Pl yearbook 2014

PROFIT & LOSS EVENTS 2014

YEAR BOOK BOGOTA • MEXICO CITY • LONDON NEW YORK • TORONTO • COPENHAGEN CHICAGO • SINGAPORE • SHANGHAI

P&L EVENTS YEARBOOK

PROFIT & LOSS EVENTS

2014 YEARBOOK

Profit & Loss is pleased to present the 2014 Forex Network and FX Growth Markets yearbook.

Profit & Loss began hosting industry conferences in January 2000 with a standing room only series in London and New York that looked at “What is e-FX?” and featured a “who’s who” of e-FX in those early days.

Over the past 15 years, our conference roster has grown to a dozen annual conferences, seminars and specialised workshops. In 2014, our annual Forex Network conferences in London, New York and Chicago drew record crowds, while our FX Growth Markets series drew wide ranging participation across Latin America and Asia, where we celebrated a return to Shanghai this year. Our second annual event in Copenhagen attracted nearly 300 attendees from around the Scandinavian region.

Nearly 3,000 senior industry peers have joined us at conferences in Europe, Asia, North and South America throughout 2014.

Profit & Loss Forex Network Chicago in particular has gone from strength to strength, and is currently the largest annual event for the wholesale FX industry globally, drawing more than 600 people to our September conference.

We hope you enjoy this roundup of the year, and will join us in 2015 for what promises to be another year of challenges and opportunities in the FX industry.

Visit our website at www.profit-loss.com for programme, sponsorship and registration information for our 2015 events calendar. www.profit-loss.com

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CONTENTS 6

FX GROWTH MARKETS MEXICO

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BOGOTA, MARCH 18

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FX GROWTH MARKETS COLOMBIA MEXICO CITY, MARCH 20

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FOREX NETWORK LONDON 2014 LONDON, APRIL 23

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PROFIT & LOSS DIGITAL FX AWARDS DINNER LONDON, APRIL 23

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FOREX NETWORK NEW YORK NEW YORK, MAY 29

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PROFIT & LOSS READERS’ CHOICE AWARDS

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NEW YORK, MAY 29

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PROFIT & LOSS TORONTO TORONTO, JUNE 12

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PROFIT & LOSS SCANDINAVIA COPENHAGEN, SEPTEMBER 10

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FOREX NETWORK CHICAGO CHICAGO, SEPTEMBER 25-26

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P&L WORKSHOP: THE FUNDAMENTALS OF BENCHMARKING & THE FX FIX CHICAGO, SEPTEMBER 23

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PROFIT & LOSS FOREX NETWORK ASIA SINGAPORE, OCTOBER 21

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PROFIT & LOSS SHANGHAI SHANGHAI, OCTOBER 23

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2014 SPONSORS ANNUAL FOREX NETWORK SPONSORS PLATINUM SPONSORS:

GOLD SPONSORS:

SILVER SPONSORS:

SUPPORTING SPONSORS:

EVENT SPONSORS & EXHIBITORS

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P&L EVENTS YEARBOOK • MEXICO

FX GROWTH MARKETS MEXICO MEXICO CITY, MARCH 18 Agenda: Session 1: “Looking at the Bigger Picture” Session 2: “How is Technology Changing FX Markets?”

Session 3: “The Shifting Regulatory Environment and its Impact on Emerging Markets” Session 4: “Derivatives Trading in Mexico”

Session 1: Richard Cochinos , Head of Americas G10 FX Strategy, Citi

Opening Address: Karla Siller Ojeda, Director of Market Entities, CNBV

Session 1: Gabriel Casillas, Ph.D. , Managing Director , Chief Economist and Head of Research, Banorte

Session 1: Marco Oviedo, Chief Economist for Mexico, Barclays

Is Technology Changing the Role of Regional Banks?

The role of regional banks in the FX market and the level of risk that they are willing to accept was a hot topic at Profit & Loss FX Growth Markets Mexico conference this year. Galen Stops reports.

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n the panel entitled “How is technology changing the FX markets”, discussion centred on whether technology is helping the regional banks to take risk or actually pushing this risk onto the core few banks.

“To me it seems as though risk has been ebbing from the regional banks in the past few years. All the technology and the aggregation systems mean that they’re using the main streams from the big banks to price for their customers. Where do you see this risk going and where do the regional banks want that risk to go?” asked one audience member.

Matt O’Hara, senior vice president, head of capital markets, market development at Thomson Reuters, said that the risk profile of the FX market is symptomatic of the way that it has developed.

He cited research showing that the top four spot FX dealers account for almost 50% of the total volume, showing the level of concentration risk in the market.

O’Hara said that regional banks are typically market makers in their own currencies and market takers in other currencies, trading with some of the larger tier one banks to offset their risk.

“I think what’s interesting is that you see some of the regional

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Session 2: Vincent Sangiovanni, Chief Operating Officer GTX, Gain Capital

banks starting to offset risk in their primary currency and then they’re longer on another currency. They’re not running the risk anymore – they’re offsetting the risk to other banks,” he said.

The panellists also suggested that new regulations could provide opportunities for banks outside the top tier to gain market share in the FX NDF market.

“Naturally, regulation is a big issue and a big driver of technology,” said Vincent Sangiovanni, chief operating officer at GTX, Gain Capital.

Sangiovanni claimed that the introduction of Swap Execution Facilities (SEFs) will create a more level playing field, allowing firms to get access to greater liquidity and more end-users.

“We’re registering as a SEF, but we don’t believe that options will be ready to be mandated onto these platforms for a long time.

However NDFs look like they’ll be coming much sooner and so we’re preparing ourselves for that,” he added.

The panel noted that the banks that are trading on SEFs are generally not the top tier global banks.

That’s because these institutions have invested heavily in their proprietary e-commerce solutions, with NDFs having been added to these platforms in recent years and proving to be an area of growth for them.

“Due to the fact that they currently don’t have to trade on SEF and provide pricing and liquidity on SEFs, they see this as an opportunity to gain as much market share as possible, mainly because they have the competitive advantage over the banks that don’t have big development budgets to build out their proprietary platforms to

MEXICO • P&L EVENTS YEARBOOK

Session 2: Joel Machado, VP Latin America, Integral

Sofiane Nait Saidi , Head of ForexClear Product for US, LCH Clearnet

Session 2: Matt O'Hara, Senior Vice President, Head of Capital Markets, Market Development, Thomson Reuters

Session 3: Galen Stops, Markets Editor, Profit & Loss

Session 4: Luis Martins, Managing Director, Head of Foreign Exchange Latin America, BBVA • Reynaldo Lozano, VP of Fixed Income and FX Derivatives, MexDer • Guillermo Camou, Director, Scotiabank

Session 3: Jaime Hernandez, Director, Intercam

Keynote Address: Alfredo Sordo, Director of Domestic Operations at Banco de Mexico

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P&L EVENTS YEARBOOK • MEXICO

effectively support the NDF market,” said O’Hara.

As a result of this, the non-top five banks have been trading on SEFs for the buy side clients that want to trade on them ahead of the mandate. The hope is then that when the clearing and SEF mandate comes into force that the advantage will swing back towards them and they will be able to grab market share.

However, it was agreed that there are inevitable costs to this new technology.

Although technology has facilitated firms in countries like Mexico connecting to the broader global FX market, there are costs associated to clearing and trading NDFs on SEFs. This cost will be attached to each trade at some point in its lifecycle and it is the enduser that will ultimately pay this price, said the panel.

The panellists were also keen to stress that technology is an important enabler for market participants and has played a significant role in helping markets such as Mexico develop in recent years.

“Technology now allows market makers to provide prices to many different counterparties around the world. For buy side customers, technology allows them to get access to different international markets, and to manage that risk,” said Joel Machado, VP Latin America at Integral.

David Clark, chairman of the Wholesale Markets Brokers’ Association, who was moderating the discussion, posed the question of “whether the real trick is not actually a technological one, but to get people in other regions to buy technology?”

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In response, the panellists discussed the different stages of market maturity of countries in Latin America. They said that typically what happens is that as a market develops and becomes electronic the interbank market starts looking to access liquidity in international currencies from some of the large global banks.

At this stage a single bank portal is the best technology for them to use as it’s more efficient. Then these banks start to examine how they can create a more differentiated experience for their clients on a domestic basis, so they start to look at investing in their own proprietary solutions for the distribution of their prices to their clients.

As these markets develop, clients – corporates, asset managers and other buy side participants – want to maintain relationships with a number of banks for various credit and fiduciary reasons and therefore the demand grows for multi-bank platforms.

“Each firm is concerned about getting best execution. To achieve this optimal performance they need a tailored solution,” said Machado.

The panel concluded that technology, as well as helping the evolution and maturation of a market, is also still in demand as a means to access new markets.

“We started out to be a provider of technology to our clients,” said Sangiovanni. “We now see ourselves as a solutions provider.

By this I mean that clients come to us because they need help accessing certain markets, certain liquidity pools and certain regions.”

COLOMBIA • P&L EVENTS YEARBOOK

FX GROWTH MARKETS COLOMBIA BOGOTA, MARCH 20 Agenda:

Session 1: “Looking at the Bigger Picture” Session 2: “How is Technology Changing FX Markets?”

Session 3: “The Shifting Regulatory Environment and its Impact on Emerging Markets”

Opening Address: Juan Sebastián Rojas Moreno, Head of Markets Development, Central Bank of Colombia

Should Investors be More Discerning When it Comes to Emerging Markets?

Investors should discriminate more between different emerging markets, said analysts at the Profit & Loss FX Growth Markets Colombia conference, as they predicted a strengthening of the peso. Galen Stops reports.

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merging market currencies have suffered in recent times, including the Colombian peso (COP). The value of many EM currencies dipped after the US Federal Reserve began its tapering talk in May 2013, followed by a large sell-off in certain EM currencies, which then spread to other currencies at the beginning of 2014.

In the first discussion of the day, which examined how broader economic factors are affecting the peso, panellists noted that Colombia was not impacted as much as other EM markets.

This was largely due to the fact that unlike Argentina, South Africa, Turkey and Venezuela, Colombia has had low inflation and good GDP growth in the recent past. The Colombian central bank started lowering interest rates in July 2012 and ended these cuts in March 2013, just before the first set of Fed tapering comments.

No domestic policy could have protected the country from external shocks such as the Fed tapering plans, the panellists said, adding that despite the volatility of the financial markets, the local economy did not suffer significantly as a result.

