witnessed a 351% increase in offshore RMB trading on our FX electronic trading platforms versus September 2013, with volumes up a further 51% in September 2015. This is testament to the staggering growth and development of the currency over the past ten years,” says Michael Go Thomson Reuters’ Head of Market Development, FX, Asia Pacific. “Hong Kong has

Apart from Standard Chartered’s own experience, the growth in flows across the major trading platforms bears this out. “CNH remains a very solid growth Mark Webster

“As RMB volumes get larger and larger there will be increased demand for e-trading which is increasing anyway, and will increase at a much greater pace as people want to scale up and get more involved.

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Regional e-FX perspective on Asia become a leading global hub for RMB trade settlement, financing and asset management,” he continues. “A wide range of renminbi products and services is available there to meet the needs of businesses, financial institutions, and investors. Renminbi activities in Hong Kong are supported by the renminbi liquidity pool in Hong Kong, which is the largest outside Mainland China. At the end of 2014, renminbi customer deposits and certificates of deposit issued by banks in Hong Kong together amounted to over RMB1.1 trillion Yuan, according to the Hong Kong Monetary Authority. More quietly, Singapore has grown in stature as an offshore centre for the renminbi, starting with bond issuance by HSBC and Standard Chartered in 2013

“Trading volumes in exchange-traded FX products have increased tenfold over the past 10 years.” and quickly followed by China’s two biggest banks: Industrial and Commercial Bank of China (ICBC) and Bank of China. Singapore is building itself up as a renminbi hub not in competition with Hong Kong or London, but for Southeast Asia, capitalising on its increasing use in intra-regional trade in the fast-growing economies of the Association of Southeast Asian Nations (ASEAN).” Nonetheless liquidity remains a challenge for those looking to hedge their RMB term exposure beyond spot using forwards, options and swaps. Yet the market is deepening according to the Singapore Exchange (SGX). “SGX has seen significant volumes in its USD/CNH contract, which we launched in October 2014,” says Ivan Han, SGX’s Vice

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have seen a wide segment of end users participating in our RMB contracts, including Chinese banks, international banks, asset managers, and commodity trading firms.”

GEOGRAPHICAL SPREAD

Ivan Han

President, Derivatives (Rates & FX). “This has since become the most liquid CNH futures markets, with over 50% market share as of November 2015. Over USD20 billion in notional value has been traded since the launch in October last year, and outstanding open interest across all contract expirations has grown to around USD800 million in notional value. We

While the RMB is clearly the highlight there are many other e-FX growth stories throughout the Asian theatre. Everyone we spoke to in preparing this regional perspective pointed to Asia as a significant growth region, though not necessarily in the same way. “The Asian arena is slightly different from the west,” according to Keith Pogson senior partner Asia Pacific financial services at consultants Ernst and Young.

“We took a major step forward last year when we put our OREX technology onto TY3 so that we can offer regional liquidity alongside very good credit lines.” “The region splits into three or four chunks. There’s the Japanese market that does its own thing. Then there’s a Hong Kong / China bloc which is most concerned about Renminbi / Dollar. Given that the HKD is a proxy for the USD nobody really gets excited about hedging risk in HKD. Then there’s Singapore, which is all the Asean currencies and it is the G7 trading hub in the region. Then there’s the Aussie market which is AUD and NZD vs USD. Most of the banks are effectively running a global G7 book anyway. So what you see in London is a reflection of what’s passing through APAC. In terms of the customer interface Asian, corporates have not got as far with moving FX onto exchanges as the UK, Europe or North America.”

Francis Lee

also have corporate clients from Japan,” explains Francis Lee MD Asia for Abu Dhabi based ADS Securities.“We are seeing more private individual clients from Malaysia who want to trade FX. And just recently Cambodia has become a very hot place for us. I think that’s because there are lot of developing stories Even so, different banks, going on there. People there brokers and service providers are are getting richer and we tend making inroads in line with their to follow the growth in wealth. chosen sectors and segments of When the middle class starts to the e-trading market. grow, that’s when people get to know how to invest.” “We have a strong business in HK, China and Taiwan. We “Here in Asia,” Lee adds, Michael Go “people have more of a gambling mentality. And also “In September 2014 Thomson Reuters witnessed a 351% they tend to follow trends. So a increase in offshore RMB trading on our FX electronic few years ago they were trading trading platforms versus September 2013, with volumes gold. Now they have come back up a further 51% in September 2015. This is testament to FX. People are trading FX, to the staggering growth and development of the largely because the Dollar is currency over the past ten years,” getting stronger.”

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Regional e-FX perspective on Asia “The challenge for the platforms is to differentiate themselves through product coverage, service, liquidity and unique functionality geared towards getting the best possible execution for the buy side client.”

Jamie Salamon

At FXSpotStream, the bankowned market utility, CEO Alan Schwarz reports that the company’s new 2.0 GUI is proving attractive to some Asian customers while its API connection is gaining traction with others. “We’re set to see continued growth in Tokyo, Hong Kong, Sydney and Singapore in our API business,” he says. “My impression is that while over 60% of global spot FX is traded electronically it is less so in the Asia region. But the pace of change in the shift to electronic has accelerated.” Standard Chartered’s Mark Webster agrees. “Asia has been more reticent than some other parts of the world to embrace e-commerce. It’s a not as prevalent as it is in some regions. A lot of that is due 106 | january 2016

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to the regulatory restrictions, the on-shore market in China for example. The proof of underlying trade that’s required which can make it slightly harder than in Europe or the US. However, I think particularly as RMB volumes get larger and larger there will be increased demand for e-trading which is increasing anyway, and will increase at a much greater pace as people want to scale up and get more involved.” At 360T Jamie Salamon sees Southeast Asia as a strong area for e-FX with the bulk of that business coming out of Singapore. “Market taker banks and hedge funds are the dominant client segments and they are well served with electronic channels. So the challenge for the platforms is to differentiate themselves through product coverage, service, liquidity and unique functionality geared towards getting the best possible execution for the buy side client, which is certainly what we aim to offer at 360T. Traditional liquidity providers are in some cases less willing to provide pricing to clients for reasons associated with credit , balance sheet and general risk appetite. This means that some clients are now looking elsewhere for non-

traditional liquidity.”

BUY-SIDE SERVICING Indeed there seem to be two opposing forces struggling to gain significant shares of buy side business. On the one hand banks are benefiting from longstanding relationships, grown on the back of voice FX trading over many years. They are able to tie in their customers through offers of greater functionality. Aiming to dislodge those banks, or at least scoop a lucrative slice of buy-side wallet, are the newer platforms and technology firms. This battle is being played out on a daily basis though banks and the their competitors work hand in glove because they need each other. “Most of the corporate relationships have been very bank orientated and bank concentrated,” continues E&Y’s Keith Pogson. “They tend not to shop around among brokers but to work through one or two banks. And in reality they may have one bank that does most of their FX business. So the development here has been that straight-throughprocessing (STP) platforms have become much more key. It’s the banks’ own platforms rather than other FX trading platforms. So if the customers are with HSBC or Standard Chartered for example, the banks have worked quite hard to provide them with the FX services and STP that they need as part of their over all treasury

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REGIONAL e-FX PERSPECTIVE

REGIONAL e-FX PERSPECTIVE

Regional e-FX perspective on Asia management offering to clients. This has been a bit more robust in the Asian region than in some others.” Pogson states that, “The regional players are doing this too. So there is a kind of underground war going on. If you can provide a convenient STP platform for the client connected to their wider corporate relationship, and hopefully you’ll have some kind of API which links to the corporate’s ledger systems, you can probably mop up more of your customer’s business

“Most of the corporate relationships have been very bank orientated and bank concentrated. They tend not to shop around among brokers but to work through one or two banks. And in reality they may have one bank that does most of their FX business.” than if they are left to wander about on industry-wide open platforms. The technology is driving who is the relationship. Then it’s about the efficacy of that process for the bank to process your transactions online.” At Standard Chartered, Mark Webster notes that clients Keith Pogson

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are constantly refining their e-strategies and the way they transact business. “There is a bit of balance to be struck as people move forward, to understand the service proposition that goes alongside the e-commerce offering. And as the regulators move the industry from a price implicit to a price explicit model, there has to be a greater understanding about how people use capital, the broader relationship across the bank and how banks get rewarded for the services and the liquidity they offer. That’s the broader picture that everybody understands and the way the FX market is changing. Specifically, for ease of processing, cost pressure, transparency, flexibility and control reasons, clients will continue to move a greater

percentage of their business to be done via e-commerce. Clients are always looking for spot, forwards and NDFs, and increasingly they are also looking for options liquidity and to integrate more structured products into e-commerce.” Thomson Reuters’ Michael Go says that FX buy-side clients in the region will change in line with the growth of regional treasury centres in Asia. “As their funding positions increase and they need to hedge out their positions to manage the associated risk increases, they will seek broader pools of liquidity with tighter spreads for efficiency and a wider range of asset classes to price as part of their investment and hedging strategies. Tied to this will be the way in which they engage with cross border business and payments, which will see further reliance upon electronic FX gateways and partners.”

CREDIT AND PRIME BROKER ISSUES Credit has become a major concern across the market as Francis Lee of ADS Securities points out, “The cost of credit and liquidity have all increased substantially so these clients are looking for companies like us who can sit between them and the PB and offer a prime-of-prime or principal trading service. We took a major step forward last

The technology provider perspective While banks and individual platforms may offer strong products and services, the growth of the services offered by pure-play technology provider Broadridge Financial Solutions brings a new dimension to buy-side client servicing across Asia, especially those with regional treasury centres. Following its acquisition a year ago of TwoFour Systems, an FX technology provider, Broadridge has become more proactive in FX in Asia.

Chris Davis

“We’ll show an organisation aggregated positions and risk across venues, across currencies, across geographies and on a global basis, all in real time.” “There is a lack of electronification among participants in the Asian market,” says Chris Davis, Managing Director of Broadridge FX and Liquidity (FXL). “There are many institutions that still do things manually so we provide an automated solution that allows organisations to control how activity is received and transmitted all the way through to SWIFT. We have a componetised solution that does front, middle and back office processing and gives organisations a level of automation and regulatory reporting that is painful to do manually. The multibank and single bank platforms provide an execution management system (EMS). All of those platforms are leveraged by our clients. We consume that activity. We show an organisation aggregated positions and risk across venues, across currencies, across geographies and on a global basis, all in real time. We also handle the back office processing, confirmations, matching, net activity and settlements. We account for it, we produce statements, we interface with prime brokers – FXL is a very broad, robust offering. We are also able to do this with exchange-based transactions, and now support CFDs and spread betting.”

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Regional e-FX perspective on Asia year when we put our OREX technology onto TY3 so that we can offer regional liquidity alongside very good credit lines.” ADS Securities benefits from its high level of capitalisation but over all there is a rebalancing taking place according to FXSpotstream’s Alan Schwarz. “The requirements that prime brokers have of their clients have increased from a collateral perspective and a margin perspective. The prime space is still going through an adjustments phase so we have to wait and see how this will develop. We certainly have seen Southeast Asia is a instances of clients being unable particularly strong to trade because they don’t area for e-FX have a prime broker. Or clients are having to go and look for a new prime broker or a prime of requirements have increased,” prime because the capitalisation he says.

intensive as it settles outside of CLS. “Therefore it is challenging to trade it in a prime broking Standard Chartered however capacity. Bilateral lines are is more bullish. At the end of also stretched because of the November it launched its full unattractive settlement hurdle.” prime brokerage offering as part He adds that prime brokerage of a broader package of support is under pressure from Basle III, options, under the ECLiPSe especially for long-dated tenors platform, for its clients. But the beyond spot. It may be up to bank may be the exception. non-traditional players to step in Ravi Pandit CME Group’s a fill the prime brokerage need. Executive Director, Foreign Exchange and Interest Rate Meanwhile the need for smarter Products for Asia Pacific says tools to execute trades is bring that CNH is particularly credit more algorithmic capabilities Alan Schwarz to the market. Larger, global corporates are applying them where they feel they can use “My impression is that while over 60% of global spot FX is traded electronically it is less so in the Asia region. them to add value. But the pace of change in the shift to electronic has accelerated.” “This is a growth story,” says 360T’s Jamie Salamon. “The

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“We could see the emergence of split liquidity pools and cleared versus un-cleared in FX on OTC platforms.”

is a growing trend towards setting up small proprietary trading firms that deploy algos. This means their service providers have to upgrade their technology to cater for these needs.” He adds that a level playing field for algo trading and access to different trading venues is effectively becoming an alternative liquidity source for the Asian market.

