Profit & Loss Magazine: H2 2020 by P&L Services Ltd.

H2 2020 VOL. 21 / ISSUE 182 www.profit-loss.com

Momentum Building: FX Swaps on the Cusp of Change Is the last bastion of the “traditional” FX market about to be overrun?

PANDEMIC PEAK SURVIVED, BUT WHAT NEXT FOR FX? IS FX BACK IN THE LEGAL SPOTLIGHT IN THE UK? SETTLEMENT RISK ON GFXC AGENDA

PROFIT & LOSS

Managing Editor’s Note t’s been an interesting year to say the least, and as we head into the last months of 2020, the FX industry can look back with a degree of satisfaction over how it continued to provide a vital service to an admittedly ailing global economy.

who has been predicting it for over a decade! It is funny how so many people I talk to have FX swaps up their agenda compared to two years ago and more – a time when they would shut the conversation down if the subject was raised.

A couple of key areas have been the hotbed of innovation over the past year or two, and both appear to be coming to fruition as we head towards what most will agree is a welcome exit from 2020 – FX swaps and FX settlement. I will confess to be a little surprised this time last year when the Bank for International Settlements released its comments on the scale of settlement risk in FX markets, I think my view, along with many others, was that it was merely a matter of time before local firms or CLS filled in the important gaps in the global picture.

This has been a tough year for everyone, not least P&L, so I wanted to close out this note by expressing my thanks to our staff and, just as importantly, our supporters, who have worked so hard to provide a degree of normality in trying circumstances. The inability to host in-person conferences has been a real challenge and while I know the virtual events lack so many features of the physical, it really is the best that can be offered in the current environment.

From my perspective it has been heartening to see how service providers from all sides of the industry have continued to innovate – this will become even more important when, finally, the world comes out of the pandemic and global trade reawakens hedger interest in currency markets.

This may still happen of course, but it is interesting to see how firms are starting to innovate in this space and, even more pertinently, are taking their ideas from the digital assets space. For many years there was an argument about what was most important in the crypto space, the asset or the technology, for FX markets at least, the latter is having a serious influence. It is likely to continue to do so as well, I am confident that the future infrastructure of the FX markets, especially in the post-trade, will lean heavily on experience gained in the digital world. On FX swaps, as we report this month, there is also movement, which comes as a relief to me at least as someone

The key difference, as pointed out very eloquently by an interviewee in the feature, is that FX swaps have been “discovered” by a new group of market participants as a great source of funding. This increased demand inevitably puts the spotlight firmly on market structure and another subject we have been hearing about for many years – clearing. The credit bottleneck remains the single biggest challenge in FX swaps, we have worked out successfully how to get people to trade at or close to mid, my sense is the next year (notwithstanding whether the product is put ‘in scope’ of regulation) will see this bottleneck broken.

We have hosted six events this year and I have thoroughly enjoyed the conversations and debates I have had with all the speakers, so I thank them also. They are not giving up as much time as they would to fly to, for example, Chicago, but they have been taking a step into the unknown along with the rest of us. Hopefully 2021 will provide everyone in the industry – and indeed the world – with the chance of re-establishing something approaching a “normal”. Good luck and stay well.

Colin Lambert: Managing Editor

H2 Inside: p.26 Momentum Building: FX Swaps on the Cusp of Change Gil Mandelzis

p.38 P&L Talk Series with Baton Systems Alex Knight H2 2020 I profit-loss.com

p.44 A Smooth Transition – But What Next? Guy Debelle

PROFIT & LOSS

Editorial Directors Julie Ros: Publisher & Editor-in-Chief Julie Ros has been a journalist covering the FX markets since 1989. She founded P&L Servicesâ&#x20AC;&#x2122; Profit & Loss magazine in 1999. Six months after launch, Julie launched the industry's premier series of FX conferences, Profit & Loss Forex Network. Prior to P&L, Julie spent six years, at Waters Information Services (now Incisive Media) as the London Bureau Chief, and editor of the newsletters FX Week and ACI Briefing. Julie started her career as a currency markets reporter for the former Dow Jones Telerate. jros@profit-loss.com / @jros66 Colin Lambert: Managing Editor Colin Lambert joined P&L Services in August 2001 after a 24year career in the financial markets, predominantly in foreign exchange trading. He joined P&L from MCM Inc, an analytical company focused on the financial markets. Whilst there, Colin managed the flagship CurrencyWatch I product. In his dealing career, he worked in New York, Singapore, Toronto, Tokyo and London for both buy-side and sell-side institutions, in several roles, including chief dealer. Colin_lambert@profit-loss.com / @lamboPnL

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H2 Contents

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Cover Feature 26

Momentum Building: FX Swaps on the Cusp of Change Is the last bastion of the “traditional” FX market about to be overrun?

News Features

p.26: Momentum Building:

FX Swaps on the Cusp of Change

Finding New Ways to Play: Will Spoofing Move into the OTC World? Spoofing is back in the spotlight with US authorities fining and convicting firms associated with the practice, but while these sanctions are expected to reduce instances of the practice in listed markets. Are they likely to creep further into the more opaque OTC world?

BoE Questions Decision to Drop Spot FX Market Abuse Regime What was widely seen a technology control issue suddenly exploded onto the FX market’s radar, when the Bank of England, in response to the findings of an investigation, firmly pointed the finger at foreign exchange dealers

FMSB Paper Looks at Execution Quality in FICC Markets The FICC Markets Standards Board has released a fourth, and what it says is its last spotlight review, this one studying the challenges in measuring execution quality and how different participants assess it.

16 22

Finding New Ways to Play

FMSB Paper Looks at Execution Quality in FICC Markets

Simple, but Sophisticated: XTX Launches FX Execution Algo The non-bank market maker has added to its offering.

Regulars: 8

P&L’s Squawkbox: News from around the globe

Movers: People on the Move

The Last Word The last word on some of the themes covered recently by P&L’s Squawkbox…

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H2 Contents

Profit & Loss Forex Network @Profit_And_Loss

Features

Goldman Sachs Launches FX Swaps Axe UI The sense that change is upon the FX swaps market was reinforced by one of the FX market’s major players taking a significant step forward in how it trades the market.

New Change FX Unveils FX Swap Benchmarks, Indices With best execution becoming a more pressing topic in FX swaps markets, P&L takes a look at a new release by the benchmark provider

PhRewriting DeFi’s Playbook: Practical Applications for Mainstream Adoption In this contributed article, Philippe Bekhazi, CEO of XBTO Group, argues decentralised finance will change, and lays out some examples of how

Settlement Risk Remains High on GFXC Agenda Last year the Bank for International Settlements Triennial Survey collated, for the first time, FX settlement data, thus putting the issue front and centre in the industry’s thinking. The baton has now been taken up by the Global Foreign Exchange Committee.

P&L Talk Series with Baton Systems With Alex Knight, head of EMEA at Baton Systems

Mobile Trading: Coming of Age The growth path of mobile trading has been anything but meteoric, but a combination of greater awareness and necessity is finally bringing the channel towards the mainstream.

A Smooth Transition – But What Next? A recent GFXC report highlighted the ease with which the FX industry transitioned to remote working during the pandemic peak and provides observations of market conditions regionally and globally.

Crypto Corner: 48

Talos Unveils Institutional Digital Assets Platform Talos, a technology provider for institutional trading of digital assets, today announces the public launch of its platform that connects institutional investors, prime brokers, exchanges, OTC desks, lenders and custodians.

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P&L’S SQUAWKBOX

News from around the globe

Former JPM FX Trader Jailed for Manipulation kshay Aiyer, a former FX trader at JP Morgan in New York, has been sentenced to serve eight months in jail and ordered to pay a $150,000 criminal fine for his participation in an antitrust conspiracy to manipulate prices for emerging market currencies in the FX market. Aiyer was found guilty late last year by a jury in New York, who found that he had conspired to manipulate central and eastern European, middle eastern and African (CEEMA) markets, prices and spreads to clients as a participant in several Bloomberg chat rooms. Two of his counterparts in the chat rooms, former Standard Bank, Barclays, BNP Paribas and ANZ trader Jason Katz, and Christopher Cummins at Citi, previously pleaded guilty to the charges and agreed to help the prosecution of Aiyer in return for a more lenient sentence. “[This] sentence, including prison time, serves as yet another reminder of the consequences for those who cheat and compromise the integrity of the global financial markets,” says assistant attorney general Makan Delrahim of the Department of Justice’s Antitrust Division. “This case, which the Antitrust

Division litigated, is another step forward in the department’s ongoing commitment to prosecute and deter cartels in the financial markets that harm American consumers.” FDIC inspector general Jay Lerner adds, “[This] sentencing demonstrates the gravity of the defendant’s egregious behaviour to manipulate emerging market currencies, as well as the importance of bringing him to justice. This extensive conspiracy represents a serious breach of trust with both his clients and the major multinational bank for whom he worked. We appreciate the cooperation of our law enforcement partners, and we remain committed to investigate such unscrupulous crimes that impact the integrity of our banking sector.” According to evidence presented at trial, the defendant engaged in near-daily communications with his coconspirators by phone, text, and through an exclusive electronic chat room to coordinate their trades of the CEEMEA currencies in the spot market. The jury heard evidence that the defendant and his coconspirators manipulated exchange rates by agreeing to withhold bids or offers to avoid moving the exchange rate in a

direction adverse to open positions held by co-conspirators and by coordinating their trading to manipulate the rates in an effort to increase their profits. By agreeing not to buy or sell at certain times, the conspiring traders protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the spot market for emerging market currencies. They also heard evidence that the defendant and his co-conspirators took steps to conceal their actions by, among other steps, using code names, communicating on personal cell phones during work hours, and meeting in person to discuss

CboeFX Launches NDF Platform

boeFX has unveiled Cboe Swiss, a platform for trading NDFs. The name relates to the legal entity than launched the service. The new platform offers ECNstyle trading with curated liquidity pools to meet users’ execution criteria with streaming firm and non-firm quotes. It also has Cboe’s full amount execution protocol for

discrete large risk transfer trades, as well as extra order types, and supports pre-trade net open position (NOP) credit checks. Cboe says the platform has a comprehensive reporting suite for deeper analysis of trading outcomes and that trading is available via LD4 or on a dedicated Cboe Swiss GUI. It adds the new platform

adheres to the principles of the FX Global Code.

P&L Editorial View Does the FX market need another NDF platform? Probably for competition purposes but if the NDF segment is not to repeat the fragmentation of the spot market one has to question whether any more are needed.

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particular customers and trading strategies. The charges against Aiyer did carry a maximum penalty of 10 years in jail and a $1 million fine – the outcome may be pertinent as two members of the so-called “Cartel” face further legal action in the US, this time from the Office of the Comptroller of the Currency. If the case goes to trial it is expected to start in 2021.

P&L Editorial View It’s hard seeing an FX trader go to jail and one has to question the severity of the sentence, but to most this was plain misconduct and as such some sanction was inevitable. Did it need to involve jail time though?

P&L’S SQUAWKBOX

UK Regulator Bans Retail Crypto Derivatives

he UK’s Financial Conduct Authority (FCA) has published final rules banning the sale of derivatives and exchange traded notes (ETNs) that reference certain types of crypto assets to retail consumers, saying it considers the products to be “ill-suited for retail consumers due to the harm they pose”. Citing the “inherent nature of the underlying assets, which means they have no reliable basis for valuation”; the prevalence of market abuse and financial crime in the secondary market (eg cyber theft); extreme volatility in crypto asset price movements; inadequate understanding of crypto assets by retail consumers; and the lack of legitimate investment need for retail consumers to invest in these products; the UK regulator says retail consumers might suffer harm from sudden and unexpected losses if they invest in the products. The ban will come into effect on 6 January 2021 and the FCA says any firm offering services in these products “is likely to be a scam”. Unregulated transferable crypto assets are tokens that are not ‘specified investments’ or emoney, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation, therefore firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA. To address these harms, the FCA has made rules banning the sale, marketing and distribution to all retail consumers of any derivatives (CFDs, options and futures) and ETNs that reference unregulated transferable crypto assets by firms acting in, or from, the UK. The regulator adds it estimates that retail 10

consumers will save around £53m from the ban. ‘This ban reflects how seriously we view the potential harm to retail consumers in these products,” says Sheldon Mills, interim executive director of strategy & competition at the FCA. “Consumer protection is paramount here. Significant price volatility, combined with the inherent difficulties of valuing crypto assets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.” The move has been criticised by digital asset manager CoinShares. The firm says in a statement that it is “extremely disappointed” by the decision to include delta 1 ETNs in the ban, adding that the FCA ignored a number of reasons put forward

by the firm as to why such a ban would be “ill-advised”. “We note that the FCA ban on delta 1 ETNs will not result in the proposed savings and benefits; rather, it will simply drive UK retail investors to unregulated crypto exchanges, which, as the FCA itself admits, have far fewer protections than the regulated ETNs offered by CoinShares and other providers,” the firm states. “We also note that the timing of the FCA ban is unfortunate and sets it squarely against recent, far more positive developments in the digital assets industry, such as the European Commission publication of a proposed regulatory regime for digital assets or the OCC’s approval for US banks to custody digital assets. “Finally, we are interested to understand how the FCA ban fits with the recent UK Treasury consultation on digital assets, which, in particular, looks to

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extend the financial promotions regime to crypto assets,” the firm adds. “In conclusion, we see the FCA ban as further evidence of the UK turning its back on innovation in digital assets and on regulatory coordination with other jurisdictions. We find it difficult to see how the UK can be seen as welcoming of digital asset innovation when it is the only western jurisdiction to ban them based on an erroneous belief that they have no intrinsic value.”

P&L Editorial View Editorial View: Inevitably there will be criticism from the industry but this seems like a sensible move by the FCA. CFDs are increasingly being seen as too risky for retail clients and with such a nascent underlying product we probably need to see more development in the crypto market structure before this decision can be revisited.

P&L’S SQUAWKBOX

Cobalt Expands into Digital Asset Space X post-trade infrastructure provider Cobalt is extending its service into the digital assets space to meet growing demand for the service and also as a result of digital assets becoming more entwined with the foreign exchange market. Cobalt says this trend has been accelerated by the decision of US banking regulator OCC (Office of the Comptroller of Currency) to allow US banks to hold digital assets, adding this has led major FX institutions to look into trading digital assets, however it observes that enterprise standard post-trade infrastructure in this market is “virtually non-existent”. For institutional participants to enter the digital assets market at scale, Cobalt argues it is critical to ensure the correct management of credit and data, to which end it is now bringing its post-trade and credit FX solutions to the digital asset market. The firm is already connecting to the leading digital exchanges on behalf of clients and offering

full credit and ledger services for all currencies and digital assets. Cobalt clients are able to see their full portfolio of positions and risk across both fiat currencies and digital assets, available to clients across all segments. With a full micro service architecture and 24/7 operations, Cobalt says its solution is fully compliant with the FX Global Code and Tier 1 financial participants information security and regulatory requirements. As part of an increased focus on clients looking to trade FX and digital assets, Aiyana Currie has joined the company as head of North American sales. She is an FX sales and product specialist with 20 years’ experience held in senior e-FX positions at Morgan Stanley and UBS. “The rise of digital assets has gone from strength to strength in the past years and has moved from being an asset traded on the periphery, to being at the forefront of FX participant plans,” says Adrian Patten,

chairman and co-founder of Cobalt. “Participants today can no longer ignore the position of digital assets in the market and those who do are in danger of missing out on sizeable trading opportunities due to the 24/7 nature of the market. “Major exchanges have started to translate this to the FX market, with some offering trading over the weekends,” he continues. “24/7 operability has always been a priority to Cobalt. As

FairXchange Unveils Pricing Stack Analysis

inancial markets data science firm, FairXchange has added a new pricing stack analysis feature to its Horizon platform, a move the firm claims is “game changing’ by enabling financial institutions to make more informed, data driven decisions about how they interact with existing and prospective liquidity providers. By providing a complete view of a financial institution’s pricing stack, FairXchange’s Pricing Stack Analysis provides insight into the dynamics of their liquidity and enables banks, brokers and hedge funds to understand the financial impact of their liquidity provider selection compared to other choices they could make. The new service uses FairXchange’s proprietary

technology to start addressing what the firm says are “specific insightful yet previously unanswerable questions” such as what targeted feedback can a firm give to its liquidity providers to increase their revenues whilst simultaneously reducing the firm’s costs? The analysis tool is also able to inform decisions around how much removing or adding a liquidity provider changes its bottom line execution costs. It also looks at the best spreads and skews from LPs as well as offer analysis to back up decision making on shrinking liquidity providers within a dedicated pool. “A fundamental issue that the market currently faces is that financial institutions find it very hard to measure the financial

impact of any changes to their liquidity provision,” observes Guy Hopkins, founder and CEO, FairXchange. “Conversely, liquidity providers find it hard to demonstrate the value they can bring to a client, how much more money they can save them or how they can win more clients through data-driven discussions. We have developed our Pricing Stack Analysis to address these issues, providing concrete evidence about the impact of liquidity decisions on a financial institution’s P&L. “With margins so tight in FX, firms will increasingly need to rely on data-driven decision making in order to make greater profits,” he continues. “FairXchange has a proven track record in applying

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digital assets continue their rise and influence over the FX market, participants are going to need to adapt to new ways of doing business.” P&L Editorial View Aside from the business opportunity, this also highlights the belief in many quarters that the answer to many of the FX market’s structural challenges could lie in the digital assets space – and vice versa.

our domain expertise to help customers craft a narrative from their data. Pricing Stack Analysis propels our offering to another level as we can now crystallise the results from our analysis in monetary terms – i.e. measuring cost savings in real dollars. This makes it far easier to justify the subsequent cost of onboarding a new liquidity provider, for example. Helping them identify tangible evidence of the potential savings they can make is a core part of our value proposition.” P&L Editorial View If nothing else such a product could put lie to the spurious claims by many LPs that “we stayed in” and for that, this writer will be eternally grateful!