“We cannot say that we will not at some point be vulnerable to whatever happens abroad, but it will be different from other

countries, and we saw that the volatility of the markets did not translate into a tightening of financial conditions in the internal Colombian market,” said Daniel Niño, advisor to the Governor's Office at the Banco de la Republica.

Although the $12.7 billion deficit in the country’s current account should suggest that the COP is going to be subject to a devaluation against the US dollar shortly, the panellists argued the opposite.

They said that when comparing the current account deficit with the net income of the country, there’s a positive $6.5 billion in payments. The analysts claimed that this income was largely a result of long-term foreign investment in the country that is not volatile in nature and has been growing consistently over the past decade.

Combined with the $42-43 billion in international reserves – enough to pay for all the country’s imports for nine months – this means that Colombia’s position is relatively strong compared to other countries caught up in the EM contagion earlier this year.

“Overall the balance of payment analysis gives you reasons to expect a strengthening of the COP, but because of our relatively small size we’re subject to the volatility of the international markets and we pay heavily when risk aversion increases around the world. That’s what happened a month and a half ago,” said Andrés Duarte, investment research director at Asesores en Valores.

Much of the investment that flows into Colombia is coming through ETFs, which will provide exposures to a group of EM countries. As these other countries suffered from the tapering talk, www.profit-loss.com

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P&L EVENTS YEARBOOK • COLOMBIA

Session 3: Sofiane Nait Saidi , Head of Session 3: Felipe Trujillo, Head of Deriva- Session 3: Galen Stops, Markets Editor, ForexClear Product for US, LCH Clearnet tives, Colombia Stock Exchange Profit & Loss

investors cut their exposure to these emerging market ETFs and Colombia suffered as a result.

“What needs to follow from this correction is a more precise discrimination between the different emerging market economies because their realities are very different,” said Duartes, a sentiment endorsed by fellow panellists.

During the conference there was plenty of discussion amongst attendees about the news that JP Morgan will more than double its weighting of Colombia’s peso bonds in its GBI-EM Global Diversified Index.

JPM increased the weighting of these bonds from 3.2% to just over 8% and the index is used as a benchmark by firms that manage around $195.7 billion. As the panellists pointed out, this is significant news in a country where the nominal GDP is about $350 billion.

“This will obviously result in a stronger fixed income price and in a stronger COP,” said Duartes. “The decision from JP Morgan speaks pretty well about the country, because this revision is not based on immediate market or economic conditions, but on historic trends and longer-term economic conditions.”

The immediate result of the news about JP Morgan was that the COP appreciated 2.4% to 1,994.51 against the dollar.

The impact that Chinese growth will have on the Colombian economy was also cited by the panel as an important factor when looking at the future of the peso.

The slowing growth of China and the predicted end of the “commodities super-cycle” is expected to have a negative impact 10

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on the Latin American economies and their currencies.

However, Alejandro Reyes, economist and research director at Ultrabursatiles, said that Colombia will not be impacted as much as countries such as Chile and Peru. He pointed out that these countries’ economies are heavily dependent on copper exports to China, whereas Colombia’s is more focused on oil.

Niño highlighted this dependency on oil exports, and the dependency of Latin American countries on commodity exports in general as a potential problem in the future.

He said that during the commodity boom there has been a lot of pressure on governments to spend money, and they have done a lot of current spending as a result. But with China slowing down and interest rates in the US likely to rise in the next few years, Niño warned that the government could be forced to cut its spending which could in turn put it under pressure and create political instability.

“My concern is that we haven’t used the income from commodities effectively nor have we made the investments necessary to move on from being a commodities dependent economy. This could ultimately cause political problems or governability problems in the region,” he said.

The panel concluded that overall, the variables for at least the next six months are positive for Colombia and that market participants should expect to see a strengthening of the COP. Obviously wary of the recent past though, they all added the caveat that macroeconomic events outside of the country could still trigger more risk aversion and lead to a decrease in foreign investment.

COLOMBIA • P&L EVENTS YEARBOOK

Session 1: Daniel Niño, Daniel Niño, Advisor To The Governor's Office, Banco de la Session 1: Andrés Duarte, Investment Republica • Alejandro Reyes, Economist and Research Director, Ultrabursatiles Research Director, Asesores en Valores

Session 2: Javier Rincon, Head of Algorithmic Trading, Acciones y Valores

Session 2: Takis Spiropoulos, Head of eSolutions Group, CIBC

Session 2: Vincent Sangiovanni, Chief Operating Officer GTX, Gain Capital

Session 2: Matt O'Hara, Senior Vice PresiSession 3: Carlos Fradique Méndez, Partdent, Head of Capital Markets, Market ner, Brigard & Urrutia Development, Thomson Reuters

Joel Machado, Tarana Nabizada, David Clark

Session 2: Joel Machado, VP Latin America, Integral

Matt O'Hara, David Clark, Julie Ros, Takis Spiropoulos www.profit-loss.com

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P&L EVENTS YEARBOOK • LONDON

FOREX NETWORK LONDON 2014 LONDON, APRIL 23 Agenda: The P&L Interview: Derek Sammann Session 1: Better Execution?

The P&L Discussion: The Corporate Challenge Session 2: FX Options: The Year We Find Out?

Session 3: Vision of the Future P&L Discussion: Best Practice in FX Session 4: New Channels; New Challenges Session 5: Think Tank: Lit, Dark or Dusky? The Future of the Matching Model

The P&L Interview: Derek Sammann, Senior Managing Director, FX, Metals and Options Solutions, CME Group Session 1: Jonathan Wykes, Head of e-FX Sales, EMEA, Bank of America Merrill Lynch • Jim Cochrane, Director, Analytics, ITG • Chip Lowry, SVP, Head of Agency FX, State Street Global Markets • Justyn Trenner Global Head of Liquidity Optimization, EBS • Paul Chappell, Chief Investment Officer, C-View Limited

FX Regulation Under the Spotlight at Forex Network London Regulation, best execution, FX options, new technology channels and matching models all came into focus at the P&L Forex Network London conference. Profit & Loss staff report.

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erhaps unsurprisingly, regulation and the regulatory challenges facing corporates, banks, the buy side and FX options participants was a focal point in panel discussions at Profit & Loss Forex Network London, which took place at the end of April. Best execution, fragmented liquidity and matching models were also under the spotlight at the highly attended event.

The opening session featured a one-on-one interview with Derek Sammann, senior managing director, FX, metals and options solutions at CME Group, who discussed, among other things, the launch of CME Europe.

When asked by P&L’s editor Colin Lambert about the structural changes affecting the market and where CME Europe will sit within that., Sammann replied, “We are all trying to infer what’s going on with our customer base, what’s shaping their world, what the capital charge regime change will be and how the BCS Iosco principals are changing product choice. We have an unprecedented amount of scrutiny in our industry. While we’ve always said we are a well-run and well-governed industry, we now have to rethink that a little. We have to make sure that we are in a position to grow this business for the next 20 years, as we have for the last 20 years.

“On the exchange side, we have come a long way in the last couple of years, but we are now seeing unprecedented change in

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our markets such as the significant shift towards standardisation and acceptance of standardised attributes of OTC products. You are starting to see exchanges put swaps out there that replicate the standardised attributes of futures. You are starting to see futures exchanges like us put products out there that are very swap-like. There is a convergence of OTC and listed markets from a product and capital perspective. And we are all trying to find ways to service our global capital base. As we think about what CME was a few years ago, with one exchange and one clearing house in the US, to what we are now which is a global holding company of four US exchanges, a global clearing house, a UK clearing house and next week, we will have a UK exchange. So our globalisation strategy is actually more of a regionalisation strategy, where we will go to our customer bases rather than tell them they have to trade on a US exchange. We recognise this convergence as both an opportunity and a threat. Jurisdictional choice is critically important now more so than ever. CME has gone as far as we can to attract a global customer base that wants to trade in the US, but we’ve needed to position ourselves to serve a global customer base,” Sammann said.

The first panel of the day examined best execution, algorithms and transaction cost analysis, in “Better Execution”. The panellists gave their views on what best execution meant to them, with one saying “People are looking to trade efficiently and minimise costs. I think the best price element is taken for granted nowadays given the technology we have. Perhaps it is about best practice rather than best execution? It also depends on what you’re looking to achieve as a client – are you looking to achieve alpha, are you looking to hedge? These are factors that have to be taken into account.”

LONDON • P&L EVENTS YEARBOOK

The P&L Discussion: The Corporate Challenge: Andreas Hartmann, Head of Front Office, SAP Global Treasury • Sabrina Wong, Foreign Exchange Treasury Manager, Intel • Joy Macknight, Features Editor, Profit & Loss

P&L Discussion: Best Practice in FX: David Woolcock, Chair, ACI Committee for Professionalism with P&L’s Colin Lambert

Session 3: Steven French, Director of Product Strategy, Traiana • David Holcombe, Head of FX Product Management, NASDAQ OMX • Patrick Philpot, President, DealHub US • Dalbir Sohata, EMEA Head of FXMM Cash & Client Ops, UBS • Galen Stops, Markets Editor, Profit & Loss

Another panellist said best execution was all about cost – not only about clients achieving near zero costs in some cases, but actually helping them to get into the game. “Best execution is about how you lower costs in each venue that you might be looking to trade on, whether it be electronically or voice and to study the cost over time to make sure that in every situation you are achieving the lowest possible price.”

When asked if they were worried about hitting a public market as opposed to going to a bank, one panellist said, “Historically we relied upon the assumption that the predominant market makers are exclusively banks. What we are recognising now is that there are other people stepping into that space and providing liquidity.

Other market makers have a greater legitimacy and we are starting to now look at non-bank market makers.”

One speaker countered that liquidity is not as fragmented as it appears at first glance. “The truth is that there are central order limit books/exchanges, which have no last look and have genuine liquidity, and then there’s relationship liquidity with banks making a price in several venues. However, if they find a particular customer is hitting them in two venues at once, they will quickly take away that custom. If you try and sweep across that, you’ll come unstuck fairly quickly and liquidity will go away.”

Algorithms also came under discussion with panellists agreeing that they seem to be the most appropriate way to execute a trade.

“We have implemented a tool to take profit and stop losses on each currency. This program automatically puts a risk wrap around our trades, saving us the effort of introducing the same controls manually,” said one speaker.

“I’ve seen a big rise in the use of algos because people need to have a control over their execution, certainly in larger sizes, and

they want to create a transparency that they previously didn’t have.