Ravi Pandit

RETAIL FX GROWTH

interest is there and we see a steady move towards this client base using more of our smarter tools for order execution. The understanding is growing amongst the client base that execution through algorithms offers a more objective way of trading and achieving certain outcomes, whether focusing on trading around benchmarks, reducing market impact or offering a more auditable process. We see this becoming an increasingly influential trading requirement.” Algos may also be forcing other, smaller players to re-examine their technology offerings according to Dickson Woon, Senior Forex Manager at Phillip Futures in Singapore. “There

Not everyone is impressed by the growing use of algos. “On the retail side providers and brokers are always on the look out for new, automated trading and algorithmic tools to offer to their clients,” comments Derek Mumford Director Market Risk Advisory at Rochford Capital in Sydney, “but there are dangers in algorithms and I don’t think they help liquidity. They would deny that they are front running the market but this sort of algorithmic trading does not give corporates confidence to trade in the market.” Mumford is, however, upbeat about the growth in retail e-FX across Asia. “The enthusiasm of Japanese retail traders is

Dickson Woon

“Clients are demanding a seamless experience from account opening, support, good trading experience, execution quality and funds deposit/withdrawal.”

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Regional e-FX perspective on Asia education with an associated opportunity for providers in that space as well.” Dickson Woon at Phillip also sees education as central to the growth in retail trading. “Retail clients are more knowledgeable as information is more readily available in the internet. They will choose on-line FX services that provide educational videos, webinars, transparency and clarity of information. Clients are demanding a seamless experience from account opening, support, good trading experience, execution quality and funds deposit/withdrawal.”

The enthusiasm of Japanese retail traders is spreading to other countries especially China spreading to other countries, especially China, with its casino mentality,” he says. “Leverage may be a problem and liquidity as well to enable traders to get out when the market goes against them. Japanese broking houses are moving into other markets, making agreements and joint ventures with local financial institutions. It’s also spreading from Australia into Asia as well. So there are many smaller, medium sized houses through which flow is moving and ultimately this finishes with the big banks. There are a lot of people looking at the Asian 112 | january 2016

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market and there is a lot of potential.” At 360T Jamie Salamon agrees that the retail FX trading market is developing market and says that it will have an enormous impact across Asia in the coming years as investors become more sophisticated and trading platforms become more like those in the equities space. “The key,” he says, “is to ensure that the usual fair and effective markets and oversight from regulators is in place to protect the investors. Key to any growing market will be

Furthermore there is also an appetite among retail traders for mobile access. The approach is very clear. “We are moving to multi-asset and multi device delivery,” says Francis Lee. “In 2016 clients will be able to access ADS’ OREX platform via mobile devices with the latest app technology. What we say about OREX Mobile is that it puts the power of your desktop in your pocket and makes the markets work for you at anytime, anywhere. Our customer research has shown that this is what traders want.” At Standard Chartered retail is also a growing business in terms of volumes and geographies. “We are doing more and more in retail,” says Mark Webster. “The retail market is quite different in Hong Kong, Singapore, Japan versus

Malaysia, Indonesia, Thailand which may have more growth in the future. It depends on the regulatory environment. You can’t trade freely in many of these latter countries so retail FX causes slightly more problems.

REGULATION, REGULATION, REGULATION “Regulation is particularly important for the whole FX market,” Lee continues. “Some people here in Asia see Retail FX as some kind of underground product. They think that it lacks rules or people are cheating each other, or that companies play games and steal their money. So more regulation of our market is definitely much better. This dates back to 1996-97 when the market was unregulated and people lost money to unscrupulous people. Even now it is very easy to get an FX license. The Swiss National Bank

event and one or two others have tended to clean out the weaker players in the market.” This may in part also explain why on-exchange and clearing products have grown in popularity significantly over the last several years, especially for banks and institutions. “FX clearing is not mandatory,” says CME’s Ravi Pandit, “however the upcoming imposition of initial margin and variation margin for banks and other active institutions may propel interest in cleared FX as a more cost-effective alternative. We could also see the emergence of split liquidity pools and cleared versus un-cleared in FX on OTC platforms.” “Trading volumes in exchangetraded FX products have increased tenfold over the past 10 years,” says SGX’s Ivan Han. “We see potential for this to grow further as a result of changes in market microstructure and global regulations such as Basel III, which has increased banks’ cost of trading un-cleared OTC FX derivatives as a result of capital penalties for noncleared exposures. SGX sees exchange-traded products as complementary to OTC, particularly as many banks

Derek Mumford

“There are a lot of people looking at the Asian market and there is a lot of potential.”

and large institutional clients will continue to execute large blocks of FX trades in the OTC market and use on-exchange products, such as SGX futures, as a clearing solution. This complementary nature is why SGX is working closely with EBS to offer FX block futures trading in several currencies.” Exactly where regulation will steer the e-FX market in coming years is as unclear in Asia as it is in any other region. The regulatory wheel is still in spin. What is clear as far as e-trading of FX Asia is concerned is that more and more countries and currencies are joining the international market, though Tokyo, Singapore, Hong Kong and Sydney look set to remain the principal hubs linked by high speed connections. More products are being developed and more service providers, whether they are banks, platforms, exchanges or technology providers, are finding more work to do. It is getting more competitive by the day. China is likely to remain the biggest story of all as we go forward and could grow its own e-FX hub perhaps in Shanghai. It is also likely, in due course, to be the biggest source of new e-FX business of all. But when and how that will pan out however is anyone’s guess and everyone is following the evolving Chinese economic and currency story with intense interest.

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CFH Clearing is rapidly gaining market share as a world leading Prime of Prime broker and award-winning Liquidity Provider. Paul Groves, Sales Director at CFH Clearing, shares his views with e-Forex readers on current broker requirements and priorities for the year ahead.

What do you consider to be the biggest change to the market over recent months? I’ve noticed there’s been a real change in attitude from institutional brokers around the world about the need to have a Prime Broker. SNB events resulted in many brokers being released by their Prime Brokers – and these brokers were forced to look at alternative ways to continue in business. They may have wanted a Prime Broker relationship but weren’t able to secure one due to the unfavourable terms on offer. As it turns out, they are now reaping the benefits of working with organisations such as CFH Clearing who can help them to operate effectively. Without a Prime Broker, their fees have been reduced and the minimum monthly commission requirements have gone down, too. If they manage their business well and work in partnership with the right organisation, they are able to be more efficient and more profitable – whilst still having

Paul Groves

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In light of the SNB events last year, do you see brokers’ appetite for B book risk changing much in the future? Many B bookers survived SNB purely because their exposure in the effected pairs was minimal. Since SNB events some A/B book brokers have had to take on more risk via the B book to increase profit quickly back to pre SNB days and maybe to counterbalance the increase in margin requirements on the STP side. Brokers now look to run risk at a more refined level and have access to sophisticated risk assessment tools to build a better predictive picture of their clients, leading to a more balanced income. They are using systems like ClearVision which allows the broker to split clients’ flow between different risk books or to send STP. We have noticed more established brokers are looking to move away from a straight A/B book model. They are using more advanced analytical tools to

establish trading cycles of clients in order to reduce risk and increase the consistency of returns. What do you think has been the biggest notable change since the inception of online trading? It has to be the introduction of the retail sector and ticket sizes. The internet has obviously spawned a mass of retail brokers that have given the man on the street access to the FX market in a way that we would have never imagined years ago. With small deposits clients have aggressive leverage levels coupled with spreads that most Interbank dealers cannot access. The retail market looked very vulnerable back in January 2015 but it has since proved to be a resilient area that we at CFH Clearing see growing in the future, most probably in a more controlled manner. We look forward to playing a key role in supporting brokers with multi-asset execution, Prime Brokerage services and trading technology in 2016 and beyond. What do you think are the priorities for brokers in 2016 and how can CFH Clearing help?

I would highlight the following three areas: 1) Professional risk management systems, with the ability to tailor the risk per client – a tool such as ClearRisk in our ClearVision suite of products. 2) A deeper understanding of client requirements and trading styles so that brokers can tailor the liquidity specifically for them and have different strategies in place for different clients. 3) Building stronger relationships with Liquidity Providers so they are aware of your requirements. The more they know about how your business operates, the more they can help you and provide you with exactly what you need.

CFH Clearing can give clients the flexibility to tailor their liquidity to suit different customer requirements as well as the option to plug our liquidity tools into the platform of their choice. We have a wealth of experience in working in partnership with clients across the globe to help them to operate more effectively.

CFH Clearing is an interbank prime of prime solutions provider for small and medium sized institutional clients and is one of the largest interbank STP venues in the market, with over 400 institutional clients in over 80 countries. CFH Clearing is authorized and regulated by the Financial Conduct Authority (FCA). For more information, please visit www.cfhclearing.com

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SPONSORED STATEMENT

CFH Clearing – Helping brokers to thrive

access to a wide range of liquidity at competitive rates. The perception that brokers need a Prime Broker has now changed – and that has had a positive impact on our business and a positive impact on our clients, too.

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SPECIAL REPORT

SPECIAL REPORT

What’s causing the flight to quality in FX Prime Brokerage?

SIGNIFICANT CHANGE “The FX prime brokerage landscape has changed significantly in the last year,” says Joe Conlan, head of FX sales for INTL FCStone Markets, LLC (IFM), a wholly owned subsidiary of INTL FCStone Inc., a prime broker. Most notably, a lot of bank prime brokers pulled back from the market.

Nicholas Pratt reviews the changes that have recently taken place in the FX prime brokerage market and what it means for trading firms.

2015 has been a year of seismic change in the FX prime brokerage (FXPB) market, sparked by the events of January when the Swiss National bank (SNB) currency crisis sent the FX markets into a temporary tailspin. It led FX prime brokers to review not only their risk management practices and their client list but their whole business model and to consider whether it was a market in which they should remain. For those tier one bank-based prime brokers that did stay in the market, drastic changes were made in term of the clients they were willing to take on. This has had major implications for those firms without a bulging balance sheet. “For the less capitalised clients, having major 116 | january 2016

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banks pulling out of the FXPB space has been extremely challenging,” says John Miesner, Head of Global Sales of GTX, an independent FX ECN that offers a prime of prime service and is a subsidiary of Gain Capital. “The ‘return’ that major banks were making on these clients no longer justified the risks associated with a crisis such as the SNB. Therefore, secondary PB services have become an increasingly important gateway back to the Institutional market place for under-capitalised clients.” These secondary PB services have been provided by prime of prime (PoP) brokers that have stepped in to fill the void left by the withdrawal of the PBs, says Miesner. “Access to the institutional market place is

Conlan believes this is the result of three factors. The first and most prominent is the SNB event. “I think a number of banks were operating with the understanding that FX prime brokerage was a low risk business, but the SNB event totally changed that and demonstrated that it is a market with significant risk.” Banks are also going through a lot of regulatory change right now and taking a much more forensic view of individual business lines with the intention of narrowing its focus. And prime brokerage may be one of those businesses that they look to exit. critical to the success of many FX funds. So as the FXPB space contracts, the FX PoP sector continues to grow in importance, providing access to institutional liquidity and spreads.” Less choice on the PB side has been a particular issue for hedge funds, asset managers and high frequency traders that are now seeking a home among the PoPs in increasing numbers.