P&L’S SQUAWKBOX

Survey: Financial Industry Remains Unprepared for UMR

State Street survey finds that although the uncleared margin rules (UMR) represent a “monumental change” in the OTC derivatives industry, a large majority of the firms remain unprepared for the compliance as well as the operational challenges associated with the new workflows. The bank says 81% of institutions with a September 2021 (Phase V) or September 2022 (Phase VI) deadline are unprepared to comply with all facets of UMR. The survey measured the perceptions, plans and readiness of 300 asset managers and asset allocators in 16 countries around UMR, which were set in motion in 2008 to reform the OTC derivatives market following the global financial crisis. “UMR signifies a major change in the industry that aims to bring greater stability and transparency to the OTC derivatives market,” says Nadine Chakar, head of State Street Global Markets. “As we approach the deadline for the next phase, it is critical for buy-side firms of all sizes to be aware of the pending requirements and to not only effectively manage, but optimise, their liquidity and collateral needs with the right solutions and technology in place.” The survey found that roughly a year away from the next deadline, which was extended due to COVID-19, firms remain primarily unprepared for the different aspects of the regulation. It finds that institutions are in different stages of compliance preparedness by both phase and function and that the vast majority (86%) are preparing for Phases V or VI, representing the significant proportion of buy-side firms coming under the purview of UMR in the next two years. “These institutions face a steep learning curve as many are unfamiliar with Initial Margin

(IM) rules and operations,” State Street says. For those firms in the preparation stage, only 19% say they are fully prepared for compliance, while 42% are preparing in all relevant functions, while the remaining 39% have begun preparations in just a few areas. Nearly 8 in 10 have not agreed on how to approach settling segregated collateral with counterparties. As it stands, third-party custody with account control agreements remains the favoured approach amongst respondents, although State Street says many firms underestimate the difficulty associated with compliance with UMR. While 68% of those preparing for compliance are very confident in their ability to handle the new workflows, 80% of those in compliance said they faced challenges in incorporating them. As institutions continue toward the compliance stage, half expect these requirements will ultimately have a positive impact on overall operations, while 40%

of the smaller firms surveyed anticipate a negative impact, compared to just 20% of larger firms. Public pensions were most likely to expect a positive impact, while corporate pensions were most likely to anticipate a negative impact. Institutions are using mitigation strategies and have turned to third parties to ease the burden of complying with UMR with 80% of those in compliance functions indicating that they have faced some degree of challenge in incorporating new workflows. To ensure on-time compliance, the majority of firms are employing a mix of in-house capabilities and outsourcing to third parties with operational expertise. Finally, 56% of firms are planning to adjust strategies by reducing OTC contracts to limit the impact of UMR. For those already in compliance, 80% reported a reduction. The majority are using compression strategies to limit UMR’s impact and the bank says firms will seek

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various optimisation strategies with third parties. “The key to any regulatory compliance is to look at all the requirements and objectives holistically,” says Gino Timperio, head of funding and collateral transformation at State Street. “While it’s tempting to circumvent the complexity of UMR by simply reducing the volume of in-scope contracts, I’d argue this approach is short-sighted. Recent market volatility underscores the need to consider collateral, funding and liquidity at a firm-wide level, and buy-side firms should adopt a strategic approach to UMR compliance, with the right external support to manage some or all components of the process.” P&L Editorial View As Tom Hanks said in Apollo 13, “did we miss a step?” Surely no one can claim to be surprised by the impending UMR implementation? Unless of course, they thought there would be another extension…

P&L’S SQUAWKBOX

JP Morgan Fined $920 Million Related to Spoofing Charges

wo US regulators, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), along with the US Department of Justice (DoJ) have levied fines totalling $920.2 million on JP Morgan over spoofing activities conducted by former traders in precious metals futures and US Treasury cash markets. The authorities say the activities of John Edmonds and Christian Trunz, who have both agreed to cooperate with the CFTC, and Michael Nowak and Gregg Smith, against whom action continues, spanned more than eight years and “hundreds of thousands” of spoof orders. The fines are collectively the largest levied by CFTC and other US authorities in a spoofing case. As well fining the bank for the former traders’ actions, it was also sanctioned for failing to uncover the activity. CFTC says, “…despite numerous red flags, including internal surveillance alerts, inquiries from CME and the CFTC, and internal allegations of misconduct from a JPM trader, [the bank] failed to provide supervision to its employees sufficient to enable [it] to identify, adequately investigate, and put a stop to the misconduct.” The Commission also notes that in spite of “significant” cooperation in the later stages of the investigation the bank responded to certain CFTC information requests in the early stages in a manner that resulted in the CFTC’s Division of Enforcement “being misled”. As part of the overall fine, the SEC has fined the bank a total of $35 million for its activities in US Treasury markets between April 2015 and January 2016. JPM also entered into a deferred prosecution agreement (DPA) with the DoJ over its activities. “Spoofing is illegal – pure and simple,” says CFTC chairman

Heath Tarbert. “This recordsetting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are. Attempts to manipulate our markets won’t be tolerated. The CFTC will take all steps necessary to investigate and prosecute illegal activities that could ultimately undermine the integrity of the American free enterprise system.” Division of Enforcement director James McDonald, adds, “This action sends the important message that if you engage in manipulative and deceptive trade practices you will be caught, punished, and forced to give up your ill-gotten gains. The CFTC is committed to working with our law enforcement and regulatory partners to eradicate this unlawful activity and to hold those responsible fully accountable.” Meanwhile, Stephanie Avakian, director of the SEC’s Division of Enforcement, says, “JP Morgan Securities undermined the integrity of our markets with this scheme. Their manipulative trading of Treasury cash securities created a false appearance of activity in the market and induced other market

participants to trade at more favourable prices than JP Morgan Securities would have otherwise been able to obtain.” And not to miss out on the event, the DoJ also issued statements with acting assistant attorney general Brian Rabbitt of the Criminal Division, saying, “For over eight years, traders on JP Morgan’s precious metals and US Treasuries desks engaged in separate schemes to defraud other market participants that involved thousands of instances of unlawful trading meant to enhance profits and avoid losses. Today’s resolution – which includes a significant criminal monetary penalty, compensation for victims, and requires JP Morgan to disgorge its unlawful gains – reflects the nature and seriousness of the bank’s offenses and represents a milestone in the department’s ongoing efforts to ensure the integrity of public markets critical to our financial system. US attorney John Durham of the District of Connecticut, adds, “JP Morgan engaged in two separate years-long market manipulation schemes. Not only will the company pay a substantial financial penalty and return money to victims, but this agreement requires JP Morgan

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to self-report violations of the federal anti-fraud laws and cooperate in any future criminal investigations. I thank the FBI for its dedication in investigating these deceptive trading practices and other sophisticated financial crimes.” And last, but not least, assistant director in charge William Sweeney of the FBI’s New York field office, says, “For nearly a decade, a significant number of JP Morgan traders and sales personnel openly disregarded US laws that serve to protect against illegal activity in the marketplace. Today’s deferred prosecution agreement, in which JP Morgan Chase and Co. agreed to pay nearly one billion dollars in penalties and victim compensation, is a stark reminder to others that allegations of this nature will be aggressively investigated and pursued.” P&L Editorial View Historical activities yes, but they highlight the need for institutions to remain on top of their surveillance infrastructure because while the financial hit is inconsequential to a bank the size of JPM, too many instances and the reputation starts to suffer.

P&L’S SQUAWKBOX

Genesis Custody Officially Launches enesis, which launched the first US OTC bitcoin trading desk in 2013, has launched Genesis Custody, the culmination of integration work following the acquisition last May of digital custodian, Vo1t. “When we began to think through our plans for custody, we went in with a deep understanding of the unique characteristics of digital currencies, a strong point of view on how to build best-in-class infrastructure for investors, and years of experience working with advanced cryptographic security practices,” says Genesis CEO Michael Moro in a post announcing the launch. Genesis Custody services Bitcoin, Bitcoin Cash, Litecoin, Ethereum, Ethereum Classic, MANA, ZCash, Horizen, XRP and XLM. New assets will be added on a monthly basis, according to Moro. Moro explains that Genesis Custody offers clients streamlined access to assets and a comprehensive transaction reporting suite with full portfolio auditability, amongst other features. “Behind the scenes, our custody infrastructure incorporates layers of cryptographic security, following the same best practices utilised by government agencies to protect their most valuable assets. Additional protection is provided to clients through a

Michael Moro

suite of customised insurance solutions, tailored to meet the specific requirements of Genesis Custody by digital asset insurance specialists Paragon International Insurance Brokers and Woodruff Sawyer,” he says. “We are very pleased to have arranged vault risk and additional digital asset crime insurance for Genesis Custody to further protect their clients and to complement their impressive custody offering,” says Jeff Hanson, senior vice president, Paragon International Insurance Brokers Limited. “Genesis Custody is a unique custodial solution that demonstrates high levels of risk management and gives insurers the confidence to provide insurance coverage, offering further peace of mind to their customers. We are excited by the company’s future plans and are delighted to partner with Genesis,”

adds Nicholas Edwards, head of Specie, Canopius at Lloyd’s of London, and lead insurer of the vault risk policy. Looking ahead, Moro says Genesis is seeking regulatory approval to become a qualified custodian. “As part of this process, we’re also looking to become an agency trading venue,” he adds. “Upon approval, we’re planning on launching an agency trading desk providing robust exchange connectivity and aggregated liquidity for more capital-efficient trades.” He adds that Genesis is on the path to launching an institutional lending API, which will enable larger institutions to streamline lending with the firm. He further notes that Genesis is working with regulators on licensing efforts in Singapore as it builds out its presence there. Genesis will also be launching a capital introduction business to introduce capital to hedge funds and asset managers utilising its platform, and plans to integrate more robust capital market and fund administration tools.

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“Better global infrastructure will provide game-changing benefits in the maturation of digital currencies as an asset class – lowering barriers to entry, bringing in more liquidity and increasing the size of the overall market,” Moro says. “Genesis is proud to play a part in creating new architecture, and to bringing our services on par with the world’s top financial institutions. We are building a foundation to create value for our clients and the digital asset industry for many years to come.” Genesis facilitates billions in digital asset trades, loans and transactions on a monthly basis – including surpassing $10 billion across product sets over the first half of 2020, according to Moro.

P&L Editorial View Another step towards building a more robust market structure for digital assets – something that should make those institutions waiting on the sidelines a little more comfortable.

SPOOFING

Finding New Ways to Play: Will Spoofing Move into the OTC World?

Spoofing is back in the spotlight with US authorities fining and convicting firms associated with the practice, but while these sanctions are expected to reduce instances of the practice in listed markets, Colin Lambert wonders, are they likely to creep further into the more opaque OTC world?

robably the first thing to note about spoofing is that as a practice, it has been going on in OTC markets, especially spot foreign exchange, for longer than most can remember. True, the actual mechanics are different and, it can be argued, the allimportant intention to deal can be proven, but the very use of the word “spoofing” sets alarm bells ringing. Several traders spoken to by Profit & Loss point to the important status the primary venues of EBS Market and Refinitiv Matching hold in the spot market – specifically the market data therefrom largely fuels pricing channels to other platforms. While the pricing through these other channels is often subject to last look and therefore not firm, when it comes to “spoofing” it doesn’t actually matter. “We often see decent interest appear on the primary venues, closely followed by a shift in the market on others,” observes the head of e-FX trading at a top five bank in London. “So many pricing algos, especially at firms not in the top group of LPs, tend to recycle the primary venues’ prices and if the order book looks lop-sided then they will skew. “When this happens the primary venues look bid or offered, but the actual trading takes place on the secondary venues,” the e-FX trading head continues. “In such an environment it’s hard not to

think that some players are not trying to spoof the market. If they can squeeze an extra half pip or more out of a trade they’re going to at least try to do it.” The interesting aspect of this strategy is how unlikely it is that it would be found out – the pricing and trading takes place on different venues, often with different owners – but even if it is, there are many who feel there is nothing untoward taking place. “The two primary venues are no-last look,” argues the head of e-FX trading at European bank in London. “This means that if you post interest at top of book, which is where you will have the most impact on pricing elsewhere, there is every chance you will deal. There is provable intention to trade, which is what spoofers, by definition, want to avoid.” The legal semantics apart, as one experienced voice trader observes, what is termed spoofing in spot FX is radically different to what it is in listed markets. “There was always one voice broking desk that was dominant in a certain currency pair in a certain centre, but most liquidity was available through direct relationships,” the voice trader explains. “So if you wanted to buy, for example, 300 million units, and you thought there was value in it, you would first sell to the primary broker – and hit one or two direct relationships who you knew weren’t confident holding risk –

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SPOOFING

The problem with transparent markets is they breed players whose only strategy is to jump on the back of, even in front of, larger tickets.

and then go to the ‘real’ market to buy quietly. Often it would cost you 30 million to drop the market, but if you did it loudly then you got bang for your buck. Everyone thought there was a big seller and they sold into your buy order.” It can be argued of course, that such action is deliberately misleading other market participants, indeed such an argument is often made by US authorities when charging spoofers in futures markets, but while they assured Profit & Loss that they would not consider such action, all people spoken to for this article agreed they did not think it illegal. “Deals are done on both sides, the person trying to push the market up or down is actually increasing their risk and they could get wiped out,” says a hedge fund manager who spent time on a bank’s spot FX desk. “I don’t see why that would be illegal, I would think the bigger problem is internal – I am not sure the institution’s management would be happy with the strategy.” For some, whether a strategy of posting interest to a primary venue in the hope of being hit on the other side on another is misconduct depends upon the reason for the trade. “If this is an agency execution for a client I don’t think anyone should, or frankly will, mess around with the dynamics,” says the head of market risk at a bank in Asia. “Get the trade, execute it

according to the book, and pass the execution onto to the client with the appropriate fee. “The greyer area is what if the trade is to exit a large risk position the desk has built up? There is a lot of emphasis on market impact when executing large trades nowadays and some would argue that posting opposite interest to a primary venue helps reduce that.” The e-FX trading head at a European bank succinctly observes, “It’s reverse signalling risk,” adding, “You know people are out there sniffing out larger orders and you want to throw them off the scent.” This raises an interesting ethical point for all markets. US regulators, as noted, have often argued that spoofing orders in futures markets send false or misleading signals to other market participants, who may trade based upon the information and as such lose money. Whilst accepting the argument that generally spoofers brought to heel have been systematically running the strategy for months or years on an industrial scale, some are less than sympathetic to the so-called victims. “If all you are doing is waiting for a big order to appear and then trading with that order – which in turn means the person trying to execute genuine interest has to pay more to do so – are you actually adding any value to the market ecosystem?” asks a senior e-FX trader at a bank in the US. “It could be argued that all you are doing is making market conditions even harder for those people trying to execute genuine business. “This is the biggest problem with transparent markets,” the e-FX trader continues. “You breed a whole bunch of players whose only strategy is to jump on the back of, or even in front of, larger tickets. You could argue that spoofing is a defence mechanism against this practice, just as last look is against customers machine gunning your liquidity.”

A Different View

It is hard not to have some sympathy with the view that in a “consenting adults” world where traders take responsibility for their actions, if a trader is going to be spoofed by an order then they only have themselves to blame. To take the aforementioned argument further, could it actually be that by sniffing out the larger tickets those firms are actually guilty of front-running? In reality that cannot be the case, because even if they are taking an action that they would not have done previously without the knowledge of the larger order, the information being traded off is in the public domain. This is always going to be something of an anchor on business growth at leading venues, they become the de facto signal to the market of likely direction and as such genuine large interest – the type every venue wants to attract – becomes more reluctant to go there. Several traders point out that banks are happy to post orders down the book on the primary venues on behalf of their customers, but that is more a matter of convenience than best execution. “We rest all customer orders down the book on

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SPOOFING

If there is a pattern of placing large resting orders down the book, only to cancel them as they become top of book, then questions have to be asked one of the primary venues,” explains a senior FX trader at a regional bank. “They’re the venue of record when it comes to whether a trade is done or not so if I have the order in there and it’s only partly done it’s not my concern.” When it comes to any order where the skill of the trading desk or algo is at stake, the regional bank trader says they avoid the primaries unless there is decent size on the book. “A 10 year old could look at this and tell you it’s probably not a good idea to hit that one million order at the top of book,” the trader wryly observes. “It’s a pity that our compliance oversight and some customers don’t appreciate that.” So how much of a problem is spoofing in FX markets? It’s hard to find someone who thinks there is a problem, but equally, several traders are of the view, as noted, that some firms will use the primary venues to send a (misleading) signal to the market. “The primary venues monitor things like fill rates and that means they can sometimes spot someone playing games,” observes the head of e-FX trading at the bank in London. “At the same time, however, these venues really want to attract resting orders, so how hard are they going to look at suspected spoofing orders? I think if you are in at top of book nobody says a thing, perhaps if you exhibit a pattern of placing larger orders one or two legs down – which is often what happens in futures markets – and cancel them as they become top of book, then questions have to be asked. “Overall though? I don’t think the platforms want to waste time and money checking out activity that only runs the risk of them losing brokerage,” the e-FX head adds. “Also, how are platforms meant to see what goes on elsewhere? You can’t expect, for instance, EBS to have sight of what a customer is doing on Hotspot [CboeFX].” With data and analytics changing so much in markets, at least in terms of how they operate, this could change, especially if a global regulator decides they want a better look at market conditions and there are those that believe the answer to any conduct issues in markets, including spoofing, comes in more targeted oversight. “In several jurisdictions you have Suspicious Activity reports and these could be extended to OTC markets,” observes the market risk manager. “If a platform observes a pattern of larger orders being placed and cancelled by a market participant they can file such a report. “To do this, however, you would need a global FX trade repository and previously there has been a lot of resistance to such a move, not least because of the sheer amount of trades involved,” the market risk head continues. “With the advances in data, analytics and connectivity, however, it’s probably not as hard a task as it was a couple of years ago. Perhaps the solution is to have all spot trades over a certain amount, from all venues, proprietary as well as multi-dealer, reported to a central repository. If a suspicious activity report is filed then the regulator concerned can go to the repository and look across the market.” The market risk head stresses that they are not talking about making the data in the trade repository publicly available, “This 18

should be on a ‘need to access’ basis only and not visible to market participants unless or until they are involved in suspicious activity – and even then it should only be when the regulator has findings to share.”