Certainly when you have someone who is just executing, then maybe it’s more of a PB mechanism, but when you have somebody that has an alpha program, they will use algorithms to achieve a greater control of their execution and transparency,” a panellist said.

But the end of human interaction is not there yet. “Humans will still have a role in FX trading. They will be choosing the algos,” one speaker said.

The “Corporate Challenge” panel brought together FX experts from two technology powerhouses, Intel and SAP. Andreas Hartmann, head of front office and regional treasury, SAP Global Treasury, and Sabrina Wong, foreign exchange treasury manager, Intel Corp UK, outlined their FX activities and the major FX challenges facing corporates today.

In spite of operating in the same industry sector, the two treasuries have organised their operations quite differently: Intel has a decentralised model, with 60-70 people in treasury teams located in the US, EMEA and Asia Pacific; whereas SAP has a centralised approach. The majority of the treasury team members are located at the head office in Walldorf, Germany but also in the US, Ireland and around the globe.

In terms of FX activities, Intel mainly uses forwards 18 months to two years out in order to cover its cash flows for the following year of foreign currency expenses, as well balance sheet hedging. “Our day-to-day activities tend to be very transactional,” said Wong.

“Accounting and audit run our lives, which limits our FX activities, and being compliant with those rules is a necessary evil of the job.”

Similarly, SAP hedges its forecasted exposures with FX forwards www.profit-loss.com

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and non-deliverable forwards (NDF). It does not use options for operational business purposes. Previously, treasury used a rolling approach to FX hedging, but now employs a layered approach. In addition, it hedges balance sheet exposures to a ratio of 100%.

“We are not paid to make money from FX activities, but to mitigate risk and reduce P&L volatility,” explained Hartmann. “We perform FX at AG level and also on behalf of those entities that are restricted from trading internally with AG. In this situation, we trade on behalf of these entities with the local core bank entities in each country on a global basis.”

Both expressed the need for standardisation and straightthrough processing in order to manage the workload in FX. Over the past five years, Intel has focused on putting new systems in place to increase treasury’s STP level. SAP Global Treasury uses the SAP enterprise resource planning (ERP) system globally, which Hartmann said was a “big plus” during the financial crisis because it provided visibility into FX exposures, as well as liquidity positions per legal entity and counterparty bank. Both Intel and SAP use electronic trading platforms that interface with their treasury systems.

While currency volatility has been a constant challenge for corporate treasury over the past few years, which has led Intel to change its hedging strategies, both Wong and Hartmann said the biggest challenge currently is dealing with the new regulations.

“We have US entities that are subject to Dodd-Frank and EMEA entities subject to EMIR [European Market Infrastructure Regulation],” said Wong. “And we are a big corporate, so I can’t imagine how smaller corporates are coping. It is a lot of work and the regulations aren’t very clear.”

“What is concerning us is that, for the first time, we have a 14

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financial regulation – EMIR – that applies to corporates. The German BaFIN and other financial regulators haven’t previously regulated the corporate world,” said Hartmann. “We need to understand what the regulator wants and the regulator needs to understand that a corporate is a completely different business compared to a bank. I think this understanding is developing, but some improvement is needed – and we need greater clarification from the regulators.

“With just 35 people worldwide, we can’t afford three or four people to look into only reporting, for example, when the rules are changed at short notice.” In order to not be regulated under DoddFrank, SAP Global Treasury asked its core banks to switch its counterparty to a European entity.

Intel has also “cleaned up” the way it trades and now tries to trade as much as possible out of the US entity. “In addition, we have requested to trade with one entity on the counterparty side. If you trade on an electronic trading platform, frequently the book is passed to another branch. Therefore we have been very cognisant to ensure that the entity that we are trading is the entity on the ISDA,” said Wong.

The “FX Options: the Year We Find Out” panel discussed how the FX options market has regressed recently due to a lack of regulatory clarity.

Regulations in the US have not forced banks to start trading FX options through swap execution facilities yet, but a number of them have invested large amounts of capital into developing their ability to trade options electronically.

Despite this investment, the volumes in this market haven’t increased, which one panellist said is indicative of the fact that the banks know that the market is about to change.

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The big debate amongst the panellists concerned how the market will change and the level of electronification that will occur in it.

“We should stop demonising human beings in this market. Just because spot can work very well on a computer, doesn’t necessarily mean that options can as well,” said one panellist.

“When it comes to moving a yard of anything, it’s much more of an art than a science and you’re better off giving it to a human who can interpret the market and perhaps hedge it slightly differently,” the panellist added.

Another speaker countered this by pointing out that there are new demands around best execution and transaction cost analysis (TCA) to consider.

The speaker explained that FX options used to be primarily traded between the banks, but now these transactions are increasingly between the banks and corporates, the latter requiring a much more significant level of audit, which electronic trading can help provide.

Some of the speakers claimed that FX options, particularly the longer-dated contracts, are too heterogeneous to move onto an exchange-style model of trading.

“Spot is monolithic, one dimensional and very easy to automate.

Forwards have two dimensions and they don’t trade electronically very easily. With options you have three or four dimensions, which makes it so much harder to do,” said one panellist.

Another observed that corporates want to buy insurance and not sell it, so as the options market becomes more electronic, it will lose the natural two-way flow of trading. The panellist added that by doing request-for-quotes, firms can still get an audit trail, but continue transacting with humans.

Most of the panel agreed that – for the time being at least – options trading will remain a relationship-based business.

“I think that we’re in danger of over-engineering all of this.

Central Limit Order Books aren’t new, the CME has been around for a while and if it was so great, it would be dominant in the market,” commented one panellist.

A Post-Trade Vision of the Future The third panel of the day, “A Post-Trade Vision of the Future”, gathered a broad spectrum of panellists to look into the shift in emphasis away from the front end towards the back office and post-trade services in the industry, which has been pushed forward by regulation on both sides of the Atlantic.

Most of the initial changes have been driven by Dodd-Frank, but the industry is still waiting for the final mandates. For example, CCP connectivity has been tested for FX, but this will not be used until there is a mandate in place to clear NDFs and eventually options. More recently EMIR has gone live and most clients see that as an extension of what they’ve done under Dodd-Frank.

“The challenge that faces everyone in the room is how and when they will react to new regulation,” said a panellist. “There are opportunities and in some respects, the ‘land grab’ is happening now. The challenge is to innovate and to use providers such as those on this panel.”

But to really take advantage of the opportunities, it is important to look past the mandates and understand what the regulation is doing. According to another panellist, Deloitte recently analysed the cost of clearing in the OTC market. The research found that clearing an OTC trade through a CCP adds $13 per million to www.profit-loss.com

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P&L EVENTS YEARBOOK • LONDON overall cost; however, this cost rises to $120-170 per million if the trade is cleared bilaterally.

“There is a pretty strong drive to start clearing OTC trades even when it’s not mandated to clear,” he said. “One size does not fit all in the FX market. But if you start to think strategically about how your business can change with the regulations, then the answers are out there.”

One panellist recommended taking the opportunity to strip out operational costs, for example, in matching. Trades are matched at point of execution, clearing, reporting and reconciliation. “We can achieve significant cost savings as an industry working together to reduce the matching points, not necessarily the touch points.

There will be discussions around risk, but if it is done in a scalable way, then there is a great sea change coming in the industry,” he said.

The industry as a whole has focused on compliance, which has compelled much of what it has done recently, but often there “has to be the reason for change”, said another panellist, agreeing with the main points of the previous speaker. “We could achieve great operational savings moving a lot of what happens in the back office to the front. Matching is a perfect one – you could match trades right off the execution venue, and if there is a break, then it could be identified very early on. And the ones that get really excited about these types of conversations are the guys in the back office.”

However, the regulatory hurdles are still what is top of mind.

EMIR was not an easy ride, particularly as the European Securities and Markets Authority (ESMA) released updated guidelines the day before reporting went live on 12 February. “We woke up knowing that what we built wasn’t quite right,” said one panellist. “But we were going live anyways – which is an approach, but not the best one. What should have been done in hindsight, and what will probably be done going forward in other jurisdictions, is introduce the regulation in different tiers, similar to what the US Commodity Futures Trading Commission did.”

What went wrong on the day? Some of the trade repositories weren’t ready – but most admit that it was a big job. The buy side was not proactive and many relied on their banks to come to their rescue. This may have been possible for the large tier 1 banks, but many tier 2 and regional banks were caught on the back foot when clients started demanding delegated reporting services, the panellists said.

Overall, the panellists agreed that there is still a long way to go with Dodd-Frank and EMIR, particularly if looking at the number of legal entity identifiers (LEIs). In Germany alone, only 50% of the LEIs have been given out, which means that 50% of the buy side are still not reporting.

During the fourth panel, “New Channels, New Challenges”, the panellists discussed the value proposition of single-dealer platforms and how banks can differentiate themselves in a crowded space.

“A single-dealer concept is about knowing the client and putting multiple services to the client. If a client wants to trade in a multidealer environment, but do it bilaterally with a certain bank, then we should be able to offer that as a service,” said one panellist, adding, “There’s also a place for a traditional single-dealer platform with different client sectors, such as the corporate sector, which is a much less crowded space and more unique in terms of the relationship with a bank.”

Another panellist agreed, saying, “You want to control your own destiny in the institutional space. There’s still a lot of opportunity out there. I don’t believe any one platform does everything really well, there’s still scope to do things well both in the pre-trade and post-trade segments, especially with new regulations coming in.”

Also under discussion were ways to make money in the social media space, mobile apps, banks’ budgets and where money is best spent, and ways to enable banks to afford to play in a technology arms race.

“If you could spend more sensible sums on the core, then you 16

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could spend more money on the cool stuff. My frustration in some of the roles I’ve held in the past is that you could never get to do that,” said one panellist.

The Future of the Matching Model The final panel of the day looked at the debate surrounding market structure, posing the question of whether there is a serious change taking place, or whether all the talk (and some action) is just fall out from Michael Lewis’ book, “Flash Boys”.

Overall, the panellists agreed that in general, the market structure works, whether in FX or equities. In the most part, participants can achieve efficient execution; however, inefficiencies do exist and it is in these areas – which are considered to represent a very small part of the market – where regulators need to focus their attention.

In FX specifically, the market environment is seen as one of the “most robust and competitive out there”. “There are numerous ways to trade – different platforms, banks, aggregators, etc. I don’t think that other financial products have as much competition and proliferation of choice – and at the end of the day, who dominates the game is the one that delivers a service the client base wants,” said one panellist.