When it comes to the selection, Miesner says that there are numerous factors involved such as quality of service, leverage levels and cost of capital usage. “Firms are looking for quality prime broking services without the cost. If fees are too high, profitability suffers greatly, which is why prime of prime solutions such as GTX Direct are of great interest to many former PB clients that have been displaced.”

The final factor is the dwindling margins that prime brokers are faced with where the fees paid by clients are almost equalled by the costs incurred. All in

all, it does not make FX prime brokerage an attractive business for many banks. Those that do stay in the market are more selective and quick to reduce unprofitable relationships. “It is a great environment for us,” says Conlan. “We are in expansion mode right now and are looking to expand our client base.” Unlike the banks, IFM’s client profile hasn’t changed, says Conlan. “We took the decision some time ago that we would not focus on retail clients. Instead we serve a range of institutional traders, from proprietary trading firms to fund managers, other brokers and regional banks.” It is the last category, regional and international banks, that

John Miesner

“Access to the institutional market place is critical to the success of many FX funds. So as the FX PB space contracts, the FX PoP sector continues to grow in importance, providing access to institutional liquidity and spreads.”

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What’s causing the flight to quality in FX Prime Brokerage? have been the most fertile source of new clients for IFM, says Conlan, even though some of them may not have originally intended to be long-term clients of a prime of prime broker. “There are only a handful of banks that can offer a prime brokerage service now and this has left many clients waiting. They have come to us in the meantime, while they wait to be connected to a prime broker.”

prime-like service with all the tools to firms that are no longer able to access a prime broker service.”

IFM offers DMA to all major ECNs and is in the process of implementing Tradair, which will enable a service that will allow clients to access individual banks directly. Conlan says, “Tradair will provide clients with market visibility and trading limit controls so that clients Somewhat surprisingly Conlan can deal directly with their has not seen many new entrants liquidity providers. To cater to rush in to fill the void left by the this demand requires some retreat of the top tier banks, element of risk control and IFM especially in the last six months is looking to develop a credit of the year. He puts this down hub through which its prime to the fact that it is not such an clients can access single banks easy service to properly provide. and where IFM can act as the “To offer the breadth of service credit intermediary. A service that institutional investors like that would give us more risk require is very challenging. Our tools and also connect us closer initial objective was to offer a to the client’s front-end in a risk management sense.”

CHOICES So what criteria should trading firms have when selecting a PoP broker? Registration is the key word for Conlan. “If you’re registered as a swaps dealer, you can provide all the services under one roof – NDFs, swaps, spot and options. If you’re not, it is a limited offering. We registered in both the UK and Joe Conlan

“I think a number of banks were operating with the understanding that FX prime brokerage was a low risk business, but the SNB event totally changed that and demonstrated that it is a market with significant risk.”

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the US under the FCA and the CFTC.” Flexibility in the trading platform is also another important quality says Conlan. “We offer clients eight or nine options for trading whereas there are other PoP brokers calling themselves such but only offering one platform. I don’t think that’s a PoP service, it’s a margin trading shop with a proprietary platform.” So, barring another SNB event this January, will 2016 be as successful for the prime of primes? Conlan says that the momentum is likely to come from macro factors like the Federal Reserve’s much anticipated increase in interest rates and Europe and Japan’s move in the opposite direction via its continued efforts to raise inflation. “I think markets like the PoPs will continue to scale and that’s good for us because it allows us to make more margin and to be more competitive.” Following the SNB event, a particular problem for FX prime brokers was the creditworthiness of their numerous clients, says Peter Plester, head of FX Prime Brokerage at Saxo Bank. “The large hedge funds and banks with big balance sheets are very creditworthy and were given good lines of credit. But as you go down the pecking order, there are a number of firms that are just trading on margin and

SPECIAL REPORT

SPECIAL REPORT

What’s causing the flight to quality in FX Prime Brokerage?

RISK MANAGEMENT If truth is the first casualty of war, as was the slogan for 1980s Vietnam film Platoon, the first casualties of the SNB event were old risk management practices. “Even though FX prime brokerage is a wellcontrolled market from a risk perspective, most of the risk control was on a post-trade basis,” says Plester. “When the markets are steady, that approach works fine. But when the market goes crazy and everything is stressed, that is when you find out how good your risk controls are, and many were found to be wanting.”

FXPB is a market that is definitely not risk-free if they lose more than they have on account, it is a big problem. So many prime brokers have revisited their policy.” The top tier of prime brokers – the likes of Citi, Deutsche, Barclays, BNP Paribas – have all raised their balance sheet requirement and increased their fees so it is a double hit for their mid-tier clients, many of which are now struggling to find a prime broker willing to take them on. This is where the prime of prime (PoP) brokers have emerged to fill this void, says Plester. “In the immediate aftermath of the SNB event, there were several headlines about the losses that banks faced and some mid-tier clients found themselves cut 120 | january 2016

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loose. They had to find new prime brokers and they turned to the PoPs.” The SNB event has also been a catalyst for the consideration of pre-trade risk controls. Before January’s crisis, there were FX brokers giving leverage of 4001. There were also brokers that failed to recognise the potential risk of the Swiss central bank’s shaky currency peg and ignored the market’s concern. So while there were prime brokers, like Saxo bank, that were reducing their exposure to Swiss currency pairs, others were basing their excessive leverage on historical data ended up in severe trouble. “This has all changed now. Leverage has been reduced, margin has gone up and fees have been increased.”

Pre-trade risk controls are a big priority for Saxo Markets, the Institutional Division of Saxo,Bank Group says Plester, not least because they help to solve a credit dilemma for prime brokers. “If you have a client with $1m and you offer them 50:1 leverage, there were previously two options for how that credit would be supplied. They would get either get a $50m limit spread over 10 platforms or venues so that the prime broker is better able to control the risk although this is not so good for the customer as they have small limits per venue. The other option is to over-allocate credit and give them say a $50m limit for all the venues which increases the risk for the prime broker but keeps the customers happy.” A lot of attention has been paid to post-trade risk controls. The

big bank-based prime brokers have looked to providers like Traiana to manage post-trade risk via an API, enabling them to either shut down the credit line or control the limit, however not all liquidity venues are connected. Consequenetly few firms have a well connected pretrade risk control capability. Two years ago Saxo Markets built a system based on pre-trade risk controls and employing aggregation venues like Prime XM, Market Factory and Fluent Trade Technologies with the objective of enabling Saxo to allocate credit more freely. “Before every trade we are able to check the state of credit so that we can allow the client to trade on margin while knowing that they cannot break their credit limit,” says Plester. It seems an obvious approach to take, especially for any prime broker setting up a new system from scratch, however, says Plester, the problem is that this technology was simply not available up to 18 months ago. And for any prime brokers with much older systems, it is very difficult to add this kind of functionality. Nevertheless, Plester expects this pre-trade risk management to become normal practice in time. “It is the optimal way of doing things and there are a lot of other players now looking at using pre-trade risk controls. The technology will become cheaper to implement. If the move to pre-trade risk controls does not

happen naturally, I expect the regulators to step in and look to force the issue.” For the trading firms that have found themselves moved from big banks to prime of primes, there will be some inevitable changes. The most noticeable will be the lack of direct access to liquidity providers. They will have been used to having direct and disclosed relationships with the banks but now they are no longer trading in their own name. While this may seem like an apparent drop in status, it does offer some operational advantages for trading firms, says Plester. “There are more value-added services, more focus on credit provision, e-trading liquidity optimization and account management. A prime of prime will also centralise everything. They connect to an infrastructure in a data centre and then connect to multiple liquidity providers with one API. They can still see all the various platforms separately and we can also aggregate if they wish to do that. And everything is done at low latency. We do all the work on their behalf so that frees up more time for the client.”

CLIENT CONSIDERATIONS Other than overcoming their sense of humiliation to embrace the operational benefits on offer, what else should firms consider when looking at prime of primes? In Plester’s view there are nine important components to assess. First of all, you need a lot more than a credit line and a price feed to be a prime broker. You need account management, real-time reporting and multiple liquidity provider connections. “The first of these is financial strength. It is the ‘prime’ in prime broker. The financial

Peter Plester

“....when the market goes crazy and everything is stressed, that is when you find out how good your risk controls are, and many were found to be wanting.”

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Flexibility in the trading platform is an important quality

strength is what makes the name credit-worthy and that is why you are trading with them. A second important element is regulation. In today’s market where new rules are being introduced, firms have to ensure that their counterparties are properly regulated. A banking license is a big advantage because a higher regulatory bar has to be met. Technology is another watchword of quality. Is the PoP using the latest software? What is the average speed of its trades? Where are its servers located? The more information can be gleaned about its platforms and service providers, the better. Similarly connectivity is a crucial component. You should assess the ease of access to liquidity, the number of different data centres that are used and whether or not they 122 | january 2016

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are cross-connected. A number of qualities that clients will look for in a PoP may depend on that clients’ profile, says Plester. For example, hedge funds that have an increasingly institutional investor base are facing a growing reporting burden so they will want to know if the PoP has realtime reporting data available for it trading and execution. Some PoPs will even take this a stage further and provide a full reporting service that can be used by hedge funds. Meanwhile, money managers will want to know what options the PoP can provide in the allocation of their trades. There is also a growing interest in multi-asset trading among firms and they will be looking for a PoP to facilitate this new asset class. If the firm can use a

single PoP for trading in multiple instruments, it makes it a much more margin-efficient approach. Transparency is also a quality in increasing demand, particularly when it comes to providing access to ECNs, something that not all PoPs provide. The final component is one that is sometimes neglected and that is the speed of on-boarding, says Plester. Given the state of flux in the prime brokerage space and the rife uncertainty, it is vital that clients know exactly how long it will take to get up and running when signing up with a new PB. In some instances this process has taken months. “The process of on-boarding has become much longer because of more stringent regulations and a more cautious approach from prime brokers. Consequently, there is greater scrutiny of the

SPECIAL REPORT

SPECIAL REPORT

What’s causing the flight to quality in FX Prime Brokerage? balance sheets. For a firm that has been cut loose by its prime broker, the months spent onboarding are months in which it is cut off from the market and unable to trade, therefore the on-boarding process should be a big consideration.”

“PoPs grant a cost-effective access to PB services, irrespective of the client’s balance sheet. Nowadays, offering multi-asset rapid and hassle-free integration into any IT environment is the key differentiator when selecting a PoP of choice.”

clearing technology have finally emerged to fill the gap between INTEGRATION the interbank market and It was the retail FX trading popular retail trading platforms, market that was hit hardest by such as the MetaTrader, which the SNB event, says Cyril Tabet, were historically designed Partner & CEO of Cyprus-based to operate under B booking JFD Prime, which offers its own conditions, therefore cutting FXPB service. “The early days of off banks from the retail market the retail trading industry, where and vice-versa.” electronic trading platforms and the internet enabled mass Nowadays, Tier1 liquidity access to the financial market pools tend to compensate and retail brokers employed a shortage of interbank liquidity market-making business model, by sourcing abundant retail should now be a thing of the liquidity matching these two past. The latest business and at a lucrative premium, that is technology transformations why retail trades are now worth have eventually made the billions and what used to be a impossible possible. Robust ‘no’ business has now become bridging, aggregation and ‘the’ business, says Tabet.