An Ending…One Way or Another?

It is hard to see activity such as spoofing going away in markets, as the veteran voice trader rather caustically observes, “Most ‘traders’ in today’s market wouldn’t know a market if it hit them in the head – they hide behind the algos and don’t understand the nuances.” Certainly it is up to the institution to instil the correct attitude in traders new to the business, something that is undoubtedly harder in a dispersed workforce environment. Equally certainly, some participants in markets seem to be swayed by the benefits of a spoofing strategy. In a tough environment for making money, with targets to achieve it is inevitable that some heads will be turned – just look at the number of spoofing cases still arising in listed markets where the conduct is more visible. The attitude of a quant strategist at a bank in London is illuminating when they explain, while stressing they fully understand the conduct is improper and would not consider it, how their analysis of larger executions plays out. “We have looked at all kinds of different ways to execute trades using machine learning techniques,” the quant reveals. “In certain market conditions, the AI effectively suggested bidding the primaries and offering elsewhere, so the data points to that being an efficient strategy. We have established controls to ensure it doesn’t do that, but the analysis was revealing to say the least.” With codes of conduct and in some cases, such as in the UK, regulation, dictating that responsibility for machine learning activity is clearly apportioned, it is unlikely that systematic spoofing in OTC markets by algos will increase. Indeed, it is argued by several participants that the algos are, generally speaking, actually the “victims” of spoofing. “If the algos were better programmed they wouldn’t respond to orders down the book the way some appear to,” says the quant strategist. “Part of the problem in markets is there are ‘lazy’ algos out there that rely upon the market data and react accordingly, with no subtlety. In some ways it would be better if these players were rooted out of the market because lax operational standards and such a casual approach to markets suggests a lack of attention to detail – and who knows where that could end? Often flash events in markets are triggered by poor attention to detail in programming an algo, are strategies that are getting spoofed an early warning system?” The fact that spoofing is harder to spot in an OTC environment compared to listed, could easily be yet another stick used by those in favour of heavily regulated markets to promote their argument. There is little doubt that the practice is extremely hard to spot in OTC without a much broader view of the market, but against that has to be balanced the advantage given to customers looking to hedge large exposures who find the relative opaqueness of the order book in OTC markets much more to their liking. Ultimately, through internal and external codes of conduct and, perhaps, regulation, any would-be miscreant could be sufficiently swayed from taking the wrong path. If they are not, there are, as the quant strategist points out, more prosaic methods. “People are going to jail for spoofing futures markets and only recently a programmer was sanctioned by the CFTC for providing the software to help them spoof. The authorities are having more success going after spoofers and that should be a wake up call for anyone looking to try it – don’t.”

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SPOT FX IN MAR?

BoE Questions Decision to Drop Spot FX Market Abuse Regime

What was widely seen a technology control issue suddenly exploded onto the FX market’s radar, when the Bank of England, in response to the findings of an investigation, firmly pointed the finger at foreign exchange dealers

s part of its response to the findings of an internal investigation conducted after it was revealed that audio recordings of its press conferences were being sold to market participants, the Bank of England has flagged revisiting a previously ignored recommendation of the UK’s Fair and Effective Markets Review to create a new statutory civil and criminal market abuse regime for spot foreign exchange. In general observations regarding the broader impact of the audio feed issue, the Bank states, “There is a question as to whether the decision not to take this [the market abuse regime for spot FX markets] recommendation forward merits reconsideration. HM Treasury may, therefore, want to consider whether an extension of the regime is desirable when an appropriate opportunity arises.” In November 2019, concerns were raised with the Bank that an audio feed of certain of its press conferences was being made available to subscribers of Statisma News, an affiliate of the company – Encoded Media – which the Bank employed to video stream the press conferences to YouTube. The Old Lady also referred the issue to the UK regulator, the Financial Conduct Authority (FCA) which, it has been announced, has found no misconduct relating to the issue. It was found that Statisma was promoting faster access to the content of the press conferences via an audio feed which was, naturally, quicker than a video feed. In turn, this was seen as 20

disadvantaging certain market participants and thereby creating unfair and unbalanced market conditions. In its statement on the report’s findings, the Bank notes, “Up to now, the Bank has not routinely monitored social media or the broader web for evidence of companies that advertise inappropriate access to the Bank’s publications and press conferences.” The Bank of England does accept its shortcomings in the issue, stating, “Our Review has indicated that there were occasions where, with the benefit of hindsight, this misuse by a third-party supplier of the Bank’s audio feed could have been identified sooner by the Bank.” It adds, “In late 2018, an external party made a specific allegation to the Bank with regards to Encoded Media’s use of its feed. This was not fully investigated because it was not considered possible in the Bank’s press conference environment. This was based on the Bank’s understanding of the facts, but it was incorrect.” The Bank also notes that the European Central Bank announced in September 2019 that it was introducing its own low latency feed

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SPOT FX IN MAR?

There is a question as to whether the decision not to take the recommendation that spot FX being included in MAR merits reconsideration and respond to firms that advertise “inappropriate” access to Bank information. Whilst highlighting how it reminds market participants of their obligations under the FX Global Code and UK Money Markets Code, the Bank does acknowledge the “increasingly challenging” task of ensuring a genuinely level playing field in markets where even small differences in the speed of access to market-sensitive information can be significant. “The Bank will continue to discuss this issue with market participants and to share best practice in light of the Bank’s experience with counterparts internationally,” it concludes.

Surprise

of its key press conferences, a move which was reported as having been triggered by concerns about fast access by some companies. The report into the incident recommends that the Bank should review the way technology is used to support media interactions – something the central bank says it has already completed. The report also recommends the Bank risk assess how its market sensitive information is disseminated and as a result it says it will stop providing journalists with embargoed copies of such material. That said, it adds that once it is again able to host physical press conferences on its premises, the Bank’s most sensitive releases – the Monetary Policy Report and Financial Stability Report – will continue to be disseminated in advance to accredited reporters under the recently augmented, extensive “lock-in” security arrangements for such press briefings, which were in place for the publication of the January 2020 Monetary Policy Report. The report also recommends the Bank implement effective oversight of its “niche” suppliers and further training for senior managers in the early identification of such risks. It also recommends the bank adopt consistent processes to identify

The highlighting of FX markets came as a surprise to many in the industry who were expecting a simple wrapping up of the issue and a series of recommendations as to what the Bank should do to avoid a repeat. Several traders spoken to by Profit & Loss accepted that some FX dealers would have willingly welcomed a faster feed, but point out that even the audio feed is delayed compared to what would normally happen with many central bank announcements – namely journalists being freed from a lockdown at a precise time and publishing their story almost instantaneously. A source familiar with the issue says that FX was specifically mentioned because moves were seen in those markets before others, although the source does acknowledge, “interest rate traders would have had a great opportunity from a faster feed as well.” Overall though, the source says the thinking is that high speed market makers and traders were the primary takers of the feed, along with some bank FX desks, and therefore that market should be highlighted. “There is also the feeling that FX became a problem child five or six years ago and there is an unwillingness to give it more rope,” the source adds. The focus on FX also takes away from what is widely seen as a broader, and more important, question in markets, not just FX – the speed of trading. There is a sense that taking an audio feed to get information quicker than video consumers is no different to building a microwave tower to take data and send orders – the participant spending the money is doing so to gain a technological advantage through faster processing. The big question, which was not really answered by the report into the Bank of England saga, remains, was what Statisma was doing actually illegal? If it was not, then it is hard to see how market participants can be sanctioned for buying a service they understood to be within the law. The details of the legal contract between the Bank of England and Statisma would clarify such an issue of course, but the decision has been made that under “fair” market conditions, some parties getting information ahead of others is simply not on. This poses some interesting questions, and not just on high speed technology – for there are several private surveys of economic conditions paid for by market participants, that are subsequently given public release. Where for example, are these surveys left?

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EXECUTION QUALITY

FMSB Paper Looks at Execution Quality in FICC Markets

The FICC Markets Standards Board has released a fourth, and what it says is its last spotlight review, this one studying the challenges in measuring execution quality and how different participants assess it. Colin Lambert takes a look

ust 12 months ago there was a general sense that best execution, at least in FX markets, had been settled as an issue. Firms had their own priorities and motivation to trade and these were accurately reflected in their individual best execution policies. As illiquid conditions hit markets in March, however, many policies were found wanting and this has led to many firms once again deciding to study their policies. Be it the greater use of algos, pre-trade analytics or just a more flexible policy generally, the reminder that market conditions can, and will, change quickly, have refocused minds on the issue. This makes it a good time for the latest FICC Markets Standards Board (FMSB) Spotlight Review, which acknowledges the increased focus on best execution and transaction cost analysis (TCA) by market participants and regulators and says that as a result measuring and evidencing trade execution quality has become “critical to client servicing as well as to demonstrating ongoing compliance with investor protection regulations”. It observes that a firm’s ability to do this well depends heavily on the quality of data available and while the various regulatory requirements for measuring execution quality vary by jurisdiction and asset class, wholesale fixed income, currencies and commodities (FICC) markets face specific challenges in achieving high standards of transparency, openness and fairness. FMSB spotlight reviews seek to highlight key issues facing market participants. This latest paper, authored by FMSB’s

Rupak Ghose, explores the root cause of the challenges around best execution, highlights the progress made in regulation and market participants’ practices with regard to data reporting and best execution, and sets out key points of focus for firms navigating “difficult waters”. The review notes that effective measurement of execution quality rests crucially upon the observability of relevant highquality data sources. It adds that increased electronic trading and post-trade regulatory reporting requirements have substantially increased the amount of data available, however, the vast majority of FICC instruments continue to trade episodically, without adequate penetration by CLOBs (central limit order books) and, even where there is regular trading activity, there may be a limited amount of real-time public market data due to the OTC nature of the activity. FMSB says that the growth of disclosed liquidity channels with pre-trade trade axes can be a valuable source of data for measuring execution quality, but warns that while post-trade regulatory reporting requirements have led to a growth in the amount of data that is available, much of that data is derived from small trade sizes while block liquidity may vary significantly. Looking at the various approaches around the globe, FMSB observes “significant inconsistencies” and says there is a continuing debate amongst market participants and regulators about the benefits of increased real time reporting and

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EXECUTION QUALITY

Creating a rigid, one-size-fits-all set of requirements is not suitbable given differences in the application and principles of best exection across asset classes

dissemination of this market data. “This is particularly relevant in less liquid securities, where there is a balance between ensuring transparency and liquidity,” the paper states. Stressing the importance of reliable data, the review says ensuring that data is fit for purpose involves checking for its accuracy, robustness and timeliness as well as how it is aggregated and analysed. Much of the new data ecosystem that has emerged in recent years has not been optimised because of a lack of data quality and standardisation, it continues, saying, “This is particularly evident in the context of the Markets in Financial Instruments Directive (MiFID II)1 where a less prescriptive approach to post-trade reporting of OTC transactions has led to inconsistencies in the disclosures provided by market participants, which has in turn impacted their usefulness to the competent authorities.” Looking at the focus on best execution and TCA by both market participants and regulators, FMSB says the growing shift of liquidity risk to the buy-side over the last decade has increased its desire to ensure adequate liquidity sources across all types of market conditions. “Creating a rigid one-size-fits-all set of requirements is not suitable given differences in the application of best execution factors and TCA principles across asset classes, geographies and firms, and the variability in data availability,” the review states. “However, there may be benefits to agreeing broad best practice, including due diligence as to how execution quality is measured,

with a view to better fulfilling regulatory requirements and driving greater efficiencies.” In laying out some key inputs to a best execution policy, the review acknowledges that achieving a one-size-fits-all set of requirements for best execution and TCA is impossible given the fundamental differences across asset classes, geographies, firms’ business models, and the lack of wide availability of key data points. It adds, however, there are opportunities to agree principles of best practice in broad terms regarding the due diligence of how execution quality is measured; fulfilling regulatory requirements while driving greater efficiencies. “A broader approach to establish standardised models and processes rather than specific obligations related to an individual trade could be crucial to building trust between buy-side clients and market makers over the fairness and effectiveness of FICC markets,” it states. The review continues by observing that designing best practice focused on the measurement of execution quality must strike a fine balance between being detailed enough to improve consistency in how market participants engage with each other while not being so prescriptive that it harms liquidity. It also needs to be able to cater for the huge diversity of FICC markets, in terms of the amount of trading activity and data available, product complexity, unique market structure of individual asset classes and market segments. It is also crucial for individual market participants to dedicate time and resource to this area, the review states, adding that ensuring observability of data through the appropriate use of public data sources, such as electronic trading platforms and post-trade reporting, consensus and evaluated pricing and internal historical databases, is “foundational”. Moreover, it adds, this observed data must reflect the ‘real’ available liquidity for the relevant market participant and in the right size. It must also pass the reliability test which incorporates the need for robust processes to ensure that data is not stale or erroneous, and that there is proper timestamping and labelling of data. It also observes there is a limited public consensus on the data inputs and processes that should be included in best execution assessments. “This Spotlight Review…suggests that there may be benefits to agreeing broad best practices for measuring execution quality, both to better fulfil regulatory requirements and to achieve greater operational and cost efficiency,” says Mark Yallop, chair of FMSB. “Drawing on themes already identified in earlier Spotlight Reviews, this study highlights the importance of ensuring good quality data – from the broadest, most reliable and most appropriate sources – in order to measure the quality of trade execution.” Ghose adds, “The series of four market structure Spotlight Reviews focused on emerging themes such as model risk in algorithmic trading, the critical role of data management, the changing surveillance environment and processes around measuring execution quality. A common theme throughout this series is the increasing importance of data quality and technology advancements, such as machine learning, in shaping the financial market landscape. Ensuring that governance and industry best practice keeps up with the rapid evolution of these trends is more important than ever in today’s complex financial system.”

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XTX ALGO

Simple, but Sophisticated: XTX Launches FX Execution Algo

The non-bank market maker has added to its offering, as Colin Lambert reports

t is an old saw in the FX industry that firms respond to customer demand and with algo usage on the increase for firms executing FX trades, inevitably eyes have turned to XTX Markets with the question, ‘will it also enter the market for algos?’ As one of the biggest FX market makers such questions are inevitable and the answer, thanks to the live debut of the XTX Execution Algo, is an emphatic ‘yes’. The algo strategy has been built in house and leverages XTX Markets’ expertise in market making, specifically, as Matt Clarke, head of distribution & liquidity management (EMEA) at the firm explains, “Market making is why we exist as a firm and we are using all our knowledge of market microstructure and trading in this product.” The XTX Execution Algo is a principal algo which has a very simple outlook, reducing slippage from arrival – or implementation shortfall – but is built upon tremendously complex processes, effectively, as Jeremy Smart, global head of distribution at XTX observes, “We expect the algo to trade much like our own proprietary market making business.” The new algo is available via multiple channels, including an XTX GUI as well as via FIX connections and the major third-party platforms that support algo strategies. Clients are able to face XTX directly, alternatively the firm is partnering with several selected banking partners to make the algo available to their own clients if preferred. “We think this is a new market structure,” says Smart. “Our partner banks can put their high-quality credit together with our execution expertise and the end client doesn’t have to change anything in their workflow or whom they execute the trade with. They know their orders are being routed to XTX, that is fully disclosed and we want that level of transparency for the client, especially around who is actually executing their orders.” The partnership approach is likely to help XTX reach clients that were previously perhaps beyond it, not least those corporates and asset managers that are clients of such banks and who make up the majority of market participants using third-party algos. Conversely it also allows those clients to access the expertise of a 24

firm that has established itself as one of the small group of major players in the spot FX market especially. Maintaining the simple approach to the issue of what is essentially a simple subject, users are able to select one of three settings, low, medium and high urgency, they are also able to establish price barriers at which the algo will either stop executing or switch to high urgency to complete the order. Clients can also change the urgency setting during execution and if using the XTX GUI or a third-party platform that provides view only analytics, they are able to follow the execution in flight. “Clients like the level of information they receive during the execution,” says Smart. “It allows them to see the bigger picture, while the algo deals with the microstructure issues around the child orders.” Being an implementation shortfall algo it has a very specific objective, namely reducing market impact, and here XTX’s high profile should really help clients avoid excessive impact purely because the firm is so active on both sides of the price. This means that discerning client algo orders from the firm’s proprietary business will be nigh on impossible to other market participants. The aforementioned study of the microstructure of the FX market will also help. “We have done a lot of research work over the years aimed at creating the XTX fair value mid-rate,” explains Smart. “This is our alpha and the new algo leverages that work. “The algo has a significant amount of information driving it by definition, not least the predictive alpha our market presence and experience can provide,” he continues. “We have done a lot of work on watermarking our liquidity over the years and that has taught us a lot about different channels and different streams and allowed us

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XTX ALGO definition of what that term actually means is unhelpful. Reiterating that the urgency will dictate the skew XTX shows and not the size of the order, Smart says that the firm is looking at providing a netting solution, but is concerned about the potential information leakage such a solution can bring. “We are looking at different solutions for this, for example minimum amounts for netting,” he says. “We want to make it as hard as possible for firms to fish for larger orders. At the moment, however, we are stressing to clients the benefits we can offer on an individual order basis through our scale and expertise.”

A Different Analytical Look

to protect the alpha in our price. The new algo uses the same IP, thus it offers clients the same protections.”