In order to give their clients what they want, most electronic communications networks (ECNs) offer lit, dark and dusky markets to operate in. “You will see more evolution of venues offering a choice and a multitude of products, because they want to capture that business, versus ‘this is my model, take it or leave it’. If you do that, you are going to find yourself shut out amongst nimbler players around the table,” said a panellist.

But is fragmenting liquidity around different models a good idea? One panellist was fully in favour of fragmentation; however, expressing a preference for the term customisation instead. “The objective of a trading platform is to increase the interaction between buyer and seller, and through customisation you can enhance that interaction,” the speaker said.

Instead of hitting many small pools of liquidity, many look to the large scale banks that operate dark pools and between the banks sit BGC Partners and the FXall midpoint matching markets where trades can be executed with minimal information leakage and market impact. But they are using the reference rates of Thomson Reuters, EBS and CME, according to another panellist.

The panellists also discussed the need for a centralised utility, like CLS, which would capture the trade data from all market participants. One panellist argued that a utility isn’t needed if all the venues could agree to report the data in a consistent manner. “If we implement a consistent standard, then that is all we need to get the level of transparency required. I don’t think you need to create a utility to do it, although that would make it easier for the end consumer to grab one consolidated tape,” he said.

But there was one panellist that warned the others to be careful what they wished for. “If everything was that transparent, I am not sure that would help liquidity, but instead may damage it,” the panellist said. “There are plenty of examples where regulation has affected transparent markets and the liquidity has suffered.”

The speaker cited the dampening effect that Finra’s Trade Reporting and Compliance Engine (Trace) had on the US corporate bond market.

“The great vibrancy of the FX market is that it’s not a centrally regulated market, or planned economy – it is very diverse,” the speaker added.

The P&L discussion on best practice in FX was with David Woolcock, chair of ACI – the Financial Markets Association’s Committee for Professionalism.

The series of panel discussions was accompanied by a trade show featuring the latest innovations in the FX market. After the event, Profit & Loss held its annual Digital FX awards ceremony and dinner. For information on the winners, see related story.

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P&L EVENTS YEARBOOK • DFX AWARDS

PROFIT & LOSS DIGITAL FX AWARDS DINNER LONDON, APRIL 23

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DFX AWARDS • P&L EVENTS YEARBOOK

AWARDS WINNERS: Best Platform Best FX Platform 2014 Profit & Loss Innovation Award 2014 Editor’s Choice Award Best Execution P&L’s One to Watch in 2014 Profit & Loss Market Mover Best Navigation

UBS Neo Barclays Barx The Royal Bank of Scotland BNP Paribas Morgan Stanley BNY Mellon JP Morgan BNP Paribas

PRODUCT AWARDS Best Emerging Markets Best FX Options Platform Best Mobile Platform Best Forwards Platform Best Rates Platform Best Commodities Platform 2014 Product of the Year Super Regional Award 2014

Barclays Bank of America Merrill Lynch JP Morgan Credit Suisse Deutsche Bank Goldman Sachs Goldman Sachs Nomura

CLIENT SEGMENT AWARDS Best Banks’ Platform Best Corporate Platform Best Real Money Platform Best Leveraged Sector Platform Best Traders’ Platform Best Margin Traders’ Platform

Citi Citi JP Morgan Deutsche Bank Goldman Sachs CitiFX Margin Trading

SERVICES 2014 Post Trade Award Algo Provider of the Year Best Order Management Best Research Platform Best FX Prime Brokerage Best Structured Products Platform

UBS Credit Suisse Deutsche Bank Citi Bank of America Merrill Lynch Barclays

www.profit-loss.com

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P&L EVENTS YEARBOOK • NEW YORK

FOREX NETWORK NEW YORK

NEW YORK, MAY 29

Micah Green

Session 1: Eddie Wen, Ari Rubenstein, Chris Concannon

Session 2: Simon Wilson-Taylor

Session 2: Alex Shterenberg, Jim Cochrane, David Mechner

The P&L Interview with Andy Coyne

Session 4:Scott Moffat, Shawn Sloves, Kaushal Majmudar

The continually evolving regulatory landscape in financial services continued to dominate discussions – both on the panels and amongst attendees at all of Profit & Loss’ conferences in 2014.

More than 400 turn out for Forex Network New York.

Regulation Continues to Dominate Discussions in NYC

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s regulators shape the OTC markets in response to the G20 commitments regarding clearing, Basle III introduces new capital costs and the Volcker Rule places a ban on proprietary trading at the banks, the US remains in many ways the “Ground Zero” for this new regulatory regime.

Therefore it was entirely appropriate that Forex Network New York opened with a regulatory update from Washington, to help inform those attending about the main issues being debated in the US’s political capital.

In this update, Cyrus Amir-Mokri, former US Department of the Treasury’s assistant secretary for financial institutions and former senior counsel to Commodity Futures Trading Commission (CFTC) chairman Gary Gensler, and John Ramsay, former acting director of the US Securities and Exchange Commission’s Division of Trading and Markets, and Micah Green, partner, Squire Patton Boggs,

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candidly discussed the intentions behind the Volcker Rule, what “too-big-to-fail” means in political terms, and how high frequency trading is perceived in Washington.

This was followed by a session, “Liquid Markets”, which saw two senior representatives of non-bank market makers – Global Trading Systems and Virtu Financial – discuss the future of market making alongside the more traditional giants of the business, Citi and JP Morgan.

Although the panelists are in theory potential competitors, they agreed that there is a need for different types of liquidity provision in the market. Chris Concannon, president and COO of Virtu Financial, said that while banks can learn from the pricing efficiencies that firms like Virtu can provide, “non-banks need to learn how to customise liquidity” in the manner that the banks currently do.

In a one-on-one interview, Traiana CEO Andy Coyne emphasised how the increasing speed and automation of the FX market is exacerbating risks of which market participants need to be aware.

“Can you afford not to put controls in place? No one wants to sit in front of the regulators, explaining why they hadn’t,” he said.

The year 2014 has been when FX execution was back in the spotlight, following allegations of collusion and manipulation

NEW YORK • P&L EVENTS YEARBOOK Agenda:

Opening Discussion: “Regulatory Update from Washington” Session 1: “Liquid Markets” The P&L Interview with Andy Coyne, CEO, Traiana Session 2: “Intelligent Execution”

The P&L Discussion: “Do Virtual Currencies Offer a Realistic Alternative to Fiat Currencies?”

Session 3: “Multidimensional Models” Session 4: “Fragmentation vs Competition” Session 5: “FX on Exchange”

Session 3: Richard Estes, Jim Kwiatkowski

Session 3: Alan Schwarz

Session 3: Viral Tolat

Session 4: Vincent Sangiovanni, Ture Johnson, Dmitri Galinov, Bill Goodbody, Jacob Loveless

Session 5: Andrés Choussy

Session 5: Phil Harris

around trading at the 4pm London Fix. On the panel, “Intelligent Execution”, speakers stressed that the growing demand for transaction cost analysis (TCA) is an inevitable byproduct of a complex market with dispersed liquidity pools in which algorithms are increasingly used to execute trades.

Of course, with no national best bid/offer, like in the equities market, measuring execution efficiency and quality in FX is fundamentally more problematic. Therefore the panelists grappled with questions about how to aggregate market data in a fragmented trading environment, whether benchmarks can be flexible and what exactly is meant by “best execution”.

The controversial topic of whether virtual currencies can offer a realistic alternative to fiat currency was explored by panelist Kaushal Majmudar, CFA, portfolio manager and managing partner at Ridgewood Investments, who explained that the real value of virtual currencies such as Bitcoin could lie in applications as a payment system.

Other panelists concurred, highlighting the ability for Bitcoins to be used for micro-payments, and noting that transaction costs for merchants using virtual currencies are substantially lower than via traditional payment channels offered by banking institutions.

“Low volume and low market volatility has been a theme of this

Session 5: Craig LeVeille

Session 5: Paul Millward

conference,” noted Richard Estes, managing director, head of product management and implementation for FX and derivatives at BNY Mellon Global Markets.

As a result, innovative ways to facilitate access to liquidity was a key topic on the panel looking at “Multidimensional Models” in FX. On a subsequent panel, “Fragmentation vs Competition”, the issue of whether last look pricing still serves a purpose in the FX market was a source of much debate.

Dmitri Galinov, CEO of FastMatch, argued that it is still a useful tool in certain situations, but he was opposed by Ture Johnson, director, eFX liquidity distribution at Tower Research Capital, who said that if you “understand the quality of flow and who’s hitting it, then you should be able to provide liquidity without last look”.

The day ended with a feisty discussion on how the drive to push NDFs and options onto regulated venues will impact the market.

One potential effect of this change panelists highlighted is that trading these products could become much more expensive for end users.

“Regulators had no appreciation of underlying genuine commercial interests and investments for end users,” said Jesse Drennan, global GFX business process engineer, HSBC Bank USA NA. www.profit-loss.com

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P&L EVENTS YEARBOOK • AWARDS DINNER

PROFIT & LOSS READERS’ CHOICE AWARDS

NEW YORK, MAY 29

Profit & Loss readers voted for their favourite banks and non-banks in each category for this year’s “FoXys” or the P&L Readers’ Choice Awards. Votes for one’s own firm were discounted.

On May 29 in New York, following Forex Network New York, more than 200 members of the FX market gathered for the unveiling of the 2014 inductees to the Profit & Loss Hall of Fame and to congratulate the winners of the Digital Markets Awards for 2013 – informally known as the Foxys. This was the seventh year that Profit & Loss invited its readers to vote for excellence in the foreign exchange industry and more that 6,000 votes were registered.