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Cyril Tabet

However, the retail trading industry has been shaken up by the SNB event, if not the electronic trading industry as a whole. Top tier PBs have significantly increased their minimum capital requirements thresholds and their service fees, as much as $100 million and $5 per million respectively. Consequently, new Prime of Prime services like JFD Prime with lower thresholds and costs are setting themselves up as the PBs of choice for regulated institutions that may not match a tier one PB’s requirements yet seeks a similar quality of service. Tapping into aggregated multibank and exchange liquidity pools via the new PBs comes with significant benefits versus connecting to a single or a few select single liquidity providers

as per the traditional bank-based PB, says Tabet. “This includes custom liquidity feeds to cater for all types of clients’ trading styles, additional market depth and overall spread stability, lower hedging/trading costs translating into increased revenue margins and most importantly fully optimised cross margining and risk management capabilities. Indeed these are the key benefits of a new PB setup and the reason why a vast majority of retail online brokers and asset managers are looking into deploying such setups.” JFD Prime offers all of the above with a few notable additions, says Tabet. For example, it offers access to additional markets like metals, indices, commodities, single stocks and ETFs; it also provides a range of services incorporating choice of preferred LPs, hybrid A and B Book capabilities including a variety of risk management and analysis tools by order types, order direction, ticket sizes, instruments and exposure translating into optimal control and greater revenue margins for the broker, all under a PoP agency-only execution model guaranteeing full post-trade transparency and zero conflict of interest to its retail broker clients. But, most importantly says Tabet, it also understands its clients’ environments, both from a business and IT perspective hence offers a full service supporting multi-asset liquidity provision deployed within a record integration time of less than 48 hours in most instances via FIX API, MT4 Gateway, One Zero Hub, PrimeXM Xcore and more, which is not always the case with a vast majority of so called Prime of Prime offerings. Tabet concludes by saying that most PoPs may grant a cost-effective access to PB services, irrespective of the client’s balance sheet, yet nowadays, offering multi-asset, rapid and hassle-free integration into any IT environment should be the key differentiator when selecting a PoP of choice.

MEET THE TEAM

MEET THE TEAM

Left to right: Mark Bucaj, Ornit Niv, Brandon Mulvihill, Janill Espaillat, Anthony Mazzarese.

FXCM – poised for growth and focusing on core areas of strength in their Institutional services

e-Forex talks with Brandon Mulvihill, MD and Global Head of Institutional sales at FXCM. Brandon, last year you took on a more pivotal role in establishing FXCM’s Institutional offering. What do your day to day responsibilities now involve? At the end of summer 2014 I assumed the Global Head of Sales role for FXCM Pro. My remit was to better leverage FXCM’s distribution centres so as to grow our three primary verticals. Those product lines were firstly FastMatch, our JV with Credit Suisse which offers a matching engine, ECN, and aggregator technology to the interbank community. Secondly, FXCM 126 | january 2016

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Prime, our clearing business catered to low and medium latency funds as well as emerging market banks and institutions. Thirdly, our liquidity solutions for wholesale FX and CFD trading which we have on offer for equity brokers, futures brokers, and FX/CFD brokers globally. Post SNB, we tweaked our business plan after the announcement of FastMatch as a listed asset for sale, thus focusing instead on FXCM Prime and our wholesale business. In focusing on these two drivers for FXCM Pro, I spend 70% of my day with customers and roughly 30% of

my day helping to create and execute our strategies related to these client segments. The disposition of institutional non-core assets by FXCM has been widely reported. How important has the wholesale side of the business now become for the firm and what advantages does being smaller and leaner bring with it? In 2014, our wholesale business did over $900B in volumes, and our 2015 run rate is on a similar trajectory. Yet, what makes this client segment particularly important is that we are able to generate higher profit margins compared to adjacent institutional business lines we managed previously.

One significant benefit of focusing on core assets as a company is a collective focus across all departments. Our wholesale business certainly is a beneficiary of this. Our clients access market data, and execute FX, Metals, Energies, and Indices via a single API. This year alone, we finished a messaging enhancement which cut latency times for API customers in half. We executed a deal in acquiring CitiFX Pro, which included a significant migration of their wholesale customers who traded via CitiFX Tradestream. In October, we launched enhanced CFD functionality, an optimization designed to better pricing and execution capabilities for automated traders in instruments such as indices. Certainly, we have always produced results, but I would suggest that the pace of our output is stronger, and customers are experiencing this through tangible enhancements on our core product lines. As a result, we are excited to continue to announce more enhancements coming in 2016.

by distinctly different business units and cater to distinctly different audiences. FXCM Prime caters to low and medium latency funds. These funds mandate the use of market data across multiple venues, such as Reuters, EBS, Currenex, FastMatch, Hotspot, and Bloomberg Tradebook to name a few. Generally speaking, these users have a business need to be a maker/ taker across these venues and thus require not only access but the ability for a robust pre-trade credit check to function in both a maker/taker scenario. FXCM Prime provides trade netting across multiple trading venues, including both ECNs and single bank platforms. Our pre-trade risk software provides single NOP allocation, thus giving traders the freedom to trade intraday on their venue of choice. In addition to high and medium frequency funds, FXCM Prime also works with proprietary trading shops, corporates, and emerging market banks.

they go to my team at FXCM Prime. If customers require one platform to connect to, such as the mandate from retail brokers, they work with my wholesale team. Today, we service a couple hundred wholesale brokers worldwide. Some benefits these brokers receive are the ability to write to one API for multiple asset classes, agency style execution in FX, small ticket sizes in FX with no additional fees, and cash optimization as brokers’ PnL is cross collateralized between FX and CFDs. FXCM’s Prime of Prime offering, FXCM Prime is the second core part of its Institutional business. In what ways is your Prime product well positioned to take advantage of increasing demand for access to centralized clearing across multiple trading venues? When creating our business model we kept a simple concept

What range of services does FXCM’s Institutional department, FXCM Pro, provide and who are its main types of client?

Separately, FXCM’s wholesale business provides custom liquidity and execution services. This offering caters specifically to retail brokers, thus clientele that demands one platform, FXCM provides a clearing service but robust liquidity solutions known as FXCM Prime as well within it. And we make a big as an execution and liquidity distinction here. If customers offering, known as FXCM’s need multiple venues to trade, wholesale business. Both are sold such as high frequency shops,

Ornit Niv is the driving force behind the department

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in mind. Customer demand has not changed, what has changed is the supply chain. Our focus was to provide a tier one prime brokerage experience to those who had lost such a service. And to do this, FXCM Prime had to build a clearing model that was truly agnostic, and it is this point that underscores our offering. FXCM Prime has no incentive or directive as to where our customers wish to trade. In fact, we mandate that all clients execute contracts with both FXCM as a prime customer, and also with the ECN(s) of choice as users of those technologies. In the same way that a tier one bank isolated their desks between clearing and execution, we have done the same. The impact to the client is a completely transparent counterparty relationship, a model not widely on offer in today’s prime of prime space. Additionally, we centralize all trades through our back office.

Customers on FXCM Prime can buy in one venue and sell in another and easily see their net positioning through FXCM’s proprietary back office system. Along with statements, we utilize third party technology that provides our customers a pre-trade credit check on each trade. This allows FXCM Prime to establish one, master level NOP which our customers can more efficiently manage versus an NOP per platform model. Finally, to really match the best tier one prime brokerage models on offer you must supplement your ideology and technology with support. Our team covering customers today is currently 20 people strong. Once again, our global support and scale is yet another element of FXCM Prime that the broader prime of prime offerings have yet to build. FXCM recently doubled the size of its broker services desk which underlines how busy thing are. Who

Justin Boulton is Global Head of FXCM Prime

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are the other key people in your executive team that have been shaping your institutional offering and driving growth of the business around the world? Ornit Niv, CEO of FXCM LLC and Global Head of FXCM Pro is a driving force behind the department and FXCM Prime. Beyond the strategic decisions, Ornit is extremely hands on and involved with the execution of our business plan. As stated previously, the level of focus at FXCM right now is extremely sharp. Having said this, it is significant to highlight how FXCM operates. We are far more of a flat organization than we are vertical. This fact is observed by the unprecedented managerial bench at FXCM. For example, Mark Bucaj (Product Management), Mohammed Khan (Operations), Tangie Coon (Support), Alex Dick (Legal), Brian Bauernschmit (Risk), and Brent Cotten (Sales) are all managers directly engaged in FXCM Prime, each with over ten years experience at FXCM. Also, Justin Boulton, Global Head of FXCM Prime formerly helped create and manage the clearing business at Rabobank. Anthony Mazzarese, formerly managed sales and support at Citi FX Pro. Janill Espaillat managed our daily operations with FastMatch and transitioned to FXCM Prime to help manage operations.

Each and every person named is actively included in the progression of FXCM Prime. Our collective experience, first hand feedback, and open door policy creates an atmosphere for success. And my example using our FXCM Prime team serves as a microcosm for how we manage the larger team at FXCM Pro. Who has responsibility within the company for developing and maintaining your IT infrastructure and how important is technology in helping you to innovate and stay ahead of competitors? We are at heart, a technology company, thus we believe strongly in consistent innovation and enhancements to our technology. Evan Milazzo manages the global team at FXCM and Mark Bucaj specifically manages the technology infrastructure for FXCM Pro. For clearing customers, our entire technology around FXCM Prime, which provides access to over a dozen single bank and ECN platforms is available thanks to the builds our technology team completed. Pre trade risk systems, threepoint reconciliation processes, and redundancy considerations for FXCM Prime all require significant technology work, and our team did an excellent job with this product. While many prime of prime offers are

being marketed very few of them offer the ability to trade against multiple platforms and settle via one back office, all while ensuring a single NOP allowance across platforms. Now that the heavy work is complete, we will continue to add more ECN venues and single bank platforms to our product offering through 2016, thus further distancing our offering from the competition. In what ways are you currently looking to broaden your product offering, for example with CFDs? We see a massive gap within the CFD market. Whereas in retail FX, consumers can trade automatically via APIs and third party platforms without strategy or order restrictions, the CFD market offers no such market access. Index and energy CFDs on offer today are provided by market makers, either directly by the broker, or through a pass through system to one end liquidity provider. The result is simple. In order to protect the market maker, restrictions are put in place, and typically these restrictions limit or outright ban automated trading as well as large tickets. This concept is something we saw in FX years ago. At the end of 2006 FXCM changed our execution model so as to provide retail consumers the ability to trade with any

Brent Cotten is sales manager for FXCM Prime trading style without the need for restrictions. The result was overwhelmingly positive. FXCM experiences over 500,000 customer trades a day. This fact was made possible through the technology advances within our FX system to provide scale on a significant level while also addressing customer demand. Similarly, the CFD market is where the FX market was back in 2006. As a result, we are excited to say the least with our recent enhancements for CFD trading. 2016 will be a year we focus significant resources toward further enhancements with the goal to give retail CFD consumers the same capabilities they have in FX. Our direct customers will thus stand to benefit, as well as our wholesale customers. Like FX, this offering will become the new norm, and brokers want this product to remain ahead of the curve. Going into 2016, we have more broker customers being onboarded than ever before, and our CFD enhancements are a big reason why.

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Widening your e-FX capabilities with a new generation of white labelling solutions Heather McLean discovers more about how white labelling solutions can assist retail FX brokers to quickly establish their online trading operations and why white label partnerships can prove a very attractive proposition.

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Growing ever-faster is the retail FX trading sector. As this area continues to increase in size, so too do the demands of its traders and brokers as they seek to keep up with and stay ahead of the competition. Yet one question facing both new and established entrants to this market is that of how best to manage the technology their businesses are based upon. While one answer is to keep everything in-house, another is to outsource it completely, or perhaps partially, with a white labelled solution. Not only can this result in a faster time to market and more time to spend concentrating on the core of the business rather than operational technical issues, but it can also relieve the business of the chore of ongoing maintenance and development. Establishing an online trading operation quickly is a demanding task; this is where white labels can save the day. Commenting about how white

labelling can assist retail FX brokers to quickly establish their online trading operations, James Raiski, director of sales, TF Global Markets (UK), says that: “The cost for brokers to build and launch their own proprietary trading platform is prohibitively expensive, usually somewhere between $1 million to $5 million, dependent on the offering. While some brokers can afford this, the majority of brokers find this price, without any immediate return on investment, a large stumbling block.”

already been covered,” Raiski continues. “With an effective, all-encompassing white label solution, you can customise the offering to a level where it’ll be difficult to tell that it is a white label; this level of customisation is something that brokers should strive for, to set them apart from the competition.”