Segregation and Netting

Inevitably when a major trading firm releases such a product, questions are asked about how it interacts with the proprietary trading business. As a signatory to the FX Global Code, XTX takes these questions seriously and Smart is keen to describe how the new algo is segregated from the main FX business. “We have built our own standalone EMS (execution management system) which is segregated from our market making system,” he explains. “The two do not talk to each other, they merely send skews that are then aggregated for sending to market. By aggregating skews, no information of relevance or size relating to the client order is revealed. The level of urgency dictates the skew we may show, not the size of the order.” If the market making business and client algo are trading in the same direction the intention is for the former to trade to maintain a broadly neutral position in the market and excess fills from the skew are allocated back to the client algo. “This effectively means that the skew dictates the order fills for the algo,” explains Clarke. “It is the same methodology for two client orders that are in the same direction, we do not look at this on a first in-first out basis, we think that’s fundamentally unfair – consider a 1 million order entered a second behind a 500 million order – and heightens the risk of information leakage.” Inevitably when looking at a firm with the market presence of XTX thoughts turn to internalisation, however the lack of an industry-wide

A very interesting aspect of XTX’s new algo is how, at a basic level, it may be counter-intuitive in how it executes. For those market participants used to using basic TCA tools that look at top of book and little else, understanding the benefits of the XTX Execution Algo will need a deeper, more complex look at transaction cost analysis. Clarke is keen to stress that XTX firmly supports the use of third-party firms to provide execution quality analysis, however he also observes that the analysis needs to again be sophisticated in its approach. “Our alpha allows us to create a different mid than may be obvious in the market,” he explains. “And where our mid is predictive that means that sometimes an aggressive fill can be better than a passive fill. Imagine buying on the bid in a 10/12 market whose next price is 4/6 and then 7/9. With a predictive mid you would want to pull the 10 bid and aggress the 6 offer. We want clients to look at the child orders on a T+one second basis, for example, because that would indicate if the fill genuinely captured spread. “We think good analysis – and several independent providers can offer this – allows the client to look back with the benefit of hindsight and ask themselves whether it was a good fill or not,” he continues. “We don’t believe that just because a fill is passive it represents best execution, buying passively in a market that is about to drop is very easy, but is it best execution?” The different approach to analysing what is a growing number of algos on the market also drives XTX’s hopes that the new algo will add to what it says is good initial traction in the market. With so many algos on the market it can be difficult for clients to accurately work out which perform well, and which don’t. Smart observes that third party TCA providers now offer peer analysis, meaning that clients can access pooled (and anonymised) analytics on different individual algo strategies. Rather than having to execute hundreds, perhaps thousands, of orders to gain the necessary depth of analysis, by accessing the peer group meta-data, clients can gain insight to help them with their algo selection. “We think taking this approach allows clients to make better decisions using more robust data,” says Smart. “We think that performing this analysis will allow the best to float to the top and the objective performance metrics will see algos like ours attract a greater proportion of business.” In many ways the approach taken by XTX reflects that taken by so many successful products over the years; back up a simple client interface with very sophisticated analysis and technology – as Clarke wittily observes, “Too many algo interfaces require a PhD to navigate. He adds, “We wanted to create a simple solution that clients can use easily and with the confidence that our scale and expertise is driving the decision at micro level. The client is blending their own alpha in terms of execution timing, with our detailed knowledge of the market structure, in an environment in which their workflow doesn’t change.”

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FX SWAPS

Momentum Building: FX Swaps on the Cusp of Change

Is the last bastion of the “traditional” FX market about to be overrun? Talking to market participants and technology providers, Colin Lambert is starting to think that market structure change in FX swaps is, finally, upon us

n terms of false starts, the restructuring of the FX swaps market has, over the past decade and a half, had more than the 100 metre sprint at the summer Olympics. Probably the first was in 1997 when the FX industry had a “we have seen the future” moment with the launch of what was Reuters D2-2 for forwards, or Matching as has long been known. Rumours abounded of challengers to the platform, not least from its close spot rival EBS, but the reality is that until very recently Matching for Forwards has had the market to itself. The banks advanced the automation of the product by including forwards on their single dealer platforms, initially as an RFQ but then as a stream; the multi-dealer RFS platforms 26

followed suit and then? Not a lot. “I think the industry has lagged behind on building out FX swaps infrastructure because the clients were generally happy with what they had,” suggests the head of FX forwards trading at a bank in London. “Even more than spot clients tended to look at swaps as an administration trade and as long as the price was tight, they could electronically trade and were happy. “It is only in the last couple of years when other factors came into play that the banks started looking at the issue again,” the FX forwards head continues. “There is a fear that the market structure change will bring more competition to the space with non-bank firms able to play, so the banks have, finally perhaps, become more engaged on the subject of forwards market structure.” The e-FX head at a bank in London believes any change has been thwarted by forwards dropping further down the task list the more challenges emerged elsewhere. “Most banks could have driven change in forwards eight to 10 years ago had they been more open on credit allocation and not had to deal with unexpected challenges elsewhere in the business,” the e-FX head argues. “Our business certainly looked at several FX swaps initiatives post Dodd-Frank but then we found – as many did – that our spot business was haemorrhaging cash and was losing market share thanks to others being better at pricing and risk

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FX SWAPS

managing. When that happens, the only option is to maintain the status quo in the forwards and throw everything you have at the spot business.” The head of forwards at the bank in London also believes the ambiguous nature of the FX swaps business, specifically where it sat in the broader business, hampered development ambitions, noting, “It’s hard enough getting buy in for change in one business, but when the FX business is trying to drive it and bring the interest rates silo along for the ride – for that is where FX swaps sits in many institutions – you’re just making the challenge twice as hard.” There were three other factors at play in the resistance to change, the inability to reach consensus on what the market structure should look like – as one interviewee for this story points out, FX clearing is not exactly a new concept – and forward traders’ liking for trading at mid-market. “The voice brokers did – do – a really good job of selling their ability to bring buyers and sellers together,” says the FX forwards head. “Traders on the desk just got used to the fact that the bookies were often executing at mid and in those circumstances why change?” The third factor is ongoing, the very flat interest rate environment in the world today. “There’s still money to be made in these markets but it’s a fraction of what it was 10, 20 and 30 years ago,” explains the FX forwards head. “That is pushing

more banks towards the ‘broker’ model where they just facilitate customer business. “I am a little concerned as to what happens when interest rate volatility returns – as it will someday,” the head adds in what could be a warning to the market. “We had the ‘taper tantrum’ in 2013 which some dealers found tricky to handle, and when it comes to seeing things for the first time, in 2015-17 we had traders on the desk experiencing their first ever Fed hike. There is a whole generation of forwards and interest rate traders coming through who have no concept of how busy it can get when we get divergent interest rate paths.” Whilst all the aforementioned challenges existed and played a part in the slow change in the FX swaps market structure, there was one issue over-riding all – solving the credit bottleneck. “We have spent a lot of time talking to clients over the years about changing how the credit check is done and we often get pushback because they are concerned about collateral management, which plays such a big role in credit availability for short term funding requirements,” says Paul Clarke head of FX trading venues at Refinitiv. “A lot of our clients are using Matching for Forwards to manage their short end funding requirements and rolls, so they need to be able to continue to meet that need as the product evolves.” While Gavin Wells, head of FX swaps strategy at Deutsche Borse’s 360TGTX platform, believes the FX swaps market is at a

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FX SWAPS

turning point, he acknowledges that overcoming the credit hurdle remains a substantial challenge for some. “Fully-automated trading in FX swaps is missing because of the manual credit checking that has to take place,” he observes. “You can’t really move to API trading when there is a manual credit check, which is why we built Mid-Match.”

Changing Moods

occupying the seat,” the forwards head continues. “As regulation pushes into the FX swaps market they are faced with no choice but to embrace the change. Costs suddenly matter a lot more than they used to for these traders and while they are more obsessed than ever with making money, there seems a greater awareness that lower cost bases can reduce the ultimate number they need to make to be seen to be successful.” Automation is also being embraced. “The e-trading teams, who typically have passed their positions to the voice desk, now want to auto-hedge their exposures to gain efficiencies and because they are seeing more of their clients electronically trade forwards,” says Clarke. “We are also seeing clients become more interested in becoming market makers by posting interest – that is one reason we launched our API for Forwards Matching earlier this year. It’s not just about the short end now either, there is a lot of interest to price and execute along the curve.” Reinforcing the point, Clarke says that Refinitiv is planning the roll out of what is effectively an Excel plug in that will allow manual traders to interact more easily on the platform. “If a bank hasn't got the infrastructure or doesn't want to spend the technology budget coding to our API, they can use this Excel addon to publish their prices or curves and execute their trades more effectively,” he explains. Another important factor in the evolution of the forwards market structure is – and again this has been a long time coming – competition. “360T launching its swaps product has been good for the industry, for while we may not want fragmentation, we don’t want an effective monopoly,” says the head of e-FX at the bank in London.” Unsurprisingly, Wells agrees. “We believe the market should be offered choice and what’s missing in terms of choice in FX swaps has been price transparency,” he says. “It’s not only about trading, it is also about providing better pricing for many other areas including, for example the middle office doing rate reasonability checks.” Wells also believes another factor is at play in FX swaps at this time – the entrance of new players to the market. “The BIS and FX Committee surveys have signalled the growth in FX swaps, not just as a notional amount but also as a share of FX trading overall,” he says. “This seems out of line with existing market participants simply wanting to do more FX. To me it supports the notion of new participants in FX swaps, with new motivations to trade. “These players are there because of things like the liquidity coverage ratio, where you need to hedge all your outgoings for

The problems are clear, therefore, but whereas three-to-five years ago few were looking at solutions, now there are a plethora of firms seeking to clear the bottleneck created by credit and post-trade processes generally. From CME Group’s FX Link which seeks to break down the barriers between the OTC and futures markets through a basis spread trade, through countless technology solutions seeking to optimise collateral, credit and capital, to new offerings such as the New Change FX beta indices, the industry has more This is probably the last choice than ever before. More shot for clearing to present importantly, however, there is a mood for change. itself as a viable alternative “Working with voice brokers became very hard during the lockdown and that to some sort of automated has made banks think more about bilateral credit solution. their forwards business,” explains the head of forwards at a bank in London. We do believe the change “The result is they want it to become will occur but it’s far more electronic, but this time the impetus is coming from above, where it from guaranteed once wasn’t. “Traders are also being made even more aware of the cost of them 28

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Gavin Wells

FX SWAPS the next 30 days, and other capital requirements that have driven a need for funding, and this is becoming a more common theme – the desire to use FX swaps for funding,” he continues. “Funding and liquidity pressures seem evident by the continued use of FX swap lines between central banks – the question now is whether the FX swap market can provide the funding function that came from these.”

Front Office Solutions…

Impending regulatory pressure – and it remains significant that FX swaps remain outside of regulations in some jurisdictions – will force a degree of change, but to get the full experience, traders, both electronic and voice, have, as Clarke notes, to be brought along. “We have to be thoughtful about how we change the model and, for example, manage credit and the trading workflow,” he says. “We know the market is going to evolve and we want to ensure that all our clients can benefit –we have 300-plus clients on Matching for Forwards and they should all benefit from being able to trade with the rest of the community.” In terms of what is actually being done, the main focus seems to be on supporting the existing experience of traditional traders whilst also enabling e-traders to execute effectively with the broad set of participants on the venue. Refinitiv has an “upping the quantity” function which allows two participants to trade initially, and then communicate with each other to increase the size of the trade. This is done in the post-trade environment and Clarke says the functionality has proved “very popular”. At 360T, Wells also stresses the importance of engaging with all sides of the market, reiterating the platform’s desire to provide greater price transparency. Noting that it is “odd” that in the biggest segment of the biggest market in the world there is minimal price transparency, Wells argues that once that transparency is delivered best execution can be enabled both manually and via API, something that plays to current and impending regulation. “Our swap data feed has over 20 banks, pricing in more than 48 currency pairs in over 60 tenors,” he says. “That means lots of prices that are – importantly – clean of skew for credit and that are delivered by an independent third party. If you have a midprice, people start looking to trade on it, which is why we built Mid-Match. Clients can see mid-market through the Swaps Data Feed and then post interest in a dark environment to exchange risk at that level. “This brings players together but that doesn’t work effectively without a better credit model,” Wells continues. “The soft credit model has its place but, again, we believe there has to be choice – Mid-Match automates the credit checking process – you cannot stop a deal for credit purposes, so there is certainty of trade.” Fungibility also plays a role in the new solutions, with CME’s FX Link pioneering, although it is notable that not everyone views it positively, with one senior forwards trader observing that there is still an underlying lack of liquidity holding back broader adoption. “It’s an elegant solution, but maybe too elegant,” the trader argues. “I still think there needs to be more flexibility – this is not just about capital and credit charges, the bottom line for any trading venue is it has to offer deep enough liquidity.” The head of forwards at the bank in London acknowledges that futures are not the largest part of the FX market, but feels they are important, especially if the fungibility can be built out further. “I think CME is missing one important piece of the puzzle – and that is direct access to an OTC forwards platform to help it build liquidity. It owns EBS so the opportunity is there if it can grasp it.

Gil Mandelzis

We are going to see a growth in clearing, that is a fundamental step... but we are also going to see solutions outside that space such as compression and novation FX Link is still likely to play an important part in the evolution of FX swaps if it can fill that gap.” 360T’s Wells is bullish over the prospects for a blended pool of liquidity embracing OTC and futures. “When you bring those two pools together you create opportunities,” he says. “We have seen how popular swap algos have become and if we succeed in building these fungible pools of liquidity then I think you will see streaming EFPs – and that provides the global market with another source of funding, hedging and alpha generation.”

…And Back

It is a testament to the impact of regulation that the biggest driver of change in the FX swaps market is unlikely to come from principals or intermediaries in the market. With capital, credit and collateral management dominating the agenda the fintech world is driving a lot of change, and seeking to push even further in the search for efficiencies. “The issue is more complex than just credit limitations,” observes Gil Mandelzis, founder and CEO of Capitolis. “It could be that a firm is running out of appetite for a certain counterparty due to risk-weighted asset reasons, especially if that counterparty is not highly rated and comes with a much higher weighting. “Financial resource optimisation has become a major issue, but if, for example, you liken it to the e-commerce evolution, then we are in the 1990s. There is little refinement or granularity, and the appropriate tools to deal with this complexity are not available on an industry wide basis,” he continues. “That is what Capitolis offers, a more customised approach that recognises that different market participants have different motivations and limitations

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FX SWAPS

problem has now multiplied. Banks seeking to reduce the G-SIB rating through lower forward exposures saw spreads widen at these crucial junctures in firms’ funding cycles, the paper found. Andrew Williams, CEO of compression and optimisation services provider Quantile, points out that compression works well for reducing G-SIB scores and believes the spillover from interest rate markets will continue, making the service even more valuable to FX swaps desks. “Business managers are starting to look at both cleared and uncleared exposures together,” he says. “Whether it be the FX or rates business, they are focused on their total funding cost regardless of where the trades reside, so while our optimisation service started looking at uncleared margin, increasingly it’s being used to incorporate cleared positions as well.” Williams believes that there will continue to be greater interaction between trading and optimisation desks within banks. “In addition to the XVA desks, the optimisation desks also look at firmwide exposures to try and make the business as a whole more capital efficient, which is where we can help. Traders should be free to focus on pricing to clients and accessing liquidity, on multiple venues using multiple products. If Quantile can efficiently rebalance risk across these channels and products, there is a feedback loop that leads back to the trader making tighter prices to clients.”

The Nine Ton Gorilla

regarding their trading, but it is still very early days. Senior management at the banks understand the problem, but at the trading desk level that understanding is only now starting to have an impact.” Mandelzis believes that interest in optimisation is going to spread beyond the top 10-15 players currently engaged on the issue. “We are going to see growth in clearing, that is a fundamental step towards solving the issue, but we are also going to see solutions outside of that space such as compression and novation,” he says. “Three years ago people were saying I don’t need to compress in FX – that is changing.” Earlier this year a Bank for International Settlements’ paper found evidence that G-SIB requirements were prompting several larger banks to pull back from the FX swaps market at month and quarter ends, thus signalling that what was once just a year-end

Andy Williams 30

“You can forget the saying about the 900-pound Gorilla in the room,” says the head of forwards trading at the bank in London. “We have an absolute monster sitting there and it’s got a clearing tag around its neck. There are those who feel clearing is a panacea and others who are less sure – all I can say is that if clearing does eventually emerge as a major part of the FX swaps market then we would have discussed it to death internally and it will be there because it works.” At face value the argument for clearing seems strong – a centralised liquidity pool without credit restrictions – but if that is the case, why is it taking so long for the market to embrace it? Dodd-Frank was seen as a driver but exempted FX, the CFTC in 2014 looked set to mandate FX clearing but pulled back and then just a year later Europe looked like it was going to take the lead, but again nothing has happened. “I think there were cost issues,” says a source in the clearing world. “Few firms were going to spend valuable resource on building the framework required for clearing, but as UMR gets SA-CCR provides a closer, that mood is changing. significant incentive Frankly it just wasn’t important enough for most banks and, if for clearing. We you ask them now, they would need to clear in an still prefer not to be heading that way.” optimised fashion The reluctance to embrace to increase netting change is partly, some argue, and decrease risk because clearing will ramp up competition levels in the fragmentation forwards market and drive across multiple something similar to what was seen in spot markets with the netting sets entry of non-bank market makers. “Getting prime