Award Winners: Best Platform for Corporates Citi FXall Best Platform for Hedge Funds Morgan Stanley KCG Hotspot FX Best Platform for Asset Managers Barclays FXConnect Best Platform for Banks Barclays EBS Best Margin Sector Platform CitiFX Margin Trading LMAX Exchange Best Multi-Dealer Platform FXall Best ECN Thomson Reuters Matching Best Bank FX Platform Barclays Best FX Options Platform Bank of America Merrill Lynch GFI ForexMatch Best Emerging Markets Platform Citi GFI ForexMatch Best Multi-Asset Class Platform UBS CME Group

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AWARDS DINNER • P&L EVENTS YEARBOOK

Best Liquidity Aggregation Platform Barclays FXSpotstream Best Algorithmic Execution Credit Suisse Bloomberg The Digital Markets Innovators’ Award UBS DealHub Best Order Management Deutsche Bank Barracuda FX Best Market Data Thomson Reuters Eikon Best Research Portal JP Morgan Thomson Reuters Eikon Best NDF Platform Goldman Sachs GFI ForexMatch Best Post-Trade Provider UBS DealHub

q The Profit & Loss Hall of Fame: “Class of 2014”

Best in Connectivity Traiana Best FX Prime Brokerage Citi INTL FCStone Best Risk Management System Citi FENICS David Cooney

Edward Pla

Gavin Wells

Soren Haagensen www.profit-loss.com

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P&L EVENTS YEARBOOK • TORONTO

PROFIT & LOSS TORONTO

TORONTO, JUNE 12

Agenda: “The Profit & Loss Fireside Chat” Session 1: “Intelligent Execution” Session 2: “Multidimensional Models” Session 3: “SEF Style” - Sponsored by EBS

P

rofit & Loss’ annual conference in Toronto kicked off on June 12 with a “Fireside Chat” between two veterans of the FX industry, David Clark, chairman of the Wholesale Markets Brokers’ Association and Alex Jurshevski, managing partner at Recovery Partners.

In a wide-ranging discussion about how broader economic trends are likely to impact the financial markets, Jurshevski expressed consternation that a number of countries had failed to recognise the real damage done by the financial crisis and about the subsequent response to this crisis from central banks.

“A lot of the pressures that we saw building up three or four years ago in response to the financial repression are still growing and now we’re starting to see the real impacts of this and yet still the authorities remain bent on pursuing the same trajectory of policies,” he said.

Jurshevski highlighted the continued low interest rates in Europe as an example of one such policy. He argued that while low interest rates were initially seen as a positive sign that the policies being implemented were working; they are actually a function of manipulation by the European Central Bank to ensure that sovereign bond yields remained low so that struggling countries in the Eurozone could stay afloat.

‘The question is: can this state of affairs be maintained for much longer?” he asked.

The first full panel of the day looked at “Intelligent Execution” and grappled with the concept of what best execution means in today’s FX market.

Jim Cochrane, director, analytics, at ITG, talked about a number of ways that best execution can be defined. He pointed out that to a lot of people it used to be considered best execution if they traded within their daily range.

For others, he noted, it is about how you executed compared to the rest of the market at that point in time. Then there are issues of process improvement, for example, did you trade at the right time of day?

“So these are ways of defining best execution, but a hedge fund would still laugh at them and say, “no, best execution is when you buy low and sell high”, so it does matter who you are when you look at this issue,” added Cochrane.

George Dowd, senior director, head of Chicago FX at Newedge USA, concurred with this last point. “I would define best execution

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as whether you accomplished your goal in executing the trade,” he said.

Dowd pointed out that for more aggressive funds, or ones trading off signals, risk transference might be more important than price.

The next panel focused on market structure and debated whether the FX industry is likely to see more or less consolidation in the future.

“There’s always this contradiction: how is it that there’s so many platforms and so many venues and yet the liquidity is concentrated, it seems, in a few large banks? The answer is that at the end of the day, the natural interest in this market doesn’t come from banks, it comes from a few clients,” said James Sinclair, CEO of MarketFactory.

One speaker on the panel commented that the possibility of new technologies coming to market could limit the prospect of consolidation amongst vendors.

“We’re in a risk averse, constrained technology budget environment. I don’t think that there’s going to be a tremendous amount of consolidation as there’s always going to be technology firms that come up with innovative point solutions that are attractive to specific customers,” they said.

The final panel of the day looked at the introduction of Swap Execution Facilities (SEFs) to the market, with the panelists looking back on the genesis of these new venues in attempting to explain how the OTC market is evolving.

“Why do we have SEFs at all? How did this come about? What did the regulators try to achieve and what are the tools that will enable them to achieve that?” asked one speaker.

In attempting to answer this questions, panelists said that the introduction of SEFs as a means to help achieve the regulatory goals of reducing systemic risk is contingent upon a number of other related market developments.

One of those developments is trade reporting, which the speakers said can provide regulators with an effective method of examining if there are significant risk exposures building up at the banks.

Another important measure aimed at reducing systemic risk in the OTC market is centralised clearing but, as one speaker pointed out, there still isn’t a clear timeline for clearing FX NDF and options contracts.

TORONTO • P&L EVENTS YEARBOOK

“The Profit & Loss Fireside Chat”: David Clark, Alex Jurshevski

Session 1: Jim Cochrane, Steve Toland, George Dowd

Session 2: David Clark, Vincent Sangiovanni, Matt O'Hara, James Sinclair, John Ashworth

Session 3: Takis Spiropoulos, Dan Torrey, Rafael Quezada

www.profit-loss.com

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P&L EVENTS YEARBOOK • SCANDINAVIA

PROFIT & LOSS SCANDINAVIA

COPENHAGEN, SEPTEMBER 10

Jeppe Christiansen

Svante Hedin, Javier Corominas, Marcus Samuelsson, Jonathan Wykes, David Clark

Jonas Lundbek Hansen, Peter Hall, Justyn Trenner, David Clark

he second annual Profit & Loss Forex Network Scandinavia conference, held in Copenhagen on 10 September, brought together almost 300 buy and sell side market participants from across the Nordic countries and beyond, highlighting the importance of the region for the FX industry.

Jeppe Christiansen, CEO of Maj Invest, a Danish asset management company, kicked off Profit & Loss Forex Network Scandinavia on an optimistic note, forecasting a good macro picture, and suggesting that the worst of the global financial crisis is “seriously over”.

Christiansen dove into global economic fundamentals, which began with the US as the “supertanker” of the world. The US economy is growing at almost 4% in a positive business cycle, which could continue for two to three years, he said. Strength is being driven by low energy prices, strong solvency in the banks, a rising housing market and the fact that some industries are bringing back production from Asia to start investing in the US again.

Europe, meanwhile, faces a large problem from a structural perspective, according to Christiansen. In the short term, Europe will be part of the global business cycle, which is now on the way up. However, financial problems still exist in southern Europe, and

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France may be the next casualty. Meanwhile, in countries such as Spain and Portugal, exports are growing and starting to redress the imbalance between imports/exports. He predicted that the euro will remain stable over the next five years, but many issues haven’t completely gone away and will likely return in the longer term.

In his conclusion, Christiansen counselled market participants to stay positive because he believes growth rates will increase on average by 3-4% in the next two or three years.

Execution 3.0: The Next Level The first panel of the day tackled the complex question of best execution. As the FX market moved from request for quote (RFQ)/request for stream (RFS) to liquidity aggregation through multi-dealer platforms and bespoke services, has the definition of best execution also evolved? Should transaction cost analysis (TCA) be the focus of everyone’s attention?

Best execution isn’t solely best price – it is much more, according to one panellist. “Best practice, from our perspective as a bank, is trying to deliver what the client thinks is best practice and best execution. That means measuring, monitoring and

SCANDINAVIA • P&L EVENTS YEARBOOK Agenda: Opening Address: The Big Picture Session 1: Execution 3.0 Session 2: The Corporate and the Modern FX Market The P&L Discussion - Building Liquidity in Scandinavian Markets

Session 3: Towards a New Market Structure Session 4: Regional Strengths, Global Relevance Session 5: The P&L Insight Session - Breaking Ranks: Central Bank Policy in Scandinavia

Mustafa Kilic??, Noel Singh, Dave Reid, David Holcombe, David Clark

Erik Åkesson, Jan Strømme, John Schmidt, John Ashworth, Lars Elmegaard-Fessel

Klaus Dalsgaard, Anders Eklöf, Arne Lohmann Rasmussen, Martin Enlund

managing the execution process from start to finish,” they explained. They believe that TCA plays a key role in providing the transparency that the market is demanding, effectively giving the client greater control over the execution process.

However, other panellists were quick to point out that TCA is just one piece of best execution, with one noting that TCA has its limitations. “We use a third party supplier and noticed that the time stamp that we submit ourselves for that service has a five- to 10-minute delay, which could be significant for less liquid pairs, where there is no data for the exact time of transaction. So we look at the next trade and interpolate, but this is not an ideal solution.

For EM spot deliverable, TCA is fine; but for non-deliverable forwards (NDFs), forwards and broken dates, it is perhaps less useful because the data is patchy.”

For many corporates, best execution has a lot to do with building trust, especially within the organisation. Although it is important to get a “best price” for the CFO’s benefit, it is not just price-by-price, but best execution (ie, best price and liquidity), over time, which requires a different approach.

Market volatility shifted the conversation to the value of relationships. According to a buy side panellist, “In terms of

volatility affecting liquidity on some e-platforms, even without a big event when e-FX bid/offer spreads increase significantly, we are aware of the centrality of voice trading and our bank relationships.

We don’t have predatory flows, which our banks appreciate; as a result, they make sure that there are less skews in forward pricing than otherwise seen on an e-platform.”

In a low volatility regime with many active market makers and platforms in the e-space – effectively slushing liquidity around in various pools – when an event occurs, principal market makers are clearly revealed as the ones that are prepared to run some risk and make a price, according to one panellist.

In this environment, the role of the salesperson completely changes – they become almost an execution consultant, according to another. “They shouldn’t be trying to sell something, but should advise clients as to the best option. For example, it isn’t always best to use an algo, because the client then holds the risk; instead, it might be better to transfer the risk. As a salesperson, it is critical to work with the client to find out what the best outcome might be.”

New regulations are compelling salespeople down the road of adding colour and market intelligence, as well as internalising www.profit-loss.com

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P&L EVENTS YEARBOOK • SCANDINAVIA smaller flows, whereas traders are only needed for barriers, the Fix and large tickets.

One panellist voiced concern over the gradual erosion of senior traders without pre-2008 experience. “This will become a problem when volatility picks up, because no one will know how to deal with such a situation – there will be pandemonium and panic,” the speaker said. “We haven’t stress-tested the lack of human element with pre-2008 experience.”

The discussion returned to benchmarks and the widespread usage of the Fix. The ongoing probe into manipulation of FX fixings has opened up a useful debate in the industry as to how benchmarks are used and how the fixings take place.