“White label partnerships allow small to medium size brokers immediate access to the platforms and infrastructure they require to start up at a fraction of the cost, as the initial outlay for all the technology has James Raiski

“The cost for brokers to build and launch their own proprietary trading platform is prohibitively expensive, usually somewhere between $1 million to $5 million, dependent on the offering.”

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Widening your e-FX capabilities with a new generation of white labelling solutions

WHITE LABELS FOR FAST ROI As people go through the time, cost and effort to get the appropriate regulation to act as principal to the trade it is vital to start seeing a return on investment quickly and efficiently. For this reason, Ross Newell, head of institutional FX and CFD, AxiTrader, states that white labelling can step into the breach and get an operation up and running, fast. “Critically the white label model allows a shortcut for a broker to get their brand out there in the market with statements, website and platform technology all showing the new company logo; assuming the broker has partnered with a quick and proactive partner, success becomes a numbers game, but support of a new brand is paramount at this stage and as quick as a brand is released, it can fail if the right processes and support functions are not in place,” he says. While according to Newell, the key advantages of white labelling for a retail FX broker are: speed to market; leverage off of an established functioning entity in this space, allowing a new brand to grow to critical mass; having a partner to stand beside you as you expand in this very competitive environment; and mitigating the cost of an expensive server and platform purchases, by reducing the sales team and marketing costs.

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Newell adds: “Dynamic white label solutions at AxiTrader, for example, offer flexibility to the broker client at a variety of levels from technology, risk management, sales, marketing, first/ second line support and day to day operational tweaks. We can customise and adapt around a broker to fill in the gaps.”

focus on user requirements and have a technology firm at arm’s length with the ability to implement required functionality and get it to market faster than the competition.”

“For retail brokers, the important part is generally to build up brand affinity when selecting a white labelling solution,” Talei continues. Whilst Alexander Talei, Head “We are seeing this end of the of Trading, at Price Markets market mature with firms being UK states that: “In terms more focused on custom UX. of technology, building Our white label solutions don’t something from scratch is a very come with just a new logo and expensive and difficult task. product name; we customise Broker and dealers are better the entire framework and UI off spending that money on to build stand out technology branding, marketing and sales for each partner. We also and getting the technology provide full source code if the delivered ‘plug and play’.” broker or dealer wants to take over the entire or parts of the The key advantages of white development after delivery.” label solutions for retail brokers are costs and time, says Talei. He explains: “Developing proprietary technology is extremely resource intensive. Brokers and dealers are generally marketing and sales experts, and their focus should remain on those strengths rather than trying to be “all over the place” just because a few competitors are. With the user base in retail FX markets evolving faster than ever, I believe brokers should Ross Newell

“Some brokers have the resources to do it themselves from scratch, in their own way. The issue with that is the cutting edge ideas are old ideas by the time implementation is carried out; speed to market is critical.”

Talei adds that in terms of liquidity, Price Markets opens up all sorts of doors: full multiasset connectivity; multi-clearer support; connectivity via FIX and all major binary protocols; custom-built order-routing algos; and more. “We have a deep understanding of the different micro-structures in the increasingly fragmented markets. Our partners like to see things in black and white, so we provide in-depth initial and ongoing TCA reviews to ensure they extract as much value as possible from their dealing activities,” he notes. Meanwhile Luis Sanchez, CEO, BMFN, comments: “We, as a white label provider, must pay close attention when a broker wants to do a white label. Often a tailor made solution with an open infrastructure is required, allowing the new brokers to adapt and modify the white label solution at any time. Remember we are in a fast and constantly changing world where the white label solutions and technology must be flexible enough to adapt at any time, and for several years in the future, in order to allow the new broker to remain competitive; clients today are much smarter than they used to be, and they learn fast and demand many more options and solutions, so the technology must move forward accordingly.” “The ability to white label your business, platform

It is vital to start seeing a return on investment quickly and your technology today embodies simplicity,” continues Sanchez. He says the steps are: 1) identify your target market, and 2) choose which platform and technology to use in order to meet the needs of that target market.

OPTIONS TO CONSIDER FOR SELECTION The term white label is an expression used in many industries, most particularly the FX industry, comments Sanchez. “In some markets FX is seen as a new investment asset, a niche, and in the present financial economic landscape, companies are seeking new niche and income-driving products. Therefore FX is becoming increasingly known

as such. The reality is that this market is expanding year after year on a global scale. This applies mainly to small and medium sized companies and we can say that the majority of these new firms are born from ex employees of existing FX brokers with external investors.” “So the question here is simple; what are the options to consider when it comes to opening a new FX brokerage firm? The most important one is technology,” notes Sanchez. “FX brokers require a high level of technology in all aspects of their business, from trading platforms, back offices, CRM, liquidity, trading book, reporting, accounting, and more, all in an interactive way,

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Widening your e-FX capabilities with a new generation of white labelling solutions allowing integration amongst the different departments.” Sanchez adds that as a new FX broker the options are to: A) build my own technology, knowing that this will take a long time and will be extremely expensive or B) take a white label from an existing entity of broker. “So, a white label is the outsource or lease of an existing technology often branded under the new broker’s name,” Sanchez continues. “While this concept is understood, we must mention that there are different types of white

label: a complete or full one; or a partial white label. Today technology is being designed and developed in a way that can match the new broker’s needs and expectations.” For those looking to find a reliable white label partner, Newell says the most important point is that a broker is licensed and that the retail clients set up under that are contracted to that broker. He explains: “At AxiTrader we do our best to understand the broker as it is now and what they hope to achieve with our involvement.

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Normally a client will require technology support and a platform that reflects their brand and obscures the AxiTrader involvement, but still harnessing our strengths such as superior risk management, award winning support and flexible business acumen. That involves working with a broker to help them realise their vision behind the scenes with product set up, group set up, mark-ups if required, MAM set ups, mobile and multi terminal options. Flexibility is the key, but not just at the initial product stage; we have to keep communication channels open as our partner brokers develop and have changing needs.”

They don’t have the time to read an extensive manual or go to complicated classes over webinars. What they are expecting is to have all solutions fully integrated in a couple of days; a week at tops including training. BMFN is an IB specialist and we have developed internally state of the art technology, where an IB can register via our web page or a simple link and in approx five to 10 minutes, they will have a full brokerage created. This solution comes with built in CRM, back office, web browser, web page, reports, accounting, and all branded with the IB’s logo for identification and all ready to onboard their clients just with a click of a link.”

FACTORS TO CONTEMPLATE Sanchez says there are several factors to consider when choosing a white label. Time is the most important aspect for an IB partner entering into a new partnership with a provider, he comments: “The IB knows their business and they want to get on with it; they want to help their clients but they want to start today, they can’t wait months for an implementation. So, how much time will it take for a provider to offer them this complete solution?”

That onboarding system must be very simple to complete for the IB, and especially for their clients, warns Sanchez. “Because of this, the brokers back office must react quickly to be able to onboard clients, check the data, do the AML and approved the accounts. Also, trading support must be very fast for them; if there is any kind of trading issue, the IB will expect to have a very fast response for their clients. This demands a special team behind monitoring the trades and transactions on a 24 hour basis,” he states.

Sanchez adds. “They need a complete turnkey solution, all fully integrated in a very simple operational design.

He adds: “Independent of whether it is a creator of a full white label or a partial one, each provider must be

Factors to consider when choosing a white label partner according to Luis Sanchez, CEO of BMFN 1) Technology: Trading platform, back office, CRM, liquidity, trading book, reporting and accounting. Open architecture to be adaptable, and at an affordable cost. 2) Cost: How much will the entire development of the white label cost, including one-time and ongoing costs. 3) Platforms: At least one different trading platform, multiple trading products, plus customisable applications for mobile for iOS, Android and Mac interfaces. 4) Build in applications: For monitoring selftraders and especially for IB’s where they can follow their clients, trades, and commissions in real time and on mobile devices. 5) Business Model: Know what business model underpins and drives the relationship. 6) Social Interaction: Brokers must provide social features, tools and opportunities in a simple and interactive way. 7) Training and Support: White labels must provide intensive and constant training to partners online and face to face. 8) Marketing tools: New brokers are also looking for marketing solutions that interface, such as web pages, landing pages and educational videos. 9) 24 hour service: This is crucial and should be a consideration by default. 10) Sub white labels: Technology must be developed in a way that allows the white label partner to provide this technology to its clients 11) Time of implementation: The white label solution must be in place in a short, reasonable time frame, around one month tops for a basic package. 12) Multi level of features: The white label provider must allow the new broker to select the features they need to start and to add new features in the future. 13) API and EA’s: The platform must be open to accept APIs and expert advisors, sometimes in multi languages. 14) Constantly meeting: Your white label partner is a real partner, like a brother or a sister company; the real question is, are they a real partner, or a competitor?

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Widening your e-FX capabilities with a new generation of white labelling solutions constantly developing new features and new technology according to the client’s needs. And because an open infrastructure is a must, the development department must keep in constant communication with the IB’s in order to understand what’s next and how to keep its partners satisfied and up to date. This is definitely not an easy task, as this requires a lot of investments from the provider side and many hours talking to existing clients, partners and constant research.” Cost is also key, notes Sanchez, who says: “Having all the above-mentioned features, all the technology involved, web pages, tutorial videos, reporting etc, the question here is how much will it cost? It all depends on the technology of the provider; in the case of BMFN since the system is already developed and automatic, there is no cost for the IB. Here technology plays an important role because as per automation is done, the only cost applicable here is to maintain it and develop new features. Remember IB’s are key players in this industry and in some regions they expect to be treated as kings and VIP’s!” Sanchez adds: “IBs understand that the way to have more income is to have more clients on board, and for this they need several tools and they are even willing to sacrifice

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“Developing proprietary technology is extremely resource intensive. Brokers and dealers are generally marketing and sales experts, and their focus should remain on those strengths rather than trying to be “all over the place” just because a few competitors are.” the amount of rebate they receive if it means they can have more features. It is not necessarily true that the broker that pays more in rebates is the most successful broker; it is the one that has the better technology, understanding of their client’s needs, and a reasonable paying rebate.”

ATTRACTION OF PARTNERSHIPS Answering the question of why white label partnerships are attractive to brokers, Talei says that: “For the simple reason that brokers are successful for different reasons to technology firms. To get the best of two worlds it’s generally better to have a fully focused team managing the technology aspects but with your full input.” While Newell points to, “speed to market, and leveraging from the experience of the host broker involved and acting as a spring board for smaller brands to gain that critical mass”. He adds: “Some brokers have the resources to do it themselves from scratch, in their own way. The issue with that is the cutting edge ideas are old ideas by the time implementation is carried out; speed to market

Alex Talei

is critical. Some of the best well-oiled white label solutions in the market have constant project lists to keep them just treading water. Trying to create and build a white label of your own and release it involves cost, time and resource.” White labelling partnerships have also begun to change the traditional IB relationship for FX retail providers, and on this point Raiski states that the art of good business in this space is being a good middleman, and the best IBs are the ones that create genuine value for both the broker and the client. He explains: “Good IBs carve out a niche for themselves in the middle, maybe by offering clients a piece of bespoke software, quality research or a

tailored service. These IBs want to build a brand behind these products and services, so that it scales with their business as it grows. Ultimately, IBs that add real value in-between, rather than just providing a simple marketing introduction, want to build their own brand through their sales and marketing efforts rather than building the brand of the brokers they introduce to.” “White labels that add genuine value for clients can often widen spreads or charge extra fees for their service, so unless you already have a really well established financial brand (where there is an inherent brand value already attached,) the secret to successful white labelling for most partners is in value creation,” says Raiski. “So, as the ROI on marketing alone has diminished through higher client acquisition costs and lower spreads, the onus has shifted so that successful partners are focusing on technology, product and service rather than a marketing centric approach.”

the broker’s terms of business”. Newell continues: “IBs and white labels are so keen to build their own brand and move forward themselves that it creates this demand for a middle range of solutions that many established brokers can now offer. Both the IB and white label in the past were rebate based. Yet increasingly now you see both looking for branded platforms and profit share style deals, which in their own way can be accommodated at the IB and white label level.