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FX SWAPS

brokers onto the OTC trading platforms would be a good start, it We know the could provide additional liquidity and interest,” says a senior manager at a market is going to platform. “There will be resistance evolve and we want from banks, though, and I wonder how many platforms are really willing to to ensure that all poke that bear at this time when our clients can competition is high and volumes in spot are not exactly growing.” benefit from being It could be argued, of course, that able to trade with with spot volumes largely static platforms should indeed be looking the rest of the at not only building forwards community platforms but actively seeking new LPs to power them, but as a senior Paul Clarke trader at a major asset manager points out, “We’re perfectly happy with our pricing in forwards. We can put banks in competition, appropriate manner, but believes the argument for clearing in FX is spreads are tight – why do we need to go elsewhere?” becoming more compelling. “Uncleared compression is typically There is also the factor that the really big issue being solved harder than cleared compression as you need to consider the for in FX swaps does not, to a large degree, involve the buy side counterparty risk and various financial agreements between – it is very much about automating and bringing efficiency to banks,” he observes. “When compressing at a CCP, it’s a different the dealer-to-dealer market that makes up such a large and more efficient process, so if there is more clearing of FX over proportion of trading. That said, if the core market structure is time it will benefit compression activity and free up more capital for enhanced, inevitably buy side clients will want to see the the business.” benefits of any change. “The rates business has generally been front and centre from a Whichever way one looks at it, credit remains a bottleneck, compression perspective but it’s fair to say that all businesses want however, as 360T’s Wells observes, “Automated credit is pretty to drive efficiency and most are assessed on return on capital, not good but it’s not centralised credit – that only happens in an just outright P&L,” he continues. “This means the incentives to exchange or central counterparty environment.” optimise the use of financial resources, such as capital and Wells believes that the changing rules are driving FX into a funding, in each individual business is becoming increasingly more regulated environment, but accepts it is still very slow to important. Compression and counterparty risk rebalancing both change. “The change to the SA-CCR risk model next year is really have a significant part to play in FX going forward, and more beneficial for clearing and it ties in with the tail end of the capital clearing will help drive that.” regulations in UMR, which also happen next year,” he says. “SA“SA-CCR provides another significant incentive for clearing,” he CCR brings netting benefits and could lead to a re-shaping of adds. “We need to clear in an optimised fashion to increase netting market infrastructure.” and decrease risk fragmentation across multiple netting sets. This Intriguingly, however, Wells also warns, “This is probably the last optimised approach will help to realise the material benefits of shot for clearing to present itself as a viable alternative to some clearing whilst managing the total margin and capital requirements sort of automated bilateral credit solution. We do believe that the across the portfolio.” change will occur but it’s far from guaranteed.” It is unlikely that all FX swaps will trade in an automated Capitolis’ Mandelzis sees clearing as the “central limit order book fashion, or be cleared, there will always be bespoke of optimisation”, which has a role to play going forward, noting, “SAtransactions with clients and different demands from the sell CCR lends itself to optimisation where participants can rebalance side hedging fraternity. There is a real sense, however, that their exposure, not only between their uncleared counterparties, genuine change is coming, both in terms of automated trading, but also move some of their risk into the clearing house, so there optimisation and clearing. From this a new, more modern, FX are significant capital benefits, which could lead to the clearing of swaps market is likely to emerge which is in itself important. For more deliverable FX.” as 360T’s Wells points out, “People have been discussing this As long as the OTC market dominates, however, Mandelzis for a long time, which is right because FX provides the oxygen stresses the need to alleviate capital and credit pressures more for the global economy. Now, however, more than just enabling generally. “This is the number one bottleneck in FX markets,” cross border trading, the FX swaps market is seen as a primary he says. “Break that bottleneck and you can unleash source of funding which means it has to modernise. It needs tremendous growth because there is a lot of pent-up demand more automated credit checking than it currently has; clearing existing today. Any time banks don’t want to win business due for those counterparties that require it to ease their regulatory burden; and deeper liquidity through a fungible cash and to regulations like G-SIB you have a fundamental problem – one futures market. that needs to be solved. We can help solve those balance sheet “A homogenised FX swaps market would offer a really viable and problems and help the industry grow by offering a flexible, richer pool of funding to a market that really needs more capital granular solution.” than is currently available if it is to provide the resiliency and Williams acknowledges the concern that margin requirements stability that both participants and regulators want.” could get out of hand as FX clearing grows if it is not managed in an H2 2020 I profit-loss.com

FX SWAPS

oldman Sachs has launched a new Axe UI on its Marquee single dealer platform that allows clients to access dynamic axes streamed by the bank in FX swaps. With the launch, the bank is aiming to disrupt the traditional voice driven delivery of axes and create a more efficient trading infrastructure for FX swaps. The new UI has five levels of conditional shading, depending upon the strength of the axes, which are streamed across standard and non-standard tenors in both Goldman’s G10 and emerging markets franchise. Clients are able to build their own ladder to receive axes. Key to the new service is work conducted by Goldman behind the scenes to build an infrastructure that allows the trading desks and e-risk management businesses to co-mingle their pricing. As Conor Daly, head of EMEA electronic FX sales at Goldman observes, the Axe Ui is a response to “market structure changes that are accelerating in the FX swaps market”, adding these changes, “have seen the mis-pricing of liquidity at times”. At issue is the lack of work by third-party platforms especially, to update their framework to more accurately reflect the costs associated with the pricing of FX swaps, especially as the regulatory impact continues to increase. “There is a lot of complexity behind the UI, led by the electronification and growth of algos in the risk management element of our business,” Daly explains. “What was once a price generated by traders sitting behind a GUI is now a much more sophisticated process that generates a more accurate price that reflects our risk position, pushed to clients who often have a matching interest. “This is a change in outlook for us and it has allowed us to become more focused on enhanced price distribution to specific clients according to a host of factors such as their RWA (risk weighted average) or CLS profiles,” he continues. “It means we can meet with our clients in a more controlled and tailored fashion.” Perhaps the biggest factor in the new service is Goldman’s ability to more accurately understand the risk exposure across the wider bank. Risk feeds from a firm of its size are many and complex and it is in blending and accessing these feeds that the critical work has been done by the bank’s systematic market making (SMM) 32

business, this has been overlaid with the trading desks’ input. “The approach we took was to first feed more aspects of the risk generation process into the framework so that different parts of Goldman Sachs could share their risk exposures, not just the trading desks” says Rob Williams, managing director of the EMEA short-term macro desk at Goldman Sachs. “We found that this generated deeper axes in much larger amounts. “FX swaps at heart remain a simple funding product and people want to trade at the best possible price, as quickly as possible,” he continues. “The new Axe UI allows us to find similar counterparties with whom to match off, in a very simple fashion, and to make more liquidity available. This is essentially what the inter-dealer broker market does, we are making it a more efficient and cleaner process for clients – and that is what it’s about, getting the right axe to the right counterparties. By standardising our approach, it allows us to focus on clients and counterparties with whom it is cheapest to deal and we can get an easier match.” The SMM business’ approach has been to focus on the big data challenges, leaving the computer to manage the day-to-day tasks using the latest analytical tools to present a broader picture of the firm’s exposures. As Williams notes, “It’s a more holistic approach to getting the risk we want as an institution by analysing a number of different views within the bank. That’s what probably excites me the most about it, we have built a vehicle for people to access Goldman Sachs’ risk in a mutually beneficial fashion.”

Engagement

The new Axe UI was rolled out in late July and Daly says the response has been very positive, not least because the bank has been able to add new clients thanks to the service. “This has struck a chord with clients,” he says. “It is about granularity of liquidity distribution and we are engaging more with short macro desks and counterparties than we would previously have met on a third-party platform. “Previously a lot of these firms would RFQ a number of players, often there would only be a small number making the price, the

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FX SWAPS are having is heartening and tells us the service is gaining traction,” he says. The engagement is not just external, however, for as Williams points out the bank has created a more symbiotic relationship between the SMM business and the trading desks. “This work could have been done previously, but the axes would have been less aggressive and the size on offer much smaller,” he says. “We have been able to reduce the cost of doing business by providing a more accurate price that better reflects the cost of doing business. The end result is simple to use, but it is backed up by a tremendously sophisticated and complex technology infrastructure, that allows us to establish the digital rules of engagement to benefit all parties.”

rest would be recycling,” he adds. “We have managed to migrate many of these firms off the multi-dealer platforms because we can offer them an entirely different and tighter price, in larger amounts, via our channel, without having to carve out credit. It builds and maintains attractive mutual relationships.” There is also the opportunity to leverage the initial roll out and some of the features on Marquee. Daly says that already the new service is generating a lot of conversations and ideas for enhancements, namely around cross currency swaps and call levels. “The amount of feedback and number of conversations we

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FX SWAPS

New Change FX Unveils FX Swap Benchmarks, Indices

With best execution becoming a more pressing topic in FX swaps markets, Colin Lambert takes a look at a new release by the benchmark provider

ith more electronic pricing of FX swaps occurring, more data is, inevitably, being produced for the swathe of independent third party firms seeking to provide execution quality assessment services. This has also led more market participants to understand that just as they have a best execution policy in markets such as spot and NDFs, so too, can they have one in the forwards. To meet this need, New Change FX (NCFX) has launched what it says are the world’s first live streaming benchmarks for FX forwards, the calculation of which has enabled the firm to simultaneously launch a set of currency beta indices that are designed to enable structured products to be created which offer asset managers an alternative to taking FX limits from a bank and then trading in the forward and swap markets. This means it is possible to buy a structured product that reflects the economic effect of the desired hedge. As is the case with the existing NCFX benchmarks in spot markets, the 38 new benchmarks take data via a FIX connection from an undisclosed number of trading platforms, but the backbone of the new forwards benchmarks is a new interpolation methodology that accounts for the “turn” effects often seen in FX swaps markets round month, quarter and year ends. Initially the curve will be streamed out to six months but NCFX has plans to extend this out to a year in a second release. As was seen repeatedly in 2019 – and indeed led to central bank intervention in cash markets – dollar funding demand around these “turns” created a blow out in repo market and FX swap spreads. As NCFX points out in a paper presenting the new methodology, the 34

Covered Interest Rate Parity theory (which states that FX swap rates should accurately reflect the cost of borrowing in both currencies) often breaks down around the turns, as witnessed in 2019. “In practice,” the paper states. “Basis (the difference between the cash and futures markets) seems to be here to stay.” It is hard to argue with that assertion given banks’ eagerness to reduce their month, quarter and year-end G-SIB (globally systemically important bank) rating which has led, as the Bank for International Settlements recently observed, to reduced liquidity around turns as the major banks in particular tend to step back from the markets. To solve the issue, NCFX’ new methodology allows the firm to produce a price through these events and to provide, it says, a much more accurate measure to calculate month end and broken dates. It involves NCFX calculating the slope leading up to the month end, and for the month. It then computes the average points per day leading up to, and after, the turn and then takes the average points per day from both to interpolate the month end based upon the day count from the target month end to the settlement date of the near contract. The same methodology is used to calculate broken dates, NCFX uses the month end as the far date contract to calculate to the broken date.

Indices

The creation of the FX forward benchmark rates has allowed NCFX to launch its Currency Beta Indices that measure the

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FX SWAPS

systematic return available from investing in currencies, although the firm observes that whereas in equities or fixed income returns might exhibit 90% correlation to the benchmark, in FX, the correlation of a currency manager to a style index is around 60%. This means that even managers following a similar investment strategy can generate significantly different returns. Noting that this “style beta” only captures a subset of the opportunity from currency exposures, NCFX says it became evident that a better way to measure and mimic currency beta was needed. To meet this need the new currency beta indices identify the systematic return for currency exposure in 21 currency pairs with the dollar, euro and sterling as the base currencies, where the exposure is proxied by a long currency exposure versus those base currencies via one-month forwards. The indices were re-based to 100 at an inception point on 29 December 2017 and returns are calculated on a daily basis, using NCFX benchmark mid-rates in spot and forwards, at 4pm London time. Each single currency index can be used for a bespoke FX benchmark and a group of indices can be weighted to reflect the beta that would have been obtained by taking the purchasing currency risk of any given asset allocation strategy. “This allows investors to accurately understand and measure the currency decision of their portfolios,” NCFX says. An independent benchmark oversight committee of three has already been established by NCFX in accordance with the European Benchmark Regulations, to oversee the new benchmarks in

“The creation of forward benchmarks and a benchmark curve is a significant change for the market” addition to the spot benchmarks, this will also oversee the governance of the currency beta indices. “The creation of forward benchmarks and a benchmark curve is a significant change for the market,” says Andy Woolmer, chief executive of NCFX. “It has not been possible to accurately separate out the skew of individual bank pricing and understand the cost of trading in FX forwards until now. The benchmark family means that FX forward users can now access a reliable set of benchmarks that explain their execution costs better than ever before’. “In addition, the opportunity to create financial derivatives from the NCFX Currency Beta Indices means that asset managers now have an alternative route for hedging, rather than relying directly on the FX market to execute their hedges. NCFX believes that transparency in markets drives out cost and invariably increases activity in those markets. A competitor to the model of directly trading forwards is long overdue.”

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DEFI

PhRewriting DeFi’s Playbook: Practical Applications for Mainstream Adoption

In this contributed article, Philippe Bekhazi, CEO of XBTO Group, argues decentralised finance will change, and lays out some examples of how

eFi (decentralised finance) refers to digital assets and smart contracts that live on the blockchain, mainly Ethereum. To a layperson, this is akin to crowdsourcing lenders to a variety of borrowing use cases, predominantly speculative and employed by those deep inside the crypto machinery. Most loans in DeFi are currently overcollateralised (usually with a pledge of bitcoin) with an automated liquidation mechanism if the value of the collateral falls below the loan to value amount (LTV) – akin to a margin call. This marketplace has grown at an impressive clip and is fast approaching $9 billion in total locked value, according to DeFi Pulse. While that is not an eye-popping number in traditional finance circles, the rise and rapid growth of DeFi has captured the imagination of the crypto community enhancing this burgeoning digital asset ecosystem. Many astute commentators in this space have drawn striking parallels between DeFi and prior financial innovations on Wall Street, reinforcing that this is far closer to an evolution than a revolution. As such, DeFi should be treated with the same bold mindset and visionary vigour to spark its true potential, especially as most experienced industry players have decried the most prevalent current use-case of DeFi, “yield farming,” as unsustainable and one that will end in pain for many speculative participants that did not do enough due diligence. That said, most maturing asset classes have watershed moments that wash out weaker players and DeFi will prove to be no different. What is much more exciting and thought provoking, however, is the longterm value of DeFi and the far reaching implications it could have across both Wall Street and Main Street, a topic that is less discussed to date among a myopic crypto community. Consider the number of applications for DeFi to be etched into the capital markets fabric at both the retail and corporate level, which would have an indelible impact on shaping and improving the future of finance. It is also perfectly positioned to provide inclusivity for those without traditional banking access – which the Global Findex database places at 1.7 billion adults.

Lending

According to Statista, transaction value in the consumer marketplace lending segment is projected to be approximately $85m in 2020 and is expected to grow to almost $100m by 2024. The number of alternative loans is valued at approximately $31m, expected to increase to $38m by 2024. When it comes to tapping this universe, there is no better mousetrap than a blockchain to ascertain the creditworthiness of a borrower globally. The particulars of borrowers, such as their name, age and address are not important in assessing credit. What is critical are leverage ratios and income and repayment statistics, all of which can be stored privately on a blockchain. This will enable someone to easily receive credit in real-time that is set by an algorithmic interest rate which could be calculated dynamically according to a number of factors such as supply and demand. 36

One could also crowdsource to obtain the most favourable borrowing terms. For example, one could offer bitcoin as collateral for USD. These transactions need to be over-collateralised and there is little to no leverage. The benefit to the borrower is that they can hold onto their bitcoin so long as they pay the agreed upon interest rate.

Trade Finance

Trade finance is a gargantuan industry currently dominated by major investment banks who can assign large credit lines to borrowers, such as oil traders. The issue with trade finance today is that it is opaque and expensive. One could envision stablecoins being used as collateral for a loan for physical oil without having to resort to unnecessarily clunky Letters of Credit (LCs). Firstly, LCs are not available to everyone and can be prohibitively expensive because of legal costs, red tape, and layers of intermediaries clipping fees. It is often backed by collateral that does not exist and there are many examples of loopholes and criminal creativity leading to fraudulent activity. On blockchain, these transactions will be more flexible and transparent, ultimately reducing fraud and spurring greater efficiencies. As an example, an oil trading firm can offer up bitcoin or a stablecoin (often tethered to USD) and ask for 1:1 ratio on oil. Once oil delivery is recorded on the blockchain, the swap for the digital currency is made automatically, totally disintermediating the brokers and their associated costs and bottlenecks. This would ultimately simplify supply chain logistics and have a domino effect across more segments of finance. While the third use case is much further adrift, we do see mortgages eventually falling into DeFi’s orbit. While there is immense work to be done to solve for this holy grail, the sheer size of the opportunity and magnitude to disrupt will be well worth the brainpower and resources. The long-term promise of DeFi (like other benefits of decentralisation) is to disintermediate brokers and banks in this $11 trillion residential and commercial mortgage market (in the US alone). The current issue with DeFi for mortgages is that it requires two digital tokens (the borrow coin and the collateral coin) that must have fairly liquid markets, since DeFi relies on oracles – a distributed decentralised pricing source – to ascertain the value of the collateral, thereby pricing both legs of the transaction. There is no other mechanism at present to assess who is credible, and anyone with a crypto asset can borrow or lend to anyone else in the cryptoverse. For mortgages to fall into DeFi’s realm, there would need to be independent valuations of the credit of the borrower and the value of the home, which will be developed over time as data providers emerge to amass and verify more real-time information. So with all the deep dive ‘insider’ talk of harvesting Yams and Sushi, as it relates to the current play of DeFi – we need to step back, harness, fuel and foster the next chapter of DeFi – which will emerge as a disruptive financial innovation with an impact as or more profound as anything that came before.

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SETTLEMENT RISK

ollowing its latest teleconference meeting, the Global Foreign Exchange Committee has reiterated its focus on settlement risk gaps in the FX market and says it will strengthen its guidance on settlement risk as part of its ongoing review of the FX Global Code. Highlighting recent incidents in the Turkish lira, where borrowing rates of over 1,000% led to several banks not fulfilling their settlement obligations on time, the committee highlighted the importance of market participants making the “maximum effort” to complete their settlements to avoid exacerbating liquidity strains or otherwise disrupting the market. As part of its efforts to support the assessment of settlement gaps, which was first raised last year by the Bank for International Settlements’ Triennial FX Survey, those regional FX committees that publish semi-annual FX turnover surveys will also collect settlement data to help build understanding of the scale, if any, of the problem. Guy Debelle, chair of the GFXC, observes that while the focus remains on encouraging PvP settlement, the committee is not promoting one solution only, adding, “We are agnostic as to what mechanism participants use, but we very much encourage them to use a mechanism if it exists.” CLS, which attended the virtual meeting, is investigating how big the settlement gap in G10 currencies actually is and whether the BIS data overstates it due to issues such as internalisation. “The numbers are what they are,” he says. “But we want to know whether, or how much we should be worrying about the gaps.” In emerging markets, Debelle noted that in spite of some jurisdictions having onshore systems to support PvP, gaps may still exist and that it is important to discuss potential solutions to that, be it CLS or another solution. The GFXC also reviewed recent trading conditions in FX markets, noting that many indicators of liquidity were approaching more normal levels, although the depth of market remains noticeably below pre-pandemic levels. Members also observed that volatility was beginning to rise, reflecting uncertainties such as COVID-19,

We are agnostic as to what mechanism participants use, but we very much encourage them to use a mechanism if it exists

the US elections, and Brexit. The committee also released a paper on how the FX market handled the pandemic conditions.