One banker said the firm had spent months analysing fixing data and applying a systematic approach to the Fix, attempting to remove all manual processes. The bank has developed a number of algos that, whilst not guaranteed to give the WMR Fix, are designed to have the lowest standard of deviation from the Fix given the specific ticket size. “They are designed to give a high degree of transparency throughout the process. The algos optimise a client’s performance against the Fix as a benchmark. Although not guaranteed to beat or get the Fix, they are designed to be totally transparent, which is why clients are utilising it.”

A buy side speaker, who doesn’t use the Fix, said that they want a transparent benchmark to value their portfolios for asset owners and mangers. “Does it have to be a ‘transactable’ benchmark?” the speaker asked. “That is the big question. As long as you accept some tracking error around the benchmark and the banks trade around the Fix, then that is fine. But the Fix doesn’t have to be transactable – it just has to be a Fix.” The Corporate and the Modern FX Market The second panel addressed the specific challenges facing corporates in the modern, e-dominated FX world, and asked whether the industry could provide a better trading environment for corporates.

The four corporates on the panel represented a cross-section of industry sectors, regions, business models and balance sheet positions. Their day-to-day FX activities also varied, but all are active in many countries outside of their home markets, which makes FX hedging an important part of their jobs.

In terms of their biggest challenge in FX, the panellists acknowledged the impact that regulations are having on both banks and corporates. “We are trying to consolidate the banks we trade with to make it easier for us to comply with different regimes,” said one.

Geopolitical issues were also raised by panellists, specifically events in Venezuela, Argentina, Romania, Bulgaria and, of course, Ukraine and Russia. “We are in need of in-depth research on those countries, which may not be our biggest exposures, but are the most challenging,” one corporate said. “We need reliable research into what the currency prices will be in the next nine to 12 months, because we are currently trying to set business plan rates in many currencies for next year, which should be as accurate as possible.”

FX risk should not be seen as a standalone, said another panellist, but in coordination with commodity, interest rate risk, etc. Corporates need to have detailed input on geographical challenges, but also cross-asset considerations.

Market volatility is also a major concern, especially in emerging market currencies, but is something that the shareholders don’t want to know about, said another speaker. In order to manage the risk, the corporate decided to undertake a structural and platform redesign, which has taken three years.

In terms of hedging strategy, one panellist explained: “It’s not aimed at getting the lowest price – which would be great and I personally want to get that – but it’s about setting a budget rate and being able to tell the Street that our EPS is going to be X in Q4 and it will be. It’s a vanilla hedge style, and our relationships with 28

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the banks revolve around replacing forwards about a year out.”

Another added: “We stopped doing budget rates and developed a new strategy for hedging, which is making a contribution to the P&L. We have changed our policy to only hedge 50% of our portfolio, use natural hedging and implement new instruments, such as hybrid cash pooling. This is not a thorough replacement for the hedging instruments, but it is helping us out of a high premium.”

Looking to Asia, one treasurer noted: “In addition to the Chinese strategy of making the renminbi into a global reserve currency, other countries in that region are keen to grow liquidity in their currencies as well. Nordic corporates with a presence in Southeast Asia are now trying to make their way onto an onshore market.”

Returning to the best execution topic, some have internally developed key performance indicators (KPIs) to benchmark their execution. “We don’t use TCA on all the transactions, but we have set a cap and beyond the cap we analyse the cost effect,” said one. “We developed six other KPIs to see the global effect on cash flow, for example.”

Building Liquidity in Scandinavian Markets A look at building liquidity in Scandinavian markets explored how the FX industry is dealing with patchy liquidity and a dependence on single dealer platforms in the light of the new regulatory environment.

The focus of the e-Scandi business is to give competitive and narrow pricing for corporate clients, which has forced banks to price tighter than they can source liquidity on primary platforms, according to one panellist. The speaker explained that they worked risk not by using primary platforms, but by pricing out into the interbank market and having bilateral relations with different banks and brokers.

The reality of building liquidity in the Scandi markets comes down to the major and secondary banking institutions being willing to continue to take and warehouse risk, but being smarter and more efficient about it.

The panel also touched on the drive towards market transparency, and the need for “a little bit of grit” to make it work.

According to one panellist, the ability of regional banks, such as SEB and Nordea, to show pricing continually, even when there isn’t a price on Dealing, is critical for growing liquidity in Scandi markets.

Towards a New Market Structure OTC derivative markets face a more regulated, structured future – and FX derivatives are no different. Panel four explored what the future market infrastructure might look like, and the challenges and opportunities in getting there.

All the panellists agreed that the industry hasn’t achieved a new market structure quite yet, and one argued that, in fact, there hasn’t been a great deal of change to date. “We are navigating our way towards the full regulatory outcome in terms of central counterparties (CCPs), swap execution facilities (SEFs) and their impact on FX. We have been in a long-term holding pattern and are still on the journey,” the speaker said.

Another outlined the three stages of reaction to regulatory change: protect, survive and thrive. The first stage, protect, relates to mechanical changes to existing workflows in order to comply with regulations. This usually produces cost without much return.

Moving beyond protection to survival, firms need look at how to optimise their workflows. “This could be clearing non-mandated products to get a better portfolio effect or pay less money to CCPs in terms of margin, making better use of posted collateral or making better use of capital in general to service a portfolio,” they explained.

The third stage is strategic thinking. “Banks need to map out how will they thrive in the new landscape. These changes present a challenge to the FX businesses to maintain revenue and client relationships,” the speaker argued. “Banks need to adapt their FX business – not by switching off the existing one, but looking to

SCANDINAVIA • P&L EVENTS YEARBOOK adopt new market structures.”

But will the new market structure deliver a better cost for end users? The panel agreed that this is unlikely. “Overall, the systemic cost of trading will increase – it’s difficult to see how it won’t,” said one speaker. “Simplistically, this is a price competitive market and it will remain such. If you are building insurance into this market in the form of greater regulation, then insurance comes at a cost.”

Another speaker argued that the impact would be different depending on the market segment. “Some clients will be negatively impacted and others will actually see a reduction in costs. For example, giving everyone the same access to information and pricing can level the playing field and some will perform better than before,” the speaker said. “Whether that outweighs the costs involved in changing their workflows and how long the payback is, depends on how regulations are implemented.”

In terms of how FX options and non-deliverable forwards (NDFs) fit into the new market structure, one speaker said many clients will opt not to use these products in the future because of complexity and cost.

“Formerly in the options market, a change in US accounting rules had a huge impact on corporates’ use of currency options,” the panellist explained. “Until then, corporates had used options quite a bit, but afterwards we saw only power users continuing to use them. I think we can expect a similar thing to happen now. If a corporate is a big, committed user of these products, then they will undertake the steps necessary to persevere. But it will have a negative impact on the intermittent user.”

But if clients stop using NDFs, how will they hedge risk? “The option of not doing the trade is not there, because that will introduce greater risk to them,” said a speaker. “So the industry needs to design a path to help them. Although the first iteration of client solutions will probably be inefficient, they will increase in efficiency over time and become an easier product for the client to use. But right now, it is hard to see how clients with no contact with the world of CCPs – and all the things that go with clearing on a CCP – are going to cope.”

according to another speaker. “It is no longer the case that a bank’s SDP [single dealer platform] should be driven solely by its execution capabilities. Instead, a bank needs to be more versatile in their offering. They should be able to draw on the expertise from the advisory side from the whole workflow knowledge they have concerning their customers to be able to put that into a services offering. So a single services platform, rather than an SDP, is the way forward if you want to put together a successful e-offering in the Nordic region,” the panellist advised.

“Technology gives regions with particular currency expertise and sophistication the opportunity to solve the identity crisis of whether they want to operate in agency or principal trading mode,” said another panellist. “For example, an optimal balance sheet strategy for the FX business might be to operate an agency mode for G7 interest coming from customers, where there is really nothing to be made out of the spread and it is a case of back-to-backing everything. But in the local currency, where there are discontinuous pricing issues, then the bank should take a principal position.”

Central Bank Policy in Scandinavia The final session of the day, moderated by Klaus Dalsgaard, CFA, chief strategist at Nykredit Markets, brought together three macro strategists to give their opinions on the direction Scandi economies are heading, and how the region’s central banks will respond in 2015.

Anders Eklof, chief FX strategist, FI/FX research, large corporations and institutions at Swedbank, said the Swedish economy will grow by 2-2.5%. This is a little weaker than the “quite bullish” 3% Riksbank expects. Eklof said that there are good reasons to be bullish about the economy given the strong government finances and

“We haven’t stress-tested the lack of human element with pre-2008 experience.”

Regional Strengths, Global Relevance The fifth panel looked at what regional banks need to do to remain relevant to their clients in the face of global competition.

Although international banks have a broader geographical footprint, the local and regional banks have local knowledge and longevity in their favour, argued one panel participant – none of the local banks are going to pull out of their home market. In addition, these smaller banks tend to give more attention to their customers.

A second panellist agreed with these points, adding: “The third session today spoke about friction in less liquid markets leading to discontinuity in pricing, which present challenges for e-pricing.

However, the flip side is that people working in these regional banks are brought up with a high degree of skill and that transmits to customer service. This may be seen as the carrot of relationship – having good service levels and answering the phone – but there is also the stick, which may be a credit mandate and lending relationships.

“Moreover, corporates are less promiscuous with their local banks, and they allocate more of their wallet, payments, lending, fixed income, etc. As the bank gets smaller, it is more likely that it can take a relationship view of the customer and make a relationship-adjusted price.”

There is a strong link between the sales/relationship-based advantages in the region resulting from close customer proximity and local market knowledge, which can be integrated into the technology platform, according to a third speaker. “A regional bank can take its advisory capability, knowledge about customer workflows and execution, and roll it into their e-offering.”

Regional banks have traditionally focused all their resources in being extremely good at pure execution. But things have changed,

strengthening global economy. Eklof nevertheless predicted that the Riksbank would cut interest rates by another 10%.

Martin Enlund, chief analyst at Nordea Markets, suggested it was a good time to buy SEK. At a high level, fundamentals look good, in terms of the housing market and goods consumption.

Worryingly, in 2015 oil investments are expected to drop 10-15%.

There are no signs yet that manufacturing and production are declining, but Enlund believes that this will likely occur. Enlund believes that fundamentals point to a hawkish rate path. As a result, interest rates should jump a few basis points, which in turn should help NOK strengthen.