“Why has this happened? Transparency and education I think have had the biggest impact,” continues Newell. “The average IB now is better educated to the mechanics of running an FX business themselves and what can be achieved. This style change if used correctly can be an advantage to both as it aligns the goals of the IB and the broker to increase revenues and stimulate demand. I believe most brokers have a different twist to their offer, so new solutions are always being created.”

The onboarding system must be very simple to complete

BLURRING OF LINES Newell believes the difference in style of set ups from a white label to an IB has become blurred because, he observes, “in ways the payouts have become increasingly similar but the bottom line is, one is papering retail clients on his terms of business, and the other is signing customers up under

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Widening your e-FX capabilities with a new generation of white labelling solutions While Talei says: “It’s a natural transition as businesses grow to try to evolve and keep as much as possible inhouse. There are many IBs who have grown to multi-million dollar businesses and they are of course proactive and want to build their own infrastructure. When and how to do it is the difficult part, as all of a sudden you face new costs and responsibilities. Some do the transition a bit too soon in my opinion, before reaching the stability in turnover to make it worthwhile going on their own.”

LEADING THE NEW GENERATION When asked about some of the features and functionalities of white labelling solutions that could be seen as leading the new generation, Talei reckons it is all about custom white labels. “We don’t want any of our white labels to be similar, so whether our customers have an entry level user base or highly advanced screen or algorithmic user base, we adapt our platforms to suit their needs.”

with our customers to take down requirements on an ongoing basis and build custom solutions. The front end is one part but we spend just as much time on customising the back end to ‘hook’ with the increasing number of third party ISV’s that most brokers utilise. Thirdly, which I believe is our greatest strength, is our AI team, who automate back end logic to ensure as much value as possible is kept inhouse for the brokers and that the liquidity is secure and protected.” “Finally, multi-asset trading functionalities are trending right now, but multi-asset trading creates a large number of unknowns as all of a sudden you are dealing with numerous microstructures, some of them

“This is beyond branding of technology,” he continues. “We have a customisation team who work together Luis Sanchez

“We are in a fast and constantly changing world where the white label solutions and technology must be flexible enough to adapt at any time, and for several years in the future, in order to allow the new broker to remain competitive.”

completely new to you. There have been examples of eightfigure losses in recent years due to lack of understanding of this,” warns Talei. “We understand that partners like to just say: “I want to add X to my product offering. Get it done.” Unfortunately some just see it as “Give me the API and I connect it”, but it’s not as simple as that, as empirical evidence suggests. We have worked with multiasset microstructures for 15 years plus for price-making and taking businesses and understand where the pitfalls and opportunities lie,” he notes. While Raiski notes that for him, the more flexible, modular and futureproofed the white label offering, the better, as white label partners and brokers can grow and expand their business together using only the components of the service they need. “On this note, open APIs are vital, not just trade APIs, but back office and account opening APIs too, allowing white label partners the flexibility to integrate their own systems and build customised applications that enhance the trading experience for their particular book of clients,” Raiski adds. “We at ThinkForex have built a full suite of open APIs to cater for this evolving segment of the market.”

IS WHITE LABELLING FOR EVERYONE? White labelling is not for

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everyone, however. Raiski comments: “I would say it is suitable for the majority of brokers but not all. A white label partnership is more suited to brokers who don’t have the initial capital up front to afford their own technology and infrastructure to service it. While a white label partnership can help certain brokers, if a broker can afford the initial upfront costs of building their own trading platform without being highly reliant on the immediate return on investment, in the long run this route could be more profitable. However, there are no guarantees as developing trading technology is never easy – so it is a risk – with the opportunity cost being investment in sales and marketing, which are the lifeblood of any firm.” Meanwhile, Sanchez says: “A full white label solution is not suitable for everyone. New and existing brokers must have a certain infrastructure, license, financial strength and operational and administrative mechanisms in place in order to operate it properly. Now, what is good to consider here is what features of the entire solution will this broker need in order to complement their operational needs.” Talei observes: “Going from an IB to full broker or dealer is tricky and needs to be considered well. However, for existing brokerage firms,

yes, a white label partnership is suitable. Few brokers or dealers have the balance sheet to build their own technology and those who do generally stop progressing with the fast evolving world of financial technology due to natural reasons. This pretty much creates a need for broker and dealers of every size to get third party technology to keep up with user requirements.” Newell agrees: “Speaking to established recognised brands allows you to discuss the pros and cons of a range of options, and this is where brokers should utilise sales people that are available to them and understand the full flexibilities of each option with a white label provider set up. Most brokers have subtle differences that salespeople are trained to dig out, understand and proceed toward a range of solutions that may suit that firm. My advice would be utilise the salespeople the white label provider has made available to you.”

BREAKING NEW GROUND Questioned about what the top white label providers are focusing their activities around today, Newell comments: “In a range of successful ways, across a spectrum of products; limited in some ways, breaking new ground in others. There are few genuine unique white labels out there. People can usually identify

what the core technology is behind something, but the emergence of firms only providing platforms brings greater variety and so the extent a white label service will allow customisation can help a partner get a truly unique offer to market. I believe this means that in some areas, companies can shop around and bring in sections they prefer to form a complete white label offering, but the companies that do a complete solution will have spent a lot of resource on it, and do it very well.” Raiski on the other hand says that most, especially in the multi-asset category, are not focusing too much on the white label area as they are primarily focussing their attention on growing their direct active client base. He adds: “Outside of providing white labels of third party technology like MT4 or Currenex we don’t really see much new white label activity by the major players. We are therefore coming to market with a state of the art, HTML5 multi-asset class trading platform, and we see a gap in the market where we are able to offer industry leading technology to a segment of the market which we believe is very under-serviced.” Whilst Talei simply concludes: “Many leading white label providers have very similar business models; we want to change that.”

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business performance Over the last six years, Gold-i has become widely known as the world leader in trading systems integration and has built an impressive client list consisting of many of the most prestigious and fastest growing brokerages across the globe.

Gold-i’s CEO, Tom Higgins explains, “The secret to the company’s success is its in-depth technical knowledge about how MT4 operates combined with a deep understanding of the technology and tools required to run a brokerage in the most effective way.”

Tom Higgins

Gold-i helps MT4 brokers with the following key business drivers: Making More Money: Gold-i has an array of products which can be integrated with MT4 to provide brokers with an unparalleled understanding of their clients’ trading performance, enabling them to implement different strategies for different client groups as well as activate and retain clients more effectively. Products such as Gold-i Visual Edge and Gold-i Broker 360, have been developed specifically to help brokers to operate more profitably. Cutting Costs: Running MT4 effectively at all times requires expert knowledge and downtime can be costly. Gold-i’s Managed

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Services enable clients to outsource all or some of their MT4 technology support, minimising downtime and cutting costs such as technology staff, self-hosting and self-management. One client cited they have saved in excess of £100,000 per year by outsourcing their hosting and server management to Gold-i. They’ve also been able to resolve server issues far quicker than ever before. Reducing Risk: Gold-i’s wide portfolio of risk management tools helps brokers to understand their exposure in real-time and set up alerts to mitigate risk. Tools such as the Gold-i Position Keeper, Gold-i Margin Caller, Gold-i Rate Limit

and Gold-i Quote Checker have proved invaluable in helping brokers to manage their risk more effectively. Recently added features to Gold-i Visual Edge provide brokers with a clear visual overview of their exposure to risk and an effective way of identifying their most toxic clients. Differentiating from Competitors: Gold-i provides access to a diverse pool of liquidity, can offer a wide range of asset classes and can integrate MT4 with virtually any other product. By providing a wealth of customisable tools, Gold-i helps brokers to set up and run their operations with a highly tailored offering.

Tips on setting up and running MT4 effectively Ian Bunn is Head of Global Support at Gold-i and manages a team which is responsible for the smooth running of MT4 for over 140 clients worldwide. Ian and his team currently support in excess of 300 servers and operate 24 hours a day, 52 weeks of the year. Their in-depth knowledge of MT4 ensures they can help clients with all their operational needs – from setting up MT4 to proactively monitoring the systems and fixing issues should they occur.

Whilst one of the biggest benefits of MT4 is its flexibility as it gives users the freedom to configure symbols, groups and securities in so many different ways, this can be a negative for those who tweak it but don’t fully understand the complexities. When MT4 is set up correctly things run smoothly. When set up badly, it can go horribly wrong!

2) Select the Correct Hardware Having MT4 running on a poorly spec’d server – such as a PC running Windows server - is also something I’ve come across a number of times, largely due to budget restrictions – and this can have a detrimental effect on the smooth running of the brokerage. The hardware costs on top of the layout for Ian’s advice to any broker the MT4 software license can or bank trying to set up or be a significant investment for manage their MT4 systems brokers, particularly for startthemselves is: ups. However, it’s a cost that is not worth skimping on during 1) Watch Out for MT4 Set-Up the set-up phase. Selecting Configurations too low a spec creates a false Be aware that a small change economy that leads to further to a symbol or group could expenditure. have a major impact on the smooth running of the system. 3) Plan for Disaster I have often seen a change Generally people only think made to a system set-up which about having a recovery plan causes MT4 to stop pricing or when something has gone results in trades rejected by LPs. wrong. Despite the increasing Ian Bunn explains, “The focus of the Gold-i Support Team is on minimising downtime, pre-empting problems and resolving any issues as soon as possible. If brokers have an issue, we can typically resolve it quickly as it is likely to be something that we have come across before.”

Ian Bunn

number of DDOS attacks in the FX World, many brokers still don’t have a robust disaster recovery plan.With MT4, a number of brokers rely solely on Watchdog. Whilst Watchdog does a reasonable job of replicating MT4 data, it is only concerned with MT4. Supplementary systems do not get backed up and this can result in a serious loss in revenue. A full Disaster Recovery suite is an absolute necessity. Should an incident occur, a switch over can be achieved within minutes – and not the hour or so we’ve seen with Watchdog. Gold-i offers differing levels of support to cater for different needs and budgets. In addition to Hosted & Managed Services, Gold-i helps brokers with risk management, liquidity and integration. For more information please visit www.gold-i.com

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SPONSORED STATEMENT

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Minimising risks and maximising trading opportunities –

exploring the benefits of financial trading ecosystems for FX Dan Barnes looks at how financial trading ecosystems have evolved, what services they can offer and the benefits they can deliver to a wide variety of FX market participants .

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In its recent report “Trends in FX Trading 2015: The Decline and Rebirth of the Inter-dealer Spot Market’, consultancy GreySpark observes that the number of trades with a bank/broker dealer as counterparty will have shrunk to 31% in 2016 from 87% in 2007 signalling a massive shift away from dealer-to-dealer trading. While the increased range of counterparties allows for more diverse trading partners it also creates a challenge in the ability to find alternative trading partners. Where the market has found a solution is in the development of trading eco-systems, built up within data centres and around telcos. A trading eco-system is

defined by those participants who are dependent upon each other to conduct electronic trading. Within that are the service providers for the sellside, the buy-side with capital to invest, and the venues providing the facilitation of trades from exchanges to the single-dealer platforms. This hub provides a source of business for the firms who provide services around those market participants the market data providers and technology providers who provide very fast calculation engines such as servers and field programmable gate array (FPGA) cards which were all of the rage about five years ago.