Buy Side Progress?

The GFXC’s Working Group on Buy-Side Outreach presented its response to feedback from some market participants for a buy side version of the FX Global Code, however, Debelle says the committee concluded that a single Code remains important in ensuring a common market standard on what constitutes good practice. Work continues on engaging with the buy side community and exploring ways to make the Code and the Statement of Commitment even more accessible to buy side firms and GFXC covice chair Neill Penney says the committee wants to provide something of a safety net for firms struggling with the issue of proportionality. “It can be quite intimidating to look at the Code and work out which principles really apply to firms, especially smaller buy side firms,” he says. “And there are lingering concerns that somehow a firm could get it wrong and that they will be questioned on why they didn’t apply a certain principle. In a code that is voluntary, there is always the temptation to say ‘why do I go through this difficult process?’ so we want to help firms overcome these issues. “We continue to emphasise that all market participants should read and understand the Code – they should understand how the industry in which they operate functions – but pragmatically they need a starting place,” he continues. “I would far rather people recognise, sign up and adhere, for example, to 10 principles and then add to them as and when it becomes appropriate, than the firm steering clear of the Code, so we want to provide a smoother lead in to the Code for those firms who currently believe it is an ‘all or nothing’ proposition.” Overall, however, Debelle points out that buy side adoption to the Code is improving, citing recent data from the European Central Bank which indicated just that. “We have had more traction on large buy side firms over the past 12-18 months, across all jurisdictions,” he says. “There is more to do, but there has been reasonable progress made.”

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SETTLEMENT RISK

P&L Talk Series with Baton Systems With settlement risk very much on authorities’ agenda, Colin Lambert talks to Alex Knight, head of EMEA at Baton Systems, about the challenges facing the industry…and the solutions Colin Lambert: Last year the BIS surprised quite a few people by highlighting the scale of settlement risk in FX markets in its Triennial Survey, can you summarise the challenges the industry is facing in reducing settlement risk? Alex Knight: This has become a much bigger issue since the BIS highlighted the gap in settlement risk and we think it boils down to one issue; getting the right assets to the right place at the right time – we refer to it as the synchronisation or orchestration of movement of assets and it’s an ongoing challenge for most banks. Settlement risk is one aspect of the challenge and that’s the one everyone is talking about now, but there is also the need to more efficiently identify and manage funding and liquidity requirements. A third hurdle to overcome is operational capacity – there are a lot of manual work arounds in the post-trade settlement space and it remains a resource-heavy process. CL: So what are you doing to help overcome these obstacles and build efficiency levels? AK: We have a ‘three pillars’ approach. First, there is the elimination of manual processes, second enabling riskless settlement via PvP, and third near-real time settlement. On eliminating manual processes, we recently extended our FX services with the launch of our Pre-Settlement Matcher, Settlement Monitor, and Liquidity Tracker. The Pre-Settlement Matcher automates communication and the agreement process between counterparties on netted payment values. The Settlement Monitor tracks and reconciles inbound payments, allowing intraday updates on settlement risk, and actual or potential failed settlements. The Liquidity Tracker maintains available account balances and combines them with expected, completed, and pending incoming and outgoing payments. This is an incremental approach to the issue but while there is undoubted value in this there is also a more fundamental approach that gets the industry to the final destination and that is actually changing the way they settle with their counterparts. If the leaders within the FX industry are prepared to embrace change in process this will allow them to do genuinely risk-free settlement across every currency pair, in real time. That's our goal and we know that it requires effort and coordination and that’s tough to achieve sometimes, but hopefully people in leadership positions will appreciate this and dedicate the resources. CL: You spoke on a panel I moderated recently and there was an interesting discussion around real-time settlement, it was pointed out that not everyone wants it. AK: Absolutely. It doesn't mean that every trade you do results in an instantaneous settlement necessarily, it means when you elect to settle, whatever it is you're settling, it is not done at some random point on value date, it is settled very deliberately and very 38

specifically at a given point, with full transparency and legal finality. This could be via a smart contract, where a specific time or event trigger results in that settlement taking place pretty much instantaneously. We think this is much more efficient compared to paying out and getting paid some time on the value date. CL: What are the roadblocks to getting to this end goal of a more efficient settlement process? AK: Primarily at the moment there is incomplete data available to people operating in that post-trade space. This creates silos with legacy processes. People get batch data rather than real time data from and across disparate systems. I mentioned earlier about manual processes, many are actually a function of the fact that firms have this incomplete, disparate, disorganised data. If everything was contained and nicely formatted in the same system, many of those manual processes could be got rid of. Another issue is the uncertainty of status. It's very difficult to actually know what the status of a specific settlement is, either inbound or outbound in real time or in something close to real time. This is not a specific FX issue either, it happens across markets – even at T+1 it exists. CL: Which brings us back to the solutions you launched at the end of September. AK: We help firms aggregate data around their obligations and balances on an intraday basis, real time if it's available, from multiple sources. We unify, normalise and make the data available for practical use. By pulling together these legacy silos and systems and normalising this data, you end up with a dataset that is current, consistent and which can be used practically. It’s a threestage process of aggregate, assess and activate. This process gives customers the right data and once they have that we have a rules engine that allows them to automate alerts, processes and, when needed, decision making. They can then sequence their payments based upon these rules. By connecting the data and the rules to a client’s payments gateway we are then facilitating the movement of whatever the asset might be. If we are talking FX, bilateral settlement in FX has a lot of those characteristics that inhibit efficient settlement, it has incomplete data, lots of manual processes and uncertainty of status. It's also expensive, not particularly scalable, and there are a lot of settlements not going through CLS. Our solutions use a shared permission ledger, but, importantly, we use existing payment rails to settle. CL: Earlier you mentioned Pre-Settlement Matcher, are you talking netting there? AK: Netting is a part of it and needs to be a bigger part of the conversation. There are a lot of interbank trades that are not CLS

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SETTLEMENT RISK

settled and you have to ask why are they not netting these? I suspect they're not because that would generate another manual process that the banks don't really feel very comfortable doing. From an operational process perspective, banks think it is simpler to merely queue up those trades and settle gross. Now, in the context of these conversations about settlement risk, you have to ask yourself, is that really the right outcome? Just because it's operationally simple? From a broader perspective, firms also struggle to actually agree what their settlement values are with one another. The calculations are not necessarily consistent because some firms want to include certain products or transactions that others want to exclude. Some may say let's cut off at midnight and others may say let's cut off at 10 in the morning. There are differences in the calculation methodology and then there are those customers who may want to extract a subset of trades out of a much larger batch because they want to gross settle them. Equally, a real money manager may have two custodians they want to split their settlements across. There is a lot that needs to be agreed and established upfront. Then of course there's the actual process of agreeing the settlement values, which by and large both sides should agree as it’s pretty straightforward. There are complexities here also, however, because the trades are being done across multiple channels and messages are coming in from different sources. This leads to a totally fractured set of conversations that go on via multiple channels and while some have tried to harmonise this by promoting new communication protocols as a standard, none have gained critical mass. Something like 50% of all settlement values are agreed via email. Baton Systems sits in the middle of this process, on behalf of our client banks. We help with the calculation of the netted values to the extent they need it and we also manage the communication with all of the counterparties through all the different channels. We act as a central point, which allows banks to agree settlement values faster and more accurately. This is a huge efficiency gain because if you are automating these processes then a high percentage of your settlement values and payments are going to be agreed without any manual input and that puts an often overworked operations team on a firmer footing for the rest of the day. CL: Which is where synchronisation comes in… AK: Yes. Based on either or both of their settlement risk appetite against specific counterparties or their funding position in the specific currencies, banks can then synchronise or orchestrate their payments. We enable them to reconcile inbound receipts against what they are expecting, and check off in real time what each counterparty has paid in. That then tells the client where they are, vis-a-vis their settlement limit. With this information they can then also calculate if by making that payment they will remain within their daily settlement limit for that counterparty. If they’re going to exceed it, they can put a brake on the payment and wait for some inbound receipts from that counterparty or, if they are tracking their funding position, in that currency. With the alerts framework, of course, they can also request an approval from a credit officer. On the funding side, clients can track what their end of day balances look like and what actions they may have to take in the form of lending or borrowing. CL: There is still likely to be some settlement risk though isn’t there? AK: There is. There are always going to be exceptions that need investigating, but if clients are netting more and are able

to demonstrate to all their stakeholders they have absolute control over the process it is tremendously reduced. CL: You have mentioned to me previously that a more efficient settlement process can benefit the broader business, can you explain what you mean by that? AK: Many markets businesses are constrained by settlement risk and by funding, which means there are pockets of business that are simply not getting done and that banks are unable to fully serve as their customers because they don't have the processes in place that allow them adequately to manage the settlement risk in accordance with the settlement risk limits that their credit officers would like to impose. So yes, this is not just about collapsing settlement risk, it's also about growing the market, it's about growing a business’ footprint. There are still institutions that only take on new business if there is a safe settlement process, in other words, if they can pay out only when they have received in. Operationally these firms are not prepared to assume the settlement risk, and if they don't have the operational staff to monitor that risk, it is the responsible, risk relevant, decision. If, however, they can automate a process that allows them to do this, they're growing their business and are becoming more relevant to their counterparties – and let’s not forget the client experience here. In a safe settlement process how often is the bank checking the funds have been received? Either way it is a bad experience for the client. CL: How close do you think we are to gaining widespread adoption of this model? AK: We have a process that has been running with a major global bank for a year now. We started off with internal and back-to-back transactions – distinct legal entities under one umbrella – and we are close to our first external PvP settlements. More generally, the level of conversation around settlement risk and the presumably increased concern that credit officers rightfully have about it because of the current macro situation with the pandemic means now is the time to strike. We can solve for some real world issues and, into the bargain, help to ease some of the pressure that established capital markets participants now find themselves under from smaller retail based participants offering real time settlement. CL: And, to go back to your earlier point, this would benefit the entire industry… AK: Reducing or eliminating settlement risk is such a key focus right now and regulators and other industry stakeholders want to see progress in this area. A successful transition to a more efficient model will serve to break down one of the key barriers to trading relationships, opening up new business channels and preserving existing ones. On an operational level the implementation of smart contracts allows banks to respond to the demands being made by customers, regulators and central banks alike, and combined with PvP it also opens the way for short-dated – even intraday – FX swaps to be used for funding or liquidity with settlement certainty. There is also increased visibility and control of intraday funding to ensure that banks are able to allocate their financial resources in an optimal manner. We are talking a solution that enables. Eliminating many of the manual processes around the post-trade process allows firms to be more resilient and to increase their capacity whilst reducing overall costs.

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MOBILE TRADING

Mobile Trading: Coming of Age

The growth path of mobile trading has been anything but meteoric, but a combination of greater awareness and necessity is finally bringing the channel towards the mainstream. In this supported article, Colin Lambert takes a look at the issues and talks to first mover JP Morgan about the evolution of mobile trading.

knee-jerk reaction back in March when the impact of the COVID-19 pandemic first really struck home and market volatility leapt, was that this was a seminal event for mobile trading. Most institutions had taken the precaution of opening their alternate sales and trading desks to separate their staff, but this was another level – dealers could not go into the office, no matter where it was. Aside from the few that already had home dealing desks installed, therefore, only two channels remained viable for the vast majority – voice trading via the phone or turning to those devices that are such a huge part of our everyday lives – mobiles. The reality has been a little different as institutions undertook a huge logistical effort and rushed to install desktops in home offices for as many of their staff as they could. This meant that the commute to the office was considerably shorter, and that the functionality and services 40

needed by dealers was once again back at their fingertips. That is not the whole story, however, for while the use of mobile devices was already increasing in FX markets, amidst the rush to establish a “new normal” it has won over more firms and individuals, especially as a means of maintaining oversight of markets and trading activities. To put the longer term growth into perspective, JP Morgan was a first mover in providing trading functionality on mobile devices, launching the service more than a decade ago. This means that the 40% growth in notional volumes it has seen over the past two years has not only been from a high base, it is also amidst greater competition. Similarly, year-on-year, the first half of 2020 saw a 45% increase in volume of transactions and March, perhaps unsurprisingly, saw a new high-water market for notional value traded on the bank’s Execute on Mobile channel. The surge in activity was driven by what was also a new high in external client logins, as Richard James,

H2 2020 I profit-loss.com

MOBILE TRADING minute to three months and also switch between different chart types. The multi-asset class nature of Execute on Mobile also really helped as by rotating the screen clients were able to compare markets side-by-side across Rates, FX and commodities. “It was also noticeable that clients were using the price charts to help manage their orders, to a much greater degree than previously,” he continues. “When you’re trading, a delayed price feed simply doesn’t cut it, you need real time information, so we saw a lot of clients looking at the price action and then going back to their orders to manage them accordingly.” Having the full suite of orders available for Execute on Mobile is undoubtedly an advantage as the college of users expands, the application supports basic limits orders but also the full suite of JP Morgan’s algo execution strategies, including loops and the Aqua POV/VWAP styles. Clients are also now able to select their liquidity sources if they wish, allowing them to optimise liquidity pools based upon what they feel are their best channels. Users can also leave orders in forwards on the app, as well as in base and precious metals as part of the extensive commodities product range supported. The bank also went live with limit orders for Rates products, something James says has been particularly popular in Asia, and is working on rolling out contingent order types in Rates to reinforce that growth. The launch of Rates means clients can select their notional in for example, US Treasuries, enter their DV01 and their limit price and submit it for execution. Even though many firms have started growing the numbers of staff allowed back to the office, mobile usage also seems to have stayed at consistent levels, for once not displaying the seasonality that James says has been identifiable over the years. “Often in the summer months there is a seasonal increase in the use of mobile, at least for maintaining contact with the market if not necessarily trading,” he explains. “This year it has been steadier at higher levels, which suggests that clients are making our mobile app an integral part of their technology stack.”

What Makes a Good Mobile App?

head of macro markets execution at JP Morgan, reveals, about 30% of the bank’s user base were actively transacting over the channel with the balance accessing market information and analytics. “The functionality most accessed was the price charts,” James says. “Clients were really drilling in to the price action and analysing markets using the charting – they are able to view live and historical rates across a time horizon of one

The upheaval caused by the pandemic has undoubtedly helped to put the mobile proposition firmly in front of clients, but for many there is one requirement above all others that needs satisfying before they switch on – the experience has to be as close as it can be to the desktop. “Having a comprehensive mobile app that is linked directly to the desktop provides flexibility,” says James. “There’s actually a very strong correlation between the two, they’re

The true secret to a successful mobile offering is making it just another channel or poiint of contact between us and our clients Richard James H2 2020 I profit-loss.com

MOBILE TRADING

symbiotic and we have tried very hard to ensure the experience is similar no matter what the channel.” The starting point for building such a strong mobile app that can replicate and link back to the desktop, is quite simple – resources, both financial and intellectual. “The amount of work behind the scenes to develop and maintain a mobile app should not be underestimated,” observes James. “The workflow has to be both familiar and easy to navigate in the slightly different format and clients have to be comfortable with the level of controls that are in place. “Furthermore, the mobile app has to have the products that clients will use,” he continues. “There’s plenty you can put on the app, but how much of it really gets used? Our experience during the height of the COVID crisis was that trading wise, customers used the mobile mostly for orders, which is intuitive because at that time most people were mostly trying to ensure they maintained their basic operations such as hedging.” Away from periods of upheaval, however, the differentiator for Execute on Mobile remains the breadth of product and the access to risk management tools, not least the suite of algos. Clients can enable the ‘quick trade’ function in both FX and commodities to enable one-tap execution and then launch ‘immediate or cancel’ orders from that screen. Protection in the form of price limits and time outs on one-tap trading also help avoid falling victim to mobile latency issues. The trade blotters available allow users to see their own trades or to have a group view, meaning the client oversight function can, through the right permissioning, have full firm-wide visibility of their activities. The development of control functionality is probably the unsung hero of mobile’s development as a trading channel, although in reality it was always going to be an important part of any success. A decade ago, in spite of people being more than willing to conduct personal transactions via mobile the argument always thrown up surrounded security of both the device and the content. Five years ago JP Morgan pioneered the use of facial recognition technology on its mobile app and has followed up with touch ID security. It has also launched Control Centre, a self-service administrative tool that allows clients to manage access to 42

various functions, including mobile apps, across their organisation. “As workforces were dispersed the need for adequate control and supervision became very important,” says James. “Again, we view Control Centre as a solution that works across all channels, not just mobile, but, for instance, clients appreciated the ability to easily and immediately grant specific staff with access to mobile.” Control Centre offers clients the ability to establish exactly what markets a trader can and cannot access and by what channel. In the COVID crisis this has proved invaluable as it is a simple process to permission staff for mobile trading; give them view only with access to trading blotters but not execution tools; or access to content through the viewing of prices and commentary only. This is backed up with the ability to place limits on trading, thus helping to eliminate fat-finger errors for example. The function also provides a comprehensive suite of reports to help clients maintain surveillance of activities, and users are able whitelist IP addresses. JP Morgan’s Notifications function has also been designed to work across all channels and as such alerts can be delivered to the client’s oversight function. For all the inevitable focus on trading and controls, however, by far the biggest user base of mobile channels is those seeking information and analytics. JP Morgan offers real time trade commentary and vols grids as part of its Market Monitor function, something that has proven very popular with clients. “There aren’t many places you can go to get a real-time overview of markets in the way you can through our mobile app,” James says. “This has become a vitally important aspect of the service because you do have quite a lot of traders who have been sitting in isolation and they need information and ideas and the ability to play with the data, mainly charts, to generate their own ideas.”