Arne Lohmann Rasmussen, chief analyst, head of fixed income research, Danske Bank Markets, was less bullish on Denmark than the other two were on Norway and Sweden. He pointed out that the country has no independent monetary policy and a fixed exchange rate, pegged to the EUR. Denmark is considered to be a weak link, together with Finland, and has experienced hardly any growth since the financial crisis in 2009. However, Rasmussen believes that it will see growth going forward, but nothing dramatic because it is in same boat as rest of the Eurozone. Despite this, investors aren’t fleeing Denmark.

Due to the pegged currency, Denmark follows the monetary policy of the ECB and the central bank’s main role is to protect the peg. Whereas during the crisis, maintaining the peg impaired the recovery, in 2012 it was seen as an advantage. At that time, NOK and SEK were appreciating because money was flowing in; while Denmark kept the peg and intervened into the market, avoiding currency appreciation. Today, DKK is on par with ECB rates.

Although the economy is still struggling, Denmark remains an investor’s darling, concluded Rasmussen. www.profit-loss.com

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P&L EVENTS YEARBOOK • CHICAGO

FOREX NETWORK CHICAGO

CHICAGO, SEPTEMBER 25-26

Patrick Philpott

Phil Harris

John Swicegood, Liam Hudson

Scott Brusso

Vincent Sangiovanni

David Mercer

Mike Harris

Keith Tippell

Chris Concannon

Jill Sigelbaum

Chip Lowry, John Cooley

Firms Benefitting Despite Rising Costs in FX enior industry figures at Profit & Loss’ Forex Network Chicago claimed that, although the cost of executing trades is likely to increase in the future, firms are getting better FX prices than ever before.

Speaking at the event, Phil Harris, head of FX strategy at Nasdaq OMX, claimed that regulation is set to drive costs up for FX service providers.

“The cat’s out of the bag, regulation is here,” he said. “One fundamental change that is going to happen in this industry is that costs will go up and firms will need to look at new business models for diverse areas of revenue.”

Harris highlighted new regulations around capital requirements as a driver of change in the FX market.

“People will clear FX products, not because they’re mandated to do so, but because the intense capital pressure on their balance sheet will cause using a CCP to look a lot more attractive than trading on a bilateral basis. This hasn’t yet resonated to the

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Chris Purves

John Beckert

industry overall.

“It is our expectation that the European market will feel those effects before the US market and so our ambitions are not just to clear NDFs and options, but a range of products, because there will be a migration towards that model and you will end up with a bifurcated market where there’s an OTC and a listed price and customers can choose which they prefer,” he said.

Despite these changing cost pressures, David Mercer, CEO of LMAX Exchange, said that firms trading FX are receiving better prices than ever before.

“There’s never been a better time to be a client than right now,” he said. “But we have a new type of client emerging. This new client has grown up with perfect price discovery, from books to iPhones to FX. They can trade millions of dollars for 10 dollars.

“But the biggest cost of trading for them is poor execution – bad fills, slippage, rejections and re-pricing. These new clients will not accept this OTC bilateral execution for much longer, they expect transparency when they purchase something because that’s what they understand,” he added.

CHICAGO • P&L EVENTS YEARBOOK Agenda: Panel 1: The Leadership Session P&L Interview: The Future for Chat and Conversational Dealing Panel 2: The Modern Trader’s Guide to Survival The P&L Discussion: From AAA to Major League Panel 3: Fault Lines: The New Risks in FX Panel 4: ACT versus TCA - Sponsored by ITG

The Hot Topic - FX Benchmarks Panel 5: Aggregation Friendly? The Reality of SEF-World Panel 6: Reinventing FX - Sponsored by FXSpotStream Panel 7: Regional Strengths, Global Relevance P&L Insight Session: A Brighter Future? FX in 2015 and Beyond Panel 8: The Think Tank – Thinking the Unthinkable?

Jim Cochrane, Asif Razaq, Simon Wilson-Taylor, Paul Aston

Jesse Drennan, Dmitri Galinov, James Sinclair, Alan Schwarz

Al Crane, Takis Spiropoulos, John Ashworth, Paul Allmark

Best Execution: Be Careful What You Wish For…

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arket participants on the panel, ‘The Modern Trader’s Guide to Survival”, claimed that a lack of nuance in the understanding of what constitutes “best execution” could negatively impact pricing in the FX market.

“Best execution means different things to different people.

There’s a conversation on the buy side right now about whether they’re getting best execution and more firms are putting together best execution committees or expanding them from other asset classes into FX,” said one panellist.

They noted that for hedge funds best execution has always been a focus because every single basis point impacts their return profile. In contrast, for the real money segment, FX execution has not been a real focus for corporate treasurers until now.

This renewed emphasis on best execution has led to many firms predicting that banks will shift from a principal to agency model of trading with their clients, with the latter model thought

to help enable firms to conduct transaction cost analysis with greater ease.

“I think the danger is that compliance is pushing us that way,” said one bank representative on the panel.

However, the panellists agreed that while the agency model might provide more transparency in terms of where the rest of the market was trading at the point of execution, it does not necessarily provide best execution.

“The quality of our liquidity is about our skew and our skew is about our view and our view normally comes back to the positions that we hold and the clients that have been trading with us,” said one panellist. Without the ability to use the information gained in its principal businesses, the banks are less able to formulate the best possible price for its clients, they added.

The general consensus amongst the panellists by the end of the session was that to truly achieve best execution, both the buy side and the banks need to utilise a combination of agency and principal trading models, with the latter still having an important place in the FX market. www.profit-loss.com

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P&L EVENTS YEARBOOK • CHICAGO

Andrew Rossiter, Soren Haagensen, Bill Goodbody

Dave Reid, Isaac Lieberman, James Sinclair

Mark Sandomeno, Craig Messinger, Chris Concannon, Gavin Wells, Derek Sammann

Engagement with Regulators Critical, says FXPA The Foreign Exchange Professionals Association (FXPA) has warned that now is a critical time for the FX industry to enhance its engagement with regulators.

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epresentatives of the Foreign Exchange Professionals Association (FXPA), which announced its launch at Profit & Loss’ Forex Network Chicago event on September 25, stressed the importance of the industry being represented by one voice to regulatory bodies around the globe.

“I think that the real threat for the FX market is that time is short and it’s clear that the regulations will be introduced soon. In order to be able to inform those finalising the regulations, we need to have established one voice as an industry. This will ensure that any impact of the regulations is fully understood before implementation,” said Gavin Wells, global head, ForexClear, LCH Clearnet, and an FXPA board member.

Chris Concannon, president and COO of Virtu Financial, also a board member, stressed that currently, some regulators are learning about the FX market in the context of the recent accusations around market manipulation and that this could negatively impact their understanding of this global market place.

“Right now, regulators are not learning about this space by coming in and understanding how it works, they’re being educated by enforcement cases. This is the worst possible education for a regulator.

“As a broad and diverse industry body we can speak to the regulators about how the market works, the benefits that it provides to end users and where there are areas that we can improve. That’s a much better dialogue,” he said.

Craig Messinger, global head of trading and risk at BNY Mellon, and FXPA’s treasurer, stressed that the diverse membership of the FXPA means that it is uniquely placed to help educate regulators about the market.

“Traditionally, a lot of trade associations were started by the primary market makers in the industry they represent. Very quickly

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we realised that this might be the only association that has vendors, exchanges, clearers, buy side, sell side and alternative market makers on board.

“If you think about how the market has evolved, every one of those constituents is having a dramatic impact on innovation and the future of this market. So my message to all segments of the FX market is: join this organisation, because you will have a voice,” he said.

The panel admitted that when the idea behind the creation of FXPA was first considered, they were concerned that the diverse nature of the association could make it difficult to build a consensus.

“We’ve had that conversation and we know that we’re not all going to agree on everything. But so far I think that there has been a relatively narrow voice representing the broad interests of the most diverse underlying asset class. What we are trying to provide is industry advocacy rather than institutional advocacy,” said Derek Sammann, senior managing director, global head of commodities and options products at the CME, and FXPA’s vice chair.

The panelists agreed that once they began engaging their counterparts in a dialogue, they realised that there were numerous areas of common ground where they could promote issues for the benefit of the FX industry as a whole.

The panellists reiterated that both the buy side and the sell side have to work together to make the market work. “One voice doesn’t mean one opinion, and that’s what this group is here to discuss,” the panellists agreed.

The panel closed by explaining that the FXPA needs to be a global organisation in order to reflect the global nature of the market that it is representing. Mark Sandomeno, manager, emerging market derivatives at GFI Group and FXPA board member, stressed the importance of this global approach.

“When you enter into an FX trade you’re automatically thrust into two sovereign and regulatory jurisdictions and so there needs to be a global dialogue. Right now, substituted compliance is a dangerous issue, because in the US we’re rushing towards deadlines, but there’s nothing to substitute the rules with yet. We have to be mindful that this is a global issue,” he said.

CHICAGO • P&L EVENTS YEARBOOK

P&L WORKSHOP:

THE FUNDAMENTALS OF BENCHMARKING AND THE FX FIX CHICAGO, SEPTEMBER 23 Agenda: Intro – Primer on FX Markets Intro – FX Benchmarks: The Whole Story Panel 1: Current FX Litigation I - FX Fixings Panel 2 – Current FX Litigation II – Appropriate Markup in FX Transactions

Erik Lehtis

Simon Wilson-Taylor

Jim Cochrane, Chip Lowry

Matthew Kulkin, Vincent P. (Trace) Schmeltz III, Rosa Abrantes Metz, Paul A. Aston, George Dowd

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nfortunately for FX market participants there has been one issue over the past year that has dominated the headlines and industry discussion in general. This has, of course, been the allegation that there has been illegal trading activity occurring around the WMR Fix. These allegations, occurring so soon after the Libor benchmark was deemed to have been manipulated, have in turn raised broader questions about how benchmarks are formulated and used in the FX market.

This is why Profit & Loss held a special workshop at the MidAmerica Club in Chicago to specifically examine the fundamentals of benchmarking and the FX Fix. The day opened with Erik Lehtis, head of strategy and trading at VisionFX, Edgewater Markets, giving a concise overview of the FX market, its structure and the various market, credit, settlement and operational risks that its users need to be aware of when they trade.

Simon Wilson Taylor, CEO of Molten Markets, then gave a presentation highlighting what has gone wrong with the WMR Fix and outlined some of the debates occurring around how to improve the benchmark.

One of the issues that he discussed was that clients currently expect their banks to provide a service, in this case completing a risk transfer by guaranteeing execution at a rate they don’t yet know, for free.