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Minimising risks and maximising trading opportunities “To have complete access with free market data and full transparency so your trading strategies can develop and evolve is the goal” supporting arbitrage strategies or access to other currency pairs.”

Robin Manicom

MANAGED SERVICE PROVIDERS The facilitators of FX trading for many firms are the managed service providers. By offering a ready-made and managed technology infrastructure the traders can get all of the benefits of the environment with a reduction in the overall set-up cost. That also creates a broader range of counterparties to trade with. “The managed service providers are very important,” says Robin Manicom, director of financial enterprise at Equinix. “Finally, and this sometimes gets overlooked, the network companies are extremely important. Inside of a trading eco-system there are many trading venues but there will always be other trading venues you need to be able to quickly get out to, whether that is

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Yousaf Hafeez, head of business development, financial technology services at BT says, “We can provide anyone with access to currency pairs and multiple venues around the world. If they want to go to more exotic locations for more exotic currency pairs, we can take them directly to brokers in those countries. Or indeed to brokers who trade those exotic currency pairs in London and New York. They don’t necessarily have to go to a country to trade the local currency.”

serving the market place,” says Jay Hibbin, technology strategist for Financial Services EMEA at CenturyLink. “I think the benefits of a managed service are the ability to abstract yourself from the IT services and focus on your core trading model. You do not have to worry about the management of the IT infrastructure, the operating system, the network and all of the hardware side. Focussing on what’s important to you – the best access to liquidity and the best access to pricing distribution.”

15 great reasons to celebrate the anniversary of the BT Radianz cloud One cOmmunITy. One cOnnecTIOn. One FOcus.

400

Thousands

1

delivering thousands of application based services critical to the everyday functions of the financial sector

100+

BT is unique:

its products and solutions span the entire Trade Cycle from pre-trade to post-trade

12

“There is the cost pressure, which our customers are facing, and then there is the pressure our customers face in demonstrating to their clients that they are giving a great service, with the best execution possible.”

40+

100 service level agreement as baseline

20 9

40+

dark pools

7

Managed hosting services in over

11

data centres globally

Up to

10

13

%

Yousaf Hafeez

post-trade and securities services providers

FX service and information providers

8

World’s largest

FIX ready network

3

40+

6

5

64

countries served

4

trading venues

Hafeez notes that the fragmentation which is now occurring in FX is similar to that which was seen in equities in 2007/2008, and consequently firms are applying the models they applied in that market to FX as well.

Unrivalled global reach: more than

of member sites in the worldwide BT Radianz Cloud

data and content providers

A variety of network vendors transport prices to buy-side clients or banks, either as traditional telco’s or extranet-type network providers. Software aggregators also provide liquiditysourcing type applications that look to create a single price book out of that data. “It’s a very fragmented market both in terms of market data price and distribution but also in terms of the number of vendors

2

year-on-year total cost of ownership savings compared to DIY models

Managed low-latency connectivity to, within and between

16

50%

key financial markets venues and data centres globally

24/7

global support from a dedicated team of experts

14

15 Over

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of the world’s top 100 banks are BT customers

Find out more about Radianz at bt.com/financialservices For BT’s vision of the ‘cloud of clouds’ visit bt.com/point-of-view

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Source: IPC Systems Inc

NETWORKS, HOSTING & CONNECTIVITY

NETWORKS, HOSTING & CONNECTIVITY

Minimising risks and maximising trading opportunities

Currency Markets Ecosystem

“Fragmentation in FX is a good thing and a bad thing,” he says. “It’s good in that it has reduced cost, and tightened spreads, so more and more people are coming into trading FX. The trading participants are challenged if they want to be able to access multiple venues and this is where firms like BT can provide a managed service to help them. We allow people to come into the market and rather than having a big fixed cost, we provide them with an operating expenditure model. So it’s a monthly cost rather than having to invest a big chunk of capital expenditure upfront.” More established institutional clients are also under pressure 146 | january 2016

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to demonstrate to their end users that they are giving them the best possible deal possible, whether that be through transaction cost analysis (TCA) or lower fees. “There are two sides,” says Hafeez. “There is the cost pressure, which our customers are facing, and then there is the pressure our customers face in demonstrating to their clients that they are giving a great service, with the best execution possible, at a very good cost.”

TOUGH ENVIRONMENT The last twelve months have been a rollercoaster ride for FX traders with the ending of the Swiss Franc cap, the revaluation

of the Renminbi and the will-they-won’t-they rate hike from the US Federal Reserve. Whether directly affected through losses or indirectly by the impact it has had on the trading environment and other firms, traders are facing a different set of challenges than they were a year or more ago. Chief amongst these is the need for greater risk management and resilience. Ganesh Iyer, global product marketing director for Financial Markets Network at IPC says, “Financial trading ecosystems can minimise the impact of black swan events. Not ‘eliminate’ them, because we don’t know when a black swan

is going to happen, but through having access to a ready-made ecosystem and connectivity throughout the trade lifecycle we can minimise the impact of black swan events.”

in Japan. The Swiss National Bank abandoning the Euro cap was the biggest black swan in recent times.” At present there is a crisis in the emerging markets including a slowdown of the Chinese economy. With lots of money invested in the high yielding emerging markets there are US Dollar carry trades that could unwind at any moment.

One example of this from the FX market stems from the Yen being a very popular carry trade. With low interest rates, firms were borrowing in Yen and investing in currencies like the Australian dollar or in high yielding assets such as asset“Firms are borrowing in US backed securities and mortgage- Dollars at low interest rates backed securities. and subsequently investing in emerging market currencies or “When the prices of highother high-yielding assets. These yielding assets came crashing trades can rapidly unwind at down, this Yen carry trade had any time leading to a crisis,” to be unwound and that was says Iyer. a big issue during the global financial crisis,” Iyer says. The danger that firms face – “Similarly there have been flash and as experience has proven crashes in some currencies, for even in liquid markets such as example the yen-dollar flash that of the Swiss franc - is that crash right after the earthquake trading out of positions can be difficult when a shock hits the system. “On the day of the SNB action you couldn’t trade electronically or find your counterparty through a screen with ease,” says Iyer. “The event taught us that you often have to pick up the phone during times of financial stress. Being able to find your counterparty becomes crucial and both voice and electronic Ganesh Iyer

“Financial trading ecosystems can minimise the impact of black swan events.”

trading can play a significant role in minimising contagion risk. We have been seeing active black swans justify having connectivity throughout the trade lifecycle and access to a ready-made financial ecosystem.” A ready-made ecosystem should offer a large community of market participants as well as diversity in buying and selling interest. While the support that this sort of ecosystem can provide is of value both to portfolio managers and buy-side traders there are other consumers of market data within firms for whom an ecosystem can provide a considerable boost. “Risk managers want to get prices independent of the portfolio managers and traders, because they want to get their own assessment of risk and pricing, especially for illiquid products,” says Iyer. Resilience is expressed in other ways as well. For example, the risk that firms face from cybercrime can be crippling. According to consultancy Accenture’s ‘2015 Global Risk Management Study: Capital Markets Report’, 58% of capital markets firms believe there will be an increase in the severity of cybercrime attacks. Concern about the risk of attack can affect the choice of service provider, with some market commentators identifying the risk as a key selling point.

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Minimising risks and maximising trading opportunities “By not being locked into a single IT infrastructure platform, you can migrate from co-location at one end to fully a managed public cloud and managed applications at the other end.” fully researched, with all of a firm’s IP address information already been determined, with executives of the company known and the purpose being to achieve financial gain.

Jay Hibbin

“There is not a regular hosting company, co-location provider or ISP that can and will protect you from a distributed denial of service (DDoS) attack,” says Jubin Pejman, founder and managing director at FCM360. “I have spoken to experts at DDoS mitigation companies that charge the banks US$20 to US$50 million dollars a year to protect their networks. There is absolutely not one ISP or hosting company that does this. So when you look at what an eco-system is if you are a publically facing entity such as a bank, an e-commerce platform, or a broker responsible for transaction processing, you potentially could be subject to attacks.” These can threaten massive downtime as coordinated events, and attackers are often 148 | january 2016

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“They are trying to hurt you or your industry to benefit theirs,” says Pejman. “In the eyes of somebody who wants financial gain they will look at financial firms, and foreign exchange is no longer in the dark; for the last ten years FX trading has been pushed to the public. When we are talking about an eco-system, hosting has become a commodity to some extent. What has to be done better as part of the eco-

system is start providing DDoS mitigation services. We have been installing unified threat management (UTM) systems in New York and London.”

OPTIMAL SERVICE When selecting service providers it is critical to have access to all of the tools that are needed for a full service offering, says Manicom, and this encompass a very comprehensive level of technology management.

Connect. Collaborate. Communicate. Not just any network, but a global, financial community network. Rely on IPC for data and voice connectivity to the Global Capital Markets

“To be neutral providers of services we don’t want to really create anything which locks other people out,” he observes. “This is why we have worked very hard with managed service providers because they can provide you know services in bundles to other trading participants who may not have the business case to spend money directly with Equinix.”

Cross connects inside data centres are much shorter network connections than network cables between data centres.

To learn how to gain access to a ready-made ecosystem of diverse market participants, visit www.ipc.com/fmn © 2016 IPC Systems, Inc. All rights reserved. IPC, the IPC logo, Connexus and Unigy are trademarks of IPC Systems, Inc.

If a trading firm does not have the capacity to build and run things directly themselves they can effectively come into one of the managed service providers who will provide them with cabinets, servers, storage and connectivity to the electronic markets, wrapped up in a monthly package. “They will also look after your service and manage those services maybe up to the operating system or even up to the data level. Effectively you can install your trading software on that platform and not worry too much about how its all put together and maintained but concentrate on building your

strategies and having as much access to the markets as some of the major players, who can build all this stuff themselves,” he says. Not only does this level the playing field with larger trading participants, by being closer to the markets it has an effect on latency. Cross connects inside data centres are much shorter network connections than network cables between data centres. That efficiency also gives an advantage to service providers located within data centres. As trading strategies evolve between asset classes, the

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Source: IPC Systems Inc

NETWORKS, HOSTING & CONNECTIVITY

NETWORKS, HOSTING & CONNECTIVITY

Minimising risks and maximising trading opportunities level of technology required to support a firms can change, for example the need for lowlatency data feeds might reflect a move towards high-frequency trading or event-driven trading algorithms. Hibbin notes that a flexible service provider prevents capital investments from taking trading firms into an operational culde-sac. “We provide the benefit to our clients of a hybrid IT approach which is one of our unique differentiators,” he says. “By not being locked into a single IT infrastructure platform, you can migrate from co-location at one end where you are just buying space and power through to fully a managed public cloud and managed applications at the other end and everything in-between. A lot of our clients and clients in this space go on that journey with us and maybe have some user acceptance testing (UAT) systems in a full cloud environment with other systems that are managed and others that are collocated. It really depends on the client’s need but having that flexibility to move within hybrid platform, is from an infrastructure perspective what a lot of clients use CenturyLink for.” The electronification of trading in equities and FX then on to derivatives and even to over-thecounter (OTC) markets requires market participants to build an

Connectivity throughout the full trade lifecycle

environment and architecture that connects to all of these markets. Manicom believes this will increase the demand for hosted environments and rich trading ecosystems. “To have complete access

with free market data and full transparency so your trading strategies can develop and evolve is the goal,” he says. “To set that up from your own data centre is extremely costly, complex, and difficult to manage and you know potentially an unreliable way of connecting to the markets because you are completely dependent on one or two network cables that come into your own building in which to access the global markets.”