The Value Proposition

With an increasing number of market participants confident in the functionality, controls and security, the opportunities for the mobile channel would appear to be exponential. Interestingly

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MOBILE TRADING James reinforces anecdotal evidence from the broader industry that tablet usage is not rising at this stage, however. In some ways this is unsurprising because people are very focused on the trading and market information, which is more easily accessed through smaller devices, but as client demand for analytics grows, especially if it is in the real-time TCA space, then the tablet could come into its own. Paradoxically, the more the mobile experience can be related to the desktop, the greater a differentiator this could become and if that is to happen the tablet is likely to play a larger role. For now though the focus is very much on phones and how they provide people with the tools to maintain, manage and monitor their business activities. Delivering mobile services to clients is most certainly not just about putting tradable prices in front of them. In the current environment trading and compliance controls have become even more important, therefore alongside access, content and trading, a good mobile offering also needs to deliver for the oversight and control function at the client. The JP Morgan experience in mobile is instructive given the bank’s heritage there and it signals the need to get the right balance between usability and functionality. Traders want quick and reliable access to markets (and their level of contentment will also be closely aligned with the access to good liquidity), while the oversight function wants the comfort of visibility. At the end of the day, the mobile channel is just that – another channel through which to conduct business – and that perhaps is the secret to success. By having mobile and web applications that are inter-linked, a client can have constant access to markets. This is important in times of stress with a dispersed workforce, but the value proposition also holds up when and if life returns to “normal” and people are running to meetings or commuting to the office. “We want our clients to have access to as many of our services as possible on a demand basis,” James concludes. “Our mobile offering is already very comprehensive, but over the coming period we will continue to add more products and services that our clients require – be it in Rates, commodities or FX, including, for example, options. “The true secret to a successful mobile offering is, we believe, making it just another channel or point of contact between us and our clients,” he adds. “It’s not easy to achieve, but if the last six months have taught us anything it is the need to react quickly to client demands and to be flexible, we think Execute on Mobile delivers.”

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FX OPERATIONAL RISK

A Smooth Transition – But What Next?

A recent GFXC report highlighted the ease with which the FX industry transitioned to remote working during the pandemic peak and provides observations of market conditions regionally and globally. Colin Lambert takes a look at the report and asks, ‘what happens next?’

he foreign exchange industry metaphorically patted itself on the back in the middle of the year – and rightfully so – for having managed what was a unique challenge in dealing with a suddenly diversified workforce. It was not only staff that were dispersed, mostly to home offices, there was the need to deliver technology hardware and software to these remote locations. As one senior manager at a bank in London observes, “In the space of a week we went from one office to 3,000!” This message of success was driven home by the Global Foreign Exchange Committee (GFXC) in a report issued in September that was based upon observations from regional FX committees at its June meeting and a Refinitiv survey of traders taken in the same month. “Overall, the transition in the lockdown environment was smooth,” the report states. “No major operational issues arose, even during the period of high market volatility in February and March.” The key factor in the above statement, however – and this is acknowledged by the GFXC – is that the discussion happened at a time when many market participants were preparing for a general return to the office. In the UK, the world’s largest foreign exchange centre, that trend has very quickly been reversed and with much of 44

the rest of world also experiencing a second wave of COVID-19, there is every likelihood that remote working is with us for some time to come. Indeed Profit & Loss understands that at least one major infrastructure provider has told its staff that remote working will now continue until “at least” June 2021. Banks have generally encouraged front office staff to attend the office as regularly as possible, and this is not seen changing, however with so many control functions operating remotely and junior staff often not among those in the office, the question has to be asked, ‘Is the industry prepared for an extended lockdown and remote working period?’ Neill Penney, co-vice chair of the GFXC, observes that the industry came through a period of dislocation and then found a sustainable way of working in such an environment, and adds, “I don’t sense there is any particular concern among market participants if the lockdown is extended due to a second wave.” Acknowledging that most thinking around dealing with the “new normal” was based upon a pandemic that will last months rather than years, Penney says he believes more focus may be placed upon the impact of the global economic environment. “As the real economy evolves and copes with a second wave, I think the industry

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will look closer at the impact on market functioning, especially in the dealer-to-client space.” Akira Hoshino, Penney’s co-vice chair on the GFXC, believes market functioning will not be overly affected. “Central bank action at the peak of the pandemic helped to calm markets and it was significant that their actions meant there was less transmission between assets so the contagion effect was limited,” he says. “That backstop still exists and will help markets cope with a second wave.” Markets generally, but FX in particular, has, over the past few years, shown a pleasing ability to learn from broadly unprecedented events, and the sense talking to trading managers is that they are generally comfortable with their ability to maintain a service to their clients. “We think we have a good structure in place, with checks and balances, that will see us cope with any further upheaval,” says the head of e-FX trading at a bank in London. “Liquidity may become challenged at times, but I don’t think it will return to the extremes of March.” As several surveys have indicated – and this is picked up upon in the GFXC report – liquidity in G10 markets has, at top of book, returned close to what it was a year ago, while in emerging markets the recovery H2 2020 I profit-loss.com

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remains a little patchier. Guy Debelle, chair of the GFXC, also observes that depth of book in most markets “has not come all the way back” and that “the potential for volatility is still there”. Overall though, in terms of market functioning, matters appear settled. The GFXC discussion in June highlighted that electronic trading proved “efficient and effective” during the lockdown period, and much easier to operate when traders and salespeople were locked down in different physical buildings. It added that many smaller banks had accelerated their electronification agendas. For many banks, however, the GFXC noted it had been a challenge to make markets in fast moving products such as spot in the lockdown environment. “The speed of these markets benefits from a traditional trading floor setup,” it states. “From the earliest days of lockdown, banks reserved their limited capacity on trading floors (after following social distancing guidelines) for market making in these products.” Inevitably, the GFXC found that effective risk taking by banks was more difficult in a lockdown environment as it was difficult for an isolated trader to accept a large risk position, and difficult for the bank to manage risk positions in the lockdown environment. This was one of the drivers for the reduced availability of liquidity for large sizes during the lockdown period, and the increased amount of interbank hedging of positions received from clients, GFXC says. This latter point is one made by several traders to Profit & Loss over the past four months. “There is no substitute for being on a desk, listening to what’s going on, and sharing ideas,” says a

voice trader based in London. “Sometimes you also want validation of your ideas and reading body language is something that’s a lot harder online.”

Culture

The one unknown issue – that is vitally important to the GFXC as it continues to promote the FX Global Code – is how an extended lockdown and dispersed working environment will influence the culture of firms. As the pages of P&L’s twice weekly newsletter Squawkbox can attest, staff moves continue, so how are new entrants, especially as junior level, inculcated into a firm’s culture? Guy Debelle “The number one challenge facing the banks in particular is ensuring junior staff are aware of their responsibilities,” says a senior risk manager in London. “We can set them tests, provide presentations and, occasionally, even get them in the office. For the majority of the time, however, they are working under light supervision – and that is a risk.” Interestingly, and possibly controversially, the risk manager also points to a trend of the past two or three years in FX that is exacerbating the risk. “If you want an example of horrible timing then you only need to look at the juniorisation of FX desks over the past couple of years. You’ve now got new entrants being supervised ineffectually by people who themselves are still finding their way in the business. It’s potentially a nightmare scenario.” To highlight the scale of the issue, one senior buy side trader

Opinion: Did the FX Global Code Work?

n the Global Foreign Exchange Committee (GFXC) report on market conditions during the pandemic peak, it was stated, “A notable feature of the lockdown period was the extent to which stories about trading and conduct did not appear in the industry press.” This would appear to suggest that all was fine in the FX world as the global crisis of COVID-19 developed and indeed it is hard to argue that the FX market functioned remarkably well. How much of this was down to the FX Global Code and how much to the operations resilience of participants? That is a more nuanced matter. There is no doubt that the Code has played a significant part in improving standards of behaviour in FX markets – it effectively provided a brake on a cultural shift that was undermining the reputation of the industry, and then a reset at acceptable levels. There were issues during the pandemic, however, which signal the Code has to penetrate further into the industry’s consciousness. The London month-end 4pm Fix in April saw several currency pairs move significantly both into and during the five minute window as participants clearly forgot the lesson of the previous

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recently told Profit & Loss that they had two colleagues, with Juniorisation means whom they were working new entrants to the closely, that they had yet to meet in person. “It’s not a institution are being huge issue, but having worked remotely supervised with someone for four months by people who you do like to get a feel for how they cope in pressure themselves are still situations and remote working finding their way in does not provide that the business understanding.” Unsurprisingly, the GFXC points to the FX Global Code as providing a backbone for a firm to educate and inform new members of staff about the expectations around levels of behaviour and conduct in general. The Code has helped drive the adoption of robust operational and risk management practices by Market Participants. This was one of the key reasons why the industry was able to move through the challenges of February and March without a major operational incident. “During the early stages of the Coronavirus crisis, adopting the principles in the Code helped market participants to navigate recent market conditions with increased confidence and a greater sense of empowerment to ask counterparties about trading challenges such as increased spreads, reduced size, and increased last look reject rates,” its recent report states. “Combined with increased usage of data and analytics by industry participants, the result has been a wider acceptance of the changes in liquidity market conditions than we have seen in some previous crises.” month which was, ironically, helped at least in part by a reminder from the GFXC that market conditions into month end would be challenging. Equally, the GFXC report also observes that reject rates increased “significantly” during the peak of the crisis in late March and that institutional clients were seeing reject rates of 12% compared to 2-3% normally. Market conditions do have to be taken into account, but is it fair to say that a 12% reject rate is acceptable? It signifies liquidity providers being overly ambitious with their spreads and exhibiting an unwillingness to assume market risk – it can also highlight an overly aggressive approach by some liquidity consumers. These are areas that probably do need further investigation before it can be concluded that there were no conduct issues in the market. Anecdotal evidence also exists that a lot of liquidity providers failed to maintain what most observers would see as an acceptable level of service during the liquidity crisis, thus bringing into question their willingness to provide a robust and continuous service to clients. One element of conduct in markets should be around the promises made to clients and in March several clients were left hanging by some LPs swiftly exiting the market (often before claiming upon their return in May that they were “always in”). It is fair to say that the jury on whether there were conduct issues during the peak pandemic is still out. Not only can we truly judge conduct in stressful conditions – and on that count several institutions failed their clients – but these issues take a long time

The GFXC adds that local committees remained in regular communication and were able to issue reminders to market participants of their obligations – it also says it has been able to remind participants of the industry’s shared goal, to maintain and protect the integrity of the FX market. “Culture is an intangible,” concludes the head of e-FX trading at the bank in London. “We can control operational resilience and make sure we are ready for liquidity and volatility events, but when it comes to people working remotely there has to be an element of trust. Our staff are reminded of their obligations under the Global Code as well as the more stringent requirements we place on their activities as an institution and it’s hard to see what else can be done in that area. The FX market will function without major issue if these conditions persist, but there is a nagging fear that a few skeletons are being placed in cupboards to emerge in a few years’ time.” to emerge. The chat room scandal that led to the creation of the Code only came to light some five or more years after it first became an issue. The FX Global Code did its job during the pandemic and should be considered a success. There can, however, be no room for complacency, especially if many jurisdictions return to lockdown and plans for 2021 are thrown into disarray. The stressful period for the world, and therefore the FX market, is nowhere near an end and that means the GFXC needs to redouble its efforts to promote the Code’s principles and, importantly, to maintain a dialogue over issues such as reject rates and execution strategies in anonymous environments to name just two. This is no small challenge in itself, of course, because GFXC members have “day jobs” which take up a tremendous amount of their time. That said, it is important that as the COVID-19 crisis extends, the FX Global Code retains a very high profile in the industry as indeed does the GFXC itself. Yes, the FX market has coped well with the first nine months of 2020, but there is a long road to travel before we do indeed approach anything remotely “normal”.

Market conditions do have to be taken into account but is it fair to say that a 12% reject rate is acceptable?

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ON THE BLOCK

CRYPTO CORNER TALOS UNVEILS INSTITUTIONAL DIGITAL ASSETS PLATFORM

alos, a technology provider for institutional trading of digital assets, today announces the public launch of its platform that connects institutional investors, prime brokers, exchanges, OTC desks, lenders and custodians. The Talos platform, which has been live for the last year, delivers a suite of solutions that supports clients through the full trading lifecycle – from price discovery to execution through clearing and settlement, across spot, futures and FX markets. “The ability to safely and efficiently trade digital assets has been one of the biggest challenges limiting institutional investor adoption of this asset class,” says Anton Katz, co-founder and CEO of Talos. “The institutional trading workflow is significantly more complex than that of the retail sector and demands a very different set of requirements. The Talos platform addresses these key issues – such as security, efficiency, and scale – in both a familiar and customisable environment that tailors the trading experience for each customer.” While this marks Talos’ industry debut, the Talos platform began development in October 2018, and has been in production since August 2019. Katz, together with former Broadway Technology colleague Ethan Feldman, co-founded Talos. Katz was at Broadway from 2009-2015 and Feldman was there from 2008-2018. Katz was more recently head of trading technology at AQR, between 2015 and 2018, at which point he left to form Talos. The two have brought together an advisory board that also has deep roots in capital markets, including Dave Cushing (former head of global trading at Wellington), Jennifer Hill (former CFO of Merrill Lynch & Co, and the wholesale banking division of Bank of America), and Tim Grant (CEO of Six Digital Exchange). “Staying quiet during these last two years was a deliberate decision,” notes Katz. “We know from our experience on the client side how frustrating it can be to get excited about a new technology solution, only to then learn the product is still years away from launch. Ethan and I decided to go about this differently, and built our platform from the ground up, where we could bring to bear our experience in developing trading systems for the capital markets. Once in production, we spent the next several months validating its effectiveness to address real issues with real customers. And now, a year after our first production trade, we are happy to finally be able to talk about our platform publicly.” The Talos platform is built to support end-to-end trading of digital assets – from onboarding to price discovery, from execution through settlement – including bilateral access to liquidity providers. The platform provides solutions for investors and financial service providers, including prime brokers, OTC desks, 48

lenders, custodians, and exchanges. Clients access the Talos platform via API or GUI, and it is configurable to their unique workflow requirements. “The design of our platform allows us to update in real-time the instrument set available for trading on the exchanges and OTC desks we’re connected to,” Katz tells Profit & Loss. “As long as our clients are KYC/AML provisioned to trade on those exchanges, they can interact with any available assets immediately. We support anything that the underlying liquidity providers support, so our clients can interact with the world the way it is without having to wait for us.” Katz explains that Talos is trying to bridge the divide between crypto and traditional FX due to the crossover interest Talos is seeing from investors. “The two asset classes have similarities, but right now, they are traded in very different ways,” Katz explains. “We are using our expertise to bring institutional clients the end-toend trading workflow they are used to in capital markets. As time progresses, we plan to de-risk some of the inherent risks associated with digital assets trading, allowing institutions to expand their participation with this asset class. “Trading through Talos is very similar to what our clients are used to in capital markets with bilateral platforms that allow clients to directly interact with the market,” he adds. “So they have their own relationships with exchanges, OTC desks, market makers and other liquidity providers. We provide capabilities for determining best prices across these participants and then trading in ways that reduce our clients’ fees and market impact. To do this, we’ve put quite a lot of work into the algorithmic execution portion of our platform.” Katz explains that Talos allows clients to define their own price aggregation parameters. “Price discovery is actually a really big

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ON THE BLOCK

element of the platform,” he says. “Even when our clients are not onboarded with specific exchanges, clients can still aggregate indicative prices coming from those exchanges. They can pick and choose which particular venues they want to see, and they can add fees to that aggregation – which allows them to see what their targeted price for a Anton Katz specific execution would be, including all the fees. As a result, we see a large number of clients that choose to onboard additional venues on our platform.” “Then, as we move to the post-trade side of things, we provide very similar reporting capabilities to our clients as we did in capital markets, among which are transaction cost analysis and the ability to provide best ex proof for their underlying customers,” he adds. In terms of offering both crypto and FX across a single platform, Katz explains that this is due to interest Talos is seeing from traditional FX investors that are increasingly interested in digital assets, so offering a hybrid came naturally. “More than half of our clients are sell side institutions and quite a few of them are international. So they may be operating in geographies where liquidity between local instruments and crypto is scarce, As a result, we are starting to connect those two asset classes together. Synthetic liquidity is one of the major things that

we are going to offer in the near future, which is one of the main reasons for the decision to add FX markets to the platform.” “Talos has refined our trading and risk management capabilities, allowing us to provide seamless best execution for our clients,” says Jordan Ettedgui, head of trading at Enigma Securities and one of Talos’ early customers. “The Talos team has shown great flexibility and creativity in problem-solving, helping take our technology stack to the next level.” “Talos’ platform provides the same levels of stability, performance and security as the leading equities and fixed income trading systems, yet is extremely intuitive and easy to use,” adds Brian Kelly, founder and CEO of BKCM, another of Talos’ early customers. In building the Talos platform, Katz and Feldman also turned to a strong group of prominent digital asset investors that included Autonomous Partners, Castle Island Ventures, Coinbase Ventures, Initialized Capital, Notation Capital, Founder Collective, and V1.VC. These financial backers were part of the firm’s initial capital raise. “Every day there are more signals demonstrating that belief in the importance of crypto assets is pervading financial institutions, but the lack of institutional friendly trading platforms has remained a major hurdle to adoption,” says Brett Gibson, general partner at Initialized Capital. “To get comfortable, financial institutions need familiar trading technology, liquidity pools large enough to support their volume, and a brand they can trust. This is precisely why Initialized invested in Talos.” “One of the biggest keys to widespread institutional adoption of digital assets is a technology infrastructure that unites all market participants and gives them the confidence to operate at scale,” says Arianna Simpson, founder of Autonomous Partners. “That is exactly what Talos has built, and we are excited to help them realise their ambitious launch and growth plans.” “The Talos team is truly best-in-class – one of the best we’ve encountered in the blockchain space since we began investing in 2013,” adds Nick Chirls, partner with Notation Capital. “They’re uniquely positioned to bridge the gap between the crypto and capital markets communities, and the product is quickly becoming essential for any serious institutional trader.” “It is a once-in-a-life-time opportunity to be involved in shaping the market structure of an entirely new asset class,” notes cofounder Feldman. “Our expertise is in trading systems, and we built this platform from the ground up specifically for crypto by working closely with our customers. We’ll continue collaborating with them to stay ahead of competition as digital assets begin to truly transform financial markets.” “We don’t get to see a brand-new asset class emerge very often, so naturally this is an incredibly exciting time, especially for engineers in the financial sector,” adds Katz. “Moreover, these technical and operational innovations we see in the digital assets space will accelerate the progress of other asset classes. Our mission is to bridge these two worlds, using our understanding of institutional requirements, and further drive the evolution of trading.” Talos plans to roll out additional capabilities in the coming months, focusing primarily on further reducing trading and settlement risks. Talos is connected with some of the largest digital asset exchanges in the world, including Coinbase, Bitstamp, Kraken, BitMEX, ErisX, LMAX, Gemini, Binance and Binance.US, Poloniex, Bitfinex and Bittrex. In FX world, Talos is connected to LMAX and Sucden Financial. OTC providers include Cumberland, Galaxy Digital, Genesis, B2C2, Alameda, FTX OTC and Heymeyer.