“The market determines what the “right” fee is for this, and the fee that they have determined so far is “zero”,” he said.

The following panel then discussed the WMR Fix in relation to how government authorities are viewing the allegations of market manipulation around the benchmark.

Rosa Abrantes Metz, principal of Global Economics Group, has served as an expert witness for these authorities and presented data regarding trading patterns around the Fix, which she claimed could be interpreted as evidence of market manipulation.

One member of the audience argued against Abrantes Metz’s data, claiming that there were legitimate reasons why these trading patterns had occurred at this time.

However, Vincent Schmeltz, a partner at law firm Barnes and Thornburg, countered by pointing out that this is exactly the problem that the FX industry now faces: this kind of data is being presented to authorities who don’t understand the market and therefore it can be used as evidence of market manipulation.

“This is a market that prosecutors don’t understand. But they see phone calls followed by a movement in the market, and that’s all you need for a grand jury,” he said.

In the last panel of the session the speakers looked at what an appropriate markup for FX transactions should be, if indeed it is the case that the banks need greater compensation for the service they provide in executing at the WMR Fix. One speaker claimed that the banks are not actually providing this service for free, but rather that its cost is included in a broader bundle of services that they provide and, one way or another, is a service for which clients are willing to pay. www.profit-loss.com

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P&L EVENTS YEARBOOK • SINGAPORE

PROFIT & LOSS FOREX NETWORK ASIA

SINGAPORE, OCTOBER 21 Agenda:

Opening Address: Eddie Tan Session 1: The Idea Session 2: The Preparation

Presentation: Arbitrage Opportunities in Virtual Currencies?

Session 3: The Execution Session 4: The Customer Session 5: The Challenge

he annual Profit & Loss Forex Network Asia conference in Singapore, which took place at the Marina Bay Sands on October 21, opened with an address by Eddie Tan, regional treasurer, regional corporate treasury at Citibank, N.A.; chairman of ACI International managing board; regional president of ACI Asia; and chairman of the Singapore Exchange disciplinary panel.

In his address, Tan said that Singapore is continuing to grow as a regional hub for foreign exchange trading and that one of the reasons for this growth is that more multinational firms are basing their regional treasury centres there. He also said that FX trading in Singapore is inevitably channeling towards electronic trading platforms and highlighted the investments being made.

Tan talked about the internationalisation of the renminbi as one potential driver of FX trading in Asia, claiming that China is pushing its policies in the right direction for the liberalisation of its currency. With regards to the perceived competition between financial centres such as London, Singapore and Hong Kong to become the main trading hub for RMB outside of China, Tan said that each region will be able to service a different customer base.

He argued that the flows going into each centre are still very geographically driven and therefore it is likely that there will be what he termed a “follow the sun” model whereby the majority of RMB trading occurs at different financial centres at different points in time each day.

In the opening panel, economists discussed the impact of policy coordination amongst central banks, with Naomi Fink, CEO and founder of Europacifica Consulting, arguing that policy divergence can be good for the FX market.

The panel fielded a number of questions from the audience, who were curious to know their opinions on whether the Hong Kong dollar had a future as a currency and whether its peg to the USD could end soon.

“I see the Hong Kong dollar and the renminbi at some point being traded together. You’d lose that peg to the US dollar because of the extreme bonds of the Chinese economy,” responded Gundy Cahyadi, an economist at DBS Bank.

The second panel looked at the buy side experience of trading FX in Asia. During the session, Luke Waddington, global co-head of e-markets at BNP Paribas, emphasised the difficulties posed by

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the fragmented geography of the region.

One of his biggest challenges is onboarding customers that traditionally execute FX over the phone. But now that firms are increasingly analysing their costs, it is becoming apparent that the traditional way of trading is too expensive. “We have to find a way to allow firms to trade for cheaper and the way to do this is through technology,” he said. “That’s why the Asian market is ripe for disruption right now.”

Waddington added that new regulations are providing opportunities for firms to provide new services and further add to the potential for market disruption.

Antony Lewis, business development director of itBit, provided an overview of arbitrage opportunities in virtual currencies. This elicited numerous questions from audience members wanting a better understanding of how cypto-currencies such as Bitcoin work.

The subsequent panel looked at FX execution and the impact of allegations around potential manipulation of FX benchmarks. This is causing information to stop moving around the market, making trading harder, panelists agreed. “The banks are shutting down chat rooms, they’re afraid to talk to their customers,” commented one panelist.

Discussing the evolving nature of the FX market structure in Asia, speakers on the next panel made the case that non-bank firms could have an important role to play as market makers in the region.

Matthew Pollard, head of systematic trading at Microsecond Trading Software, denied the often repeated accusation that nonbank market makers disappear in times of strained liquidity. “Lots of non-bank market makers are in it for the long haul,” he said, adding, “There doesn’t need to be a distinction between bank and non-bank market makers in terms of liquidity quality.”

The final panel of the day addressed some of the challenges facing FX market participants, with the fragmentation of liquidity being one of these. Tim Finch, a regional director at DealHub, predicted that there will be consolidation amongst trading venues, while James Sinclair, CEO of MarketFactory, took the opposite stance, predicting that liquidity will continue to fragment in FX, arguing that people have been predicting consolidation in FX for years, but that new venues continue to appear, fragmenting liquidity further.

SINGAPORE • P&L EVENTS YEARBOOK

Presentation: Antony Lewis

Eddie Tan, David Clark

Session 1: Gundy Cahyadi, Naomi Fink, Jason Daw, David Clark

Session 2: Vibhanshu Bahuguna, Robert Savage, Luke Waddington, David Clark

Session 3: Simon Winn, Chris Knight, Nick Ohlin, David Clark

Session 4: Dmitri Galinov, Matthew Pollard, Michael Syn, Jon Vollemaere www.profit-loss.com

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P&L EVENTS YEARBOOK • SHANGHAI

PROFIT & LOSS SHANGHAI

SHANGHAI, OCTOBER 23 Agenda:

Opening Address: The Shanghai Free Trade Zone: Opportunities Ahead Session 1: “Financial Benchmarks: A Brave New World”

Opening Address: Zhang Hong

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t is almost impossible to talk about the Asian currency markets without referencing the impact of China’s currency on the region.

In its 2013 FX turnover survey, the Bank for International Settlements showed that trading in the yuan had more than tripled in the past three years, as it entered the top 10 list of most traded currencies in the world for the first time.

In 2014, Swift announced that global payments in renminbi had more than tripled in the past two years. The importance of Chinese currency in Asia was also evidenced by the decision of the Singapore Exchange to launch renminbi futures in October.

It is with the backdrop of China’s growing importance in terms of the broader foreign exchange market, and the increasing maturity of firms trading currencies in the local onshore market, that Profit & Loss returned to Shanghai on October 23.

The day opened with a presentation from Zhang Hong, director of the China (Shanghai) pilot Free Trade Zone Administration Fiscal and Financial Bureau, on the development of the Free Trade Zone (FTZ) implemented in the country’s main financial centre.

One of the key changes to the FTZ highlighted by Hong has been the shift from a positive to negative list of rules. Now, FTZ administrators provide a list of what is not allowed in the FTZ and firms can assume that any activity not on this list is allowed. In contrast, prior to this the FTZ administrators had instead provided a list of what was allowed and everything else was to be assumed out of bounds.

This has reduced red tape by eliminating the need for firms to get constant approvals for their activities in the FTZ and it has made them more confident in conducting business there. This change was publicly praised during the keynote speech delivered

by Eddie Tan, regional treasurer, regional corporate treasury at Citibank, at P&L’s conference in Singapore two days earlier.

Keiren Harris, the director of DataContent, then explained the critical role that benchmarks play in the financial system with regards to the pricing and allocation of capital and associated risk.

He explained the difference between public data benchmarks and survey-based benchmarks, outlining the advantages and disadvantages of each.

Harris also argued that the age of self-regulating organisations is over with regards to benchmarking, and that the recent appointment of the Intercontinental Exchange as the administrator

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Session 2: “Internationalisation of the RMB” Session 3: Onshore Versus Offshore: A Narrowing Divide Session 4: The Future of Derivatives Trading

Keiren Harris

of the Libor benchmark shows that there will be more prescriptive rules in this area of the market going forward.

Sun Lijian, a professor and deputy dean at the Fudan University School of Economics, then outlined the various economic factors that China needs to have in place before the RMB is internationalised.

“If we can’t upgrade from a manufacturing to service economy, then the internationalisation of the renminbi is at risk,” he said.

The following panel then discussed the internationalisation of the RMB in more detail, with everyone agreeing that it is no longer a case of “if”, but “when” this will occur. Panellists also stressed that internationalising the currency is not the same as becoming a reserve currency and that the latter brings its own set of challenges and pitfalls for the development of China’s economy.

After lunch, attendees gathered in a packed auditorium to hear about the narrowing divide between China’s onshore and offshore currency markets.

“When people come to me and ask me what the biggest risk is in renminbi trading, I always tell them the same thing: that you’re not ready for it,” said Jon Vollemaere, founder and CEO of R5 FX. The panelists concurred that the pricing between the onshore and offshore currency markets will continue to converge as China continues to pursue programs that are friendly to an international audience – such as the FTZ – until RMB becomes fully convertible.

The final panel of the day looked at the future of derivatives trading in Asia, with the speakers questioning the region’s role in global derivatives reform.

“The proposed regulatory environment in the US and EU is becoming very onerous. A possible consequence of this is regulatory arbitrage and I think there’s a very good reason why certain Asian regulators haven’t been very vocal with regards to what their requirements will be going forward, because I think potentially they see an opportunity for hedge funds and pure speculators to relocate to the region,” said Nick Ohlin, head of GTX in Asia.

However, Bob Savage, CEO of CCTrack, took a slightly different perspective on the issue. “The role of Asia isn’t going to be the wild West of financial markets, it’s going to be the safe ground between the US and Europe until these two figure out what the commonalities and needs of the new world of regulations will be,” he said.

SHANGHAI • P&L EVENTS YEARBOOK

Keiren Harris, David Clark

Session 2 Introduction: Sun Lijian

Session 2: David Clark, Beng Hong Lee, Bob Savage, Naomi Fink, Lam Kok Chong

Session 3: David Clark, Adrian Gostick, Jon Vollemare, Simon Winn

Session 4: David Clark, Lam Kok Chong, Nick Ohlin, Bob Savage

www.profit-loss.com

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