CONCLUSION Where once the key to success was latency, now firms are looking for reliability and accessibility to ensure maximum Jubin Pejman

“There is not a regular hosting company, co-location provider or ISP that can and will protect you from a distributed denial of service (DDoS) attack.”

up-time and a constantly tradeable market. They need several FX venues, bank supplied FX rates and they need the option of connecting to these directly or from a consolidated feed via a market data provider. “They may want to build their own servers and run them, or want someone to provide them with some server capacity so they can run their software on them, Manicom says. “The main thing is that I want to be able to do that all in one location and know where my data is, know that it is all locked down under one roof and the physical security is there. The trader has to keep an eye on what is going on with their financial regulator who wants them to be able to control this environment and know who they are connecting to, with assured data security.”

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Stelrox Capital Management LLP e-Forex talks with Buford Scott, Managing Partner at Stelrox Capital Management LLP, an alternative asset manager, with a focus on foreign exchange markets.

Buford, please can you tell us a little about your background and some of the trading and investment management activities you have been engaged in during the course of your career. I started my career as a commodity trader, and evolved to become a very active market-maker in London Metal Exchange metals. Marketmaking involves taking proprietary positions (at least it used to!) and I had an affinity with computers, so I started creating and back-testing models to gain an edge in my proprietary trading, incorporating lessons learned along the way. As time went on, more of my revenue was being generated by model trading than dealing, and I became less of a dealer and more of a prop trader. My asset universe grew to encompass all futures and FX markets, and eventually I started

managing client investments alongside my own. That evolved into a distinct asset management business focused on model-driven trading, with a team of quant traders and structurers, and over $2bio in assets in seven different strategies, working within a bank infrastructure. Last year, I left the banking world, and along with some former team members, set up Stelrox. We have focused on FX from the start, where we see the greatest opportunity over the coming 3-5 years. What prompted C-View Ltd and Stelrox Capital Management to get together and form a strategic alliance and what core attributes do each side contribute to it? Starting an investment management business in the current regulatory environment is a daunting task.

Buford Scott

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Building a platform from scratch requires months of arduous and expensive work to establish regulatory registration, prime brokerage and dealing relationships, operational infrastructure etc. To trade even a small account requires a large and robust infrastructure, and, once built, infrastructure capacity can be much larger than what’s actually used. We recognised this from the start, and rather than build from new, we looked to collaborate with a company that had the necessary infrastructure already in place, and that was interested to monetise their excess operational capacity. C-View was a great fit for us, and vice versa, as they have a top class infrastructure built

specifically for FX. We have collaborated on many levels, not just for infrastructure, as Stelrox has brought some systematic expertise that can also be applied to areas other than trading. We also collaborate with marketing, where we have found that clients are often interested to invest in both discretionary and systematic strategies, rather than one or the other. You are Managing Partner at Stelrox. Who are the other key people involved in the firm and what are their main day to day responsibilities?

Stelrox has a total of four partners: myself, Charlie Genge, Richard Garlick, and Suzy Scott. Charlie is our main platform developer, and between the two of us, we handle systems development and strategy trading. Richard is our CFO, and is very qualified, having been head of finance and product control for the trading division at Lloyds Bank- Stelrox is lucky to be his ‘retirement project’! Suzy is a former bank salesperson, and focuses on marketing for us. All of us tend to be involved in all aspects of the business, as there is plenty of work to go around! We depend on C-View’s staff for trade processing and operations: a case-inpoint showing how it has made sense for us to collaborate.

What sub-strategies go to make up the C-View Stelrox Systematic Currency Strategy and what are they each designed to do? As I mentioned earlier, we have chosen to focus on the FX sector. We have a portfolio of three FX sub-strategies, all of which have evolved over years of trading, and have low correlation to each other. Our objective is to focus on relative value as the main driver of returns, which is managed with an acute focus on macroeconomic risk. Two of our three sub-strategies focus on relative value trading, split between G10 and emerging markets respectively. We diversify this approach further with our third sub-strategy, FX trend-following, which can not only add value to the portfolio independently, but also act as a hedge when relative value strategies are underperforming. Each of the three sub-strategies

William Adams

Charlie Genge is our main platform developer are independently successful, but are most effective when combined into a portfolio, which gives us another layer of diversification, and a robust returns profile. Why do think the launch of the Stelrox strategy came at a good time for investors and who are you offering it to? Our strategy performs best in an investment environment with slow to medium growth, with clear macro-economic divergence, and in particular, with rising interest rates in some parts of the world and flat or falling rates in others. This appears to be the environment that’s currently developing. A rising rate environment is

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generally detrimental to bonds and a headwind for equities, but a boon for currency strategies like ours. We think we are extremely well placed to help investors diversify their investments at this point in the investment cycle. The overall investment environment in 2015 was a complex one. Did the Stelrox strategy perform well and meet your expectations during the course of the year? At our launch in Q4 2014, the first US interest rate rise was generally expected within 4-5 months, which would have been the start of macro policy divergence. Fast forward a year, and the divergence still hasn’t

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computers give us the ability to scale our observations across a large and diversified portfolio, though each individual component might be remarkably simple. At any given point, we may hold positions in 60 or 70 currency pairs. An individual trader simply cannot monitor positions in that size of portfolio, whereas computers can monitor hundreds of inputs, to calculate risks and identify opportunities on a constant, real-time basis. The executive summary introducing your currency strategy talks about exploitable FX price phenomena. What is that and why is it important? “I think FX is a sector that will benefit greatly from divergence in macro-economic policy, and in a rising US interest rate environment it may possibly be the best sector to invest in.”

happened. So no, 2015 did not meet expectations- arguably we started up a few months too early. But that time has given us time to bed down all of our systems in a relatively quiet environment. We are now very optimistic for 2016, especially given recent developments. What primarily drives the Stelrox investment process? I would say it’s primarily a simple, logical, sensible trading processscaled up through the use of computers. We try to systemise

our experience, by programming in the profitable approaches we’ve learned, and programming out known weaknesses. That means having effective risk management and good diversification, not just robust trading models.

The main phenomenon we are referring to is the FX forward discount anomaly, also known as the forward rate bias anomaly. What do you see as the benefits of investing in a systematic currency strategy?

The beauty of FX is that currencies can be paired in hundreds of different ways to produce hundreds of different return streams, which When broken down into enables a very high degree of individual components, diversification. We monitor our process is remarkably dozens of cross rates, and for straightforward and simple- it just each currency pair, we will becomes more complex when have 10-15 data streams that we scale it up to a portfolio level we monitor: things like credit containing hundreds of positions spreads, volatility surfaces, across dozens of currency pairs. equity volatilities, etc. So

It’s the main driver of FX carry profits. There have been scores of academic research papers on the topic- all debate why the phenomenon exists, but all agree it yields outsized profit probability. Norges Bank wrote a great discussion note last year* that summarised around 70 studies on the topic. As mentioned earlier, we use this as a major input our in our relative value models, though we also have a multitude of other data streams that feature as well. We think 2016 shows exceptional promise for strategies that exploit this phenomenon, as outsized returns often coincide with the early stages of rate divergence. What frameworks have you developed to enable you to leverage your research in the most effective way in order to fine tune your existing trading models, develop new investment ideas and implement more robust risk management methodologies? We have some basic guidelines when approaching trading systems development, which have evolved over the years, but retain a lot of consistency. First, we try to keep things simple- I have a strong view that simple is usually better. With trading systems, this means we look to develop systems with low numbers of parameters, and running the same parameters across multiple markets. This

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helps us to avoid over fitting the data set, and we use several other techniques to limit this effect as well. We also try to develop systems with an eye on our operational capabilities, and scalability. For example, we won’t work on a system that our infrastructure can’t support, or that has a small capacity. We try to achieve scalable, diversified models that have consistent returns with low volatility, then combine these in a portfolio that further diversifies risk. What are the main currencies you usually trade? We trade only deliverable currencies, no NDFs, but in that set of the market, we are able to

create literally hundreds of currency pairs. We then focus on uncorrelated subsets to achieve diversification, which is important for a systematic approach. G10 gets a lot of our attention, but there are quite a few deliverable emergings too. Why no NDF’s? A couple of reasons- we avoid the basis/benchmark risk that can occasionally be an issue; also, we avoid some of the most volatile currencies. There is still plenty of juice in the deliverable emerging market currencies, and much better liquidity. How did you go about building your trading desk infrastructure and what issues have influenced the trading technology you use? We get pretty excited about our infrastructure,

which is entirely cloud based. One of many advantages is that we can spin up a super computer in the cloud for a research project, run it for a few hours, and then shut it down- and we pay for it by the hour. This gives us the ability to match or exceed the computing power we had in our former bank’s grid super computer, for a fraction of the cost, with more reliability. We’ve built our platform using open source computer resources that not only keep costs down, but also enable us to leverage our analytical capabilities well beyond what we were able

to do using bank proscribed systems. For operational infrastructure, which includes electronic execution platforms, clearing, trade processing, risk oversight, etc., we use C-View’s excellent infrastructure, which is designed particularly for FX trading. We use their electronic price aggregation systems for lowlatency execution, and benefit from their wide range of liquidity providers, which has been built up over their 18 years in business. Being able to plug into the C-View infrastructure as a start-up saved us considerable time, administrative hassle, and expense, and also makes us more attractive to prospective investors who want to see robust operational infrastructure. From that standpoint, we have considerable advantages over other start-ups. Once you have developed ideas for a new strategy how do you model and test it? Different models may require different testing techniques, but a common approach is to back-test an idea over years of data, and across multiple currency pairs, to see if the model is robust in different environments. With back testing, there is always a danger of ‘curve fitting’ (maximising profits with the benefit of hindsight), so we have some interesting methods of ‘de-

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optimising’ models which result in more robust models. As mentioned earlier, we are able to use quite a lot of computing power to crunch through millions of scenarios. Is combating latency particularly important for your trade execution performance and, if so, what steps have you taken to improve your connectivity pathways and IT architectures to reduce it? I think anyone who trades with poor latency in today’s

world is giving away ticks (at best!) and with the current state of technology, low latency architecture is within reach of most players, either directly or indirectly through intermediaries. In our case we use intermediaries that have servers based in the primary data centres, like LD4, which solve a lot of the latency vulnerabilities for us. At the end of the day, we are low frequency, long term traders, so our current solution is cost effective for us.

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I think FX is a sector that will benefit greatly from divergence in macroeconomic policy

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Do you think the value proposition of investing in a currency manager like Stelrox has strengthened over the past few years and if so why? I do- in fact I think it has strengthened considerably over the past few weeks. I think FX is a sector that will benefit greatly from divergence in macro-economic policy, and in a rising US interest rate environment it may possibly be the best sector to invest in. We are emerging from an extended period of homogenous macroeconomic policies, and low rates globally, that have produced disappointing results for the FX sector, and investors have been

well rewarded for concentrating on equities and bonds. I think that period is behind us now, and we are beginning a major new phase in the asset cycle, in which FX will present extremely attractive prospects. We have chosen to focus on FX at Stelrox because of the opportunity we see over the 3-5 year horizon, as the phase develops. Looking ahead, where will you and your team be focusing your attention to explore new currency investment opportunities for Stelrox? One of our day-to-day pursuits is research. We look at different time horizons, different models,

different portfolios, etc- there are limitless combinations. We try to focus our attention on areas where we can achieve scale. Our models are built with a degree of self-evolution programmed in, so we implement changes to existing models only when we discover something that makes a significant improvement, but we keep looking. We also look at new approaches, to look for ways to diversify our portfolio further. At the moment we are researching shorter term systems, which, if our efforts are successful, may become a fourth sub-strategy at some point in the future.

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