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MOVERS

COBALT ADDS TWO WITH NEW INVESTMENT ROUND

ost-trade infrastructure provider Cobalt has announced the addition of two new hires to its leadership team, as it continues its expansion into emerging markets and digital assets with a new institutional investment round. Duncan Lord has joined as the head of post-trade operations, while Michael Walsh joins as a consultant. Lord joins from Barclays where he managed global post trade functions and was a member of the Bank of England’s FX Joint Standing Committee and the GFXD Operations Committee. He will be spearheading Cobalt’s further development of products within emerging markets and digital assets. Walsh will be joining as a consultant on Cobalt’s current investment round and strategic alliances, where he will have a particular focus on the buyside. He, like Lord, has spent over 30 years working in executive and non-executive roles across financial markets, asset management, law, and FX in London, Paris, Dublin, and New York. He has held senior management roles at BNP Paribas, ABN Amro, RBS, Lloyds Bank and is a certified investment fund director. “To date Cobalt has been steady in its growth, trajectory and fundraising,” says Darren Coote, CEO of Cobalt. “The impact of COVID, however has made it even more clear to our clients of the need to automate and begin to embrace the role digital assets in the market. Our technology has proved to be robust and scalable in the most difficult of market conditions and we feel comfortable that now is the time to invest for growth. We are excited that two people of the calibre and experience of Michael and Duncan have chosen to join us as we continue forward.”

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GLOBAL FX HEAD LEAVES SANTANDER

ultiple sources tell Profit & Loss that Andrew Brown, global head of FX at Santander, is leaving the firm. Brown joined Santander in May 2018 after a six year spell at Spanish rival BBVA where he oversaw what sources familiar with the matter refer to as an “outperformance” of the FX business and he seems to be departing Santander on a similar high, for while the bank does not break out foreign exchange results, it did report a 45% year-on-year increase in Global Markets revenues in H1 2020, following a 12% increase for FY2019. Brown joined BBVA from an eight year career at HSBC, joining the bank in Hong Kong in 2000 before transferring to HSBC London as regional head of foreign exchange and in 2006 becoming HSBC’s sole global head for the FX business. Prior to HSBC Brown worked for Citigroup in Europe and Goldman Sachs in Europe and Asia. Santander declined to comment.

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JEFFERIES PARES DOWN FX

efferies cut its global electronic FX business, including marketing making and algos, but is keeping its FX prime broking and FX voice businesses, according to sources. These sources say New York-based Michael Porzio, SVP and e-FX product manager, and SVP Shawn Egger, as well as London-based Tom Robinson, MD and head of European FX sales, and SVP Robert Malin, have all left the firm. Porzio joined Jefferies in June 2017. Before that, was in e-FX sales at Bank of America Merrill Lynch. Egger joined in December 2018. He was head of FX sales at Euronext for the two years prior, and before that, was head of US market making sales at Citadel Securities for three years. Robinson joined Jefferies in July 2017. Previously, he was head of FX sales at MahiFX for over two years, and spent more than eight years with Goldman Sachs before that, last as an MD and global head of e-FX sales. Malin joined the firm in May 2018. Malin’s prior roles included stints at Fastmatch and ANZ. 50

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GILL EXITS BARCLAYS

arket sources tell Profit & Loss that Singapore-based Pritpal Gill, head of FX cash and options trading for Barclays in Asia-Pacific, has left the bank. Gill joined Barclays at the start of 2019 as part of a build out of the bank’s FX business, following the hire of Fabio Mudar as global head of FX trading and distribution in 2018 – Madar left the bank later in 2019, to join NatWest Markets. Gill joined Barclays from a spell working in a family office, but spent the majority of his career at Citi where he was head of Asia FX trading, having joined that bank from Lehman Brothers, where he was global head of FX options trading. He started his career in FX at Citi and also had one year as a prop trader at hedge fund Tudor Jones. Gill’s plans are not known at this stage.

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BLOOM TO LEAVE HSBC

arket sources tell Profit & Loss that David Bloom, global head of FX strategy at HSBC, is leaving the bank. Bloom joined merchant bank James Capel in 1992 and moved to HSBC when it acquired the firm in 1997, initially as UK economist. In 1999 he was named currency strategist at HSBC in London before being promoted to run the FX strategy business in 2005 – a role he held until recently. Bloom’s plans are not known and Profit & Loss understands that Paul Mackel, head of EM FX research at HSBC is covering the role of global head of FX research on an interim basis.

MOVERS

CAPITOLIS ADDS TWO TO MANAGEMENT TEAM, ONE TO SALES

apitolis, has announced the appointment of two senior executives to its executive management team. Lindsey Baptiste joins the SaaS platform as senior vice president of finance and Hen Lotan as chief of staff. According to a statement, the new hires will “support Capitolis in its next phase of growth and play a key role in advancing the company’s mission to transform the capital markets through its collaborative technology and platform”. Baptiste will oversee all finance activities, including financial planning and analysis, accounting, treasury, systems and billing, as well as support corporate governance. Lotan will manage Capitolis’ strategy, process and business performance, analyse strategic opportunities and measure business outcomes. Baptiste joins Capitolis following roles at both startups and large financial institutions. She started her career at Morgan Stanley in equity capital markets before expanding into fixed income capital markets over the course of five years. She then worked at MediaMath, Inc, an AdTech startup, where she held positions in revenue and professional services operations, and served as the international head of finance. Prior to joining Capitolis, Lotan spent eight years with Boston Consulting Group, where he served as principal and a lead member of the firm’s financial institutions practice, spearheading a variety of growth strategy engagements. He also led the firm’s thought leadership research group – the BCG Henderson Institute – where he managed the development of BCG’s intellectual property on technology and strategy. Before BCG, Lotan served as a senior associate at KPMG Somekh Chaikin on their valuation services team in Tel Aviv. “I am thrilled to welcome Lindsey and Hen to the Capitolis team. Their expertise will be instrumental as we continue on our high

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growth trajectory and reimagine capital markets for the benefit of all market participants,” says Gil Mandelzis, CEO and founder of Capitolis. Seperately, Evelina Rosenstein has joined Capitolis in London as sales manager, she joins from Broadway Technologies where she was head of sales for the firm in London having joined in May 2018. Prior to Broadway, Rosenstein spent almost three years at FXSpotStream in a senior sales role, having joined the platform from an almost 10 year career at Bank of America Merrill Lynch in London in e-FX and FX algo sales. The new hires follow a year of record growth for Capitolis, which includes the recent completion of a strategic investment from Citi, JP Morgan and State Street.

MOVERS

BNY MELLON NAMES VINCE CEO OF GLOBAL MARKET INFRASTRUCTURE

ank of New York Mellon (BNYM) has appointed Robin Vince as vice chair of the bank and CEO of its Global Market Infrastructure group. Effective, 1 October, Vince joined from Goldman Sachs where he was chief risk officer and a member of the bank’s management committee – he reports to Todd Gibbons, CEO of BNY Mellon. Vince has oversight of BNYM’s clearance and collateral management, treasury services, markets and Pershing businesses, the first time the bank has brought the four businesses together. It says there are “strong synergies” between the four and that it was leveraging those to provide more end-to-end client solutions. “In line with our growth agenda and our strategy to continue building platforms on which our clients can grow and drive profitability, we are pleased to appoint an executive of Robin’s calibre as vice chair of BNY Mellon and CEO of Global Market Infrastructure,” says Gibbons. “By bringing these four complementary businesses together under his leadership, we are better positioned to become the central facilitator in our clients’ capital markets ecosystems – across markets, asset classes and geographies. Robin is an accomplished and respected leader in the industry and will help us execute our strategy, which is centred on driving growth and creating differentiated value for our clients, digitising and optimising our operating model, and fostering a high-performance culture that is focused on delivering excellent client service in new and innovative ways.” Vince adds, “BNY Mellon is an historic institution with a rich legacy and reputation for serving as a trusted steward for the global financial markets, and I’m excited to help build on that legacy going forward. The company has an unparalleled client portfolio and is uniquely positioned to be the platform through which our clients continue to build and grow profitable businesses. We will focus on expanding solutions across our clients’ full range of needs and deepening our already robust relationships.”

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SMARTTRADE MAKES SENIOR HIRE

martTrade Technologies has appointed Ludovic Blanquet as chief product and strategic planning officer, based in London. Blanquet brings 20 years of industry experience to the role. He joins from Finastra, where he was the global head of product strategy across its five lines of business. Prior to this, he built Credit Agricole APAC’s global equities trading platform and was APAC regional director for SmartStream, a corporate banking software vendor. According to a statement, Blanquet will help shape smartTrade’s vision to deliver the leading cross-asset e-trading solution, capitalising on its e-FX LiquidityFX cloud offering. David Vincent, CEO, SmartTrade, says: “Drawing on his business leadership experience, Ludovic will provide fresh insights to our product priorities as we help our clients and the wider industry to further modernise capital markets technology. In this new era, staying ahead of the market structure and technology evolution is more important than ever to help market participants seeking higher returns.” Blanquet adds, “SmartTrade is uniquely positioned to support the digitisation of trading across all asset classes. LFX end-to-end solution is a reliable, recognised leader delivering peace of mind to its clients – and this has certainly been tested in recent volatile markets. I’m truly excited to join SmartTrade’s team and contribute to the further growth of SmartTrade’s ecosystem.” 52

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FXSPOTSTREAM ADDS TWO

XSpotStream has made two hires to its business in London and Tokyo with the hires of Rhys Bryan and Hajime Tezuka. Bryan joins FXSpotStream’s London sales team; most recently serving as VP, futures with Citi in Singapore. Prior to joining Citi in 2013, he began his career with Morgan Stanley, after graduating from Cardiff University. Tezuka joins in Tokyo in a role the firm says involves striving to provide opportunities and efficiency to the FX market. Opened in 2015, FXSpotStream says its Tokyo team has seen significant growth in terms of volume and client acquisition. Tezuke has worked at 360T, G.K. GOH Financial Services and Commerzbank.

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BNP PARIBAS NAMES NEW HEAD OF STRUCTURING AMERICAS

NP Paribas has announced the appointment of Sarah Wang as head of structuring Americas, which involves oversight of structuring teams across business lines. Previously, Wang worked at Barclays for 16 years, most recently as head of securitised product solutions structuring in the US. Prior to that, she was head of structuring in APAC and held various structuring roles in cross-asset, emerging markets and credit both in Asia and the US. Before her time at Barclays, Wang worked in structuring at Deutsche Bank and Lehman Brothers.

MOVERS

CO-FOUNDER SINCLAIR LEAVES MARKETFACTORY

ames Sinclair, co-founder of MarketFactory, which was acquired by ION last year, has left the company, where he served as executive chairman in New York. Sinclair, along with then COO Darren Jer, and CTO Ed Howorka, co-founded MarketFactory in 2007, where he initially served as CEO until 2016, at which time he was named to the chairman role. The trio all previously worked together at EBS. At EBS, Sinclair last served as head of research and strategy at the FX spot matching platform, which he joined in 1993. During his 15 years with EBS, Sinclair served in a variety of roles, including as sales manager overseeing Asia Pacific and later adding North America through 2000, at which point he was named head of product management and served in that role until his appointment to the research and strategy role in 2002. EBS was acquired by ICAP in 2006 and Sinclair and colleagues left a year later to form MarketFactory. Prior to EBS, Sinclair worked for Citi for eight years, during which time he became heavily involved in the formation of EBS. Sinclair is currently a member of the New York Federal Reserve’s US FX Committee and has previously served as a member of the Bank for International Settlements Exchange Working Group, the Fed’s Chief Dealers’ Working Group, as well as its Barrier Options Sub-Committee.

Jasmes Sinclair

CFTC’S ENFORCEMENT DIRECTOR LEAVES ON A SANCTIONS’ HIGH

ames McDonald, director of the Commodity Futures Trading Commission’s Division of Enforcement (DoE) is stepping down with immediate effect, having been in the position since April 2017. He leaves at the same time as the CFTC unveils a recordbreaking year for enforcement actions by the DoE. McDonald joined the CFTC after serving as an assistant US attorney in the Southern District of New York, prior to which he was in private practice. Upon his official departure on October James McDonald 8, Vincent McGonagle, principal deputy director of the division, will serve as acting director. Under McDonald, the DoE identified and advanced five main priorities: (1) preserving market integrity, including by developing the division’s data analytics programme; (2) protecting customers, both in traditional markets and in new markets like those for digital assets; (3) promoting individual accountability and pursuing accountability up the chain where appropriate; (4) enhancing coordination with other regulators and criminal authorities; and (5) increasing transparency in operations, through the issuance of numerous pieces of guidance and advisories about the Division’s policies and practices, including publication of the division’s Enforcement Manual, into which all published guidance and advisories are incorporated. “Jamie led the Division of Enforcement to its most momentous year in our 45-year history, which is a testament to his vision and leadership,” says CFTC chairman Heath Tarbert. “During Jamie’s tenure as enforcement director, the division has bolstered its capabilities to detect misconduct through data and analytics, strengthened relationships with other regulators and criminal authorities through parallel enforcement, and increased transparency. On behalf of my fellow commissioners and the entire agency, I thank Jamie for his public service and commitment to maintaining consumer confidence in our markets.” In the fiscal year which ended 30 September, CFTC issued 113 enforcement actions, more than at any time in its history, and imposed the largest fine related to spoofing on JP Morgan. It also filed more actions in association with US state authorities and filed 29 cases against fraud since the COVID national emergency was declared in the US on 13 March 2020. “We are tough on those who break the rules, and this historic year only further underscores this point,” says Tarbert. “The case statistics alone are impressive, but the fact that the enforcement program was this successful even during a pandemic is even more remarkable. I applaud the Division of Enforcement staff for their incredible work, professionalism, and commitment to carrying out the Commission’s mission with integrity and purpose.” McDonald adds, “In the midst of a pandemic, when volatility in the market is high, it is even more important that our team work tirelessly to preserve market integrity and pursue those who break our rules. I’m incredibly proud of the division staff for their contributions to this record-breaking year amid the numerous challenges posed by the virus.” H2 2020 I profit-loss.com

AND FINALLY...

OPINION

The Last Word The last word on some of the themes covered recently by P&L’s Squawkbox…

We all know it was ridiculous to sell EUR/CHF at 0.20, but should those who didn’t panic and bought there be penalised? 54

There are always subjects that get the P&L readership fired up, not least anything to do with SNB-Day – and that once again proved to be the case when I wrote about a recent judgement in the UK regarding CFH Clearing’s claim against Merrill Lynch. The case highlighted to me, once again, why I have concerns over the blurring of lines between retail and institutional, as well as over agency execution. Distilling the issue, it boils down to a lack of responsibility. As I noted in a column just after the judgement, neither party came out of it well. On one hand we have a customer executing without due care and attention; on the other a bank refusing to adhere to market practice and then following that up by ending the prime brokerage agreement in double quick time so that it could, I assume, draw a line under the entire matter. In neither case does there appear to be a concern for the well being of the end-user. I will argue until I am blue in the face that no rational person would think of selling EUR/CHF below 0.80 when it opens the day at 1.20, let alone around 0.20 as CFH apparently did. It did so because of one of the thorns in the side of the modern market – margin calls. There was no flexibility, no room for error. The market dropped – irrationally – through the trigger point and the firm sold, no matter what the bid. This is understandable when we are talking 10s of pips, but 10s of big figures? It signals an absolute lack of control and were the firm really thinking about its end client then it would surely have paused for breath and executed on the inevitable rebound. This is not hindsight trading, this is rational thinking – under 0.20 signals the Eurozone as a project is dead. As much as I am sure some FX traders would like a return to the days of the French franc and Spanish peseta (look them up kids), it is not in their power alone to destroy the political experiment! Several people got in touch to ask me whether Bank of America (the parent of Merrill Lynch) was in breach of the FX Global Code in its actions, specifically that it dealt at off-market rates. This is a tricky one and to date I have yet to find anyone to give me a satisfactory or conclusive answer because the low for the day was set very arbitrarily by EBS and there is no doubt at all that under the rules of the high/low set, the traded low (as H2 2020 I profit-loss.com

opposed to the market low) would have been 70, maybe even 80 big figures lower. Personally, I think the big picture has to be taken into account and we need, as an industry, a definitive solution. Was this client also trying to cancel purchases at, for example 0.70. Did this client, as I know several did in the immediate aftermath of the mayhem, try to re-paper trades that didn’t suit them, while refusing to re-paper those that did? Whichever way we look at it, we need a steadfast and widely agreed best practice on re-papering. This means – and this is an another regular of these columns – a public, robust and irrefutable high/low. Establish what will trigger the rate setting and then it’s all down to being adult about it. In hindsight we all know it was ridiculous to sell EUR/CHF so aggressively – and it highlighted a problem with algos’ (lack of) execution parameters. But should those who didn’t panic and tried to establish some degree of sanity to the market by bidding at, for example 0.50, be penalised? Of course they were bidding because they thought they could make some great money out of it – and most did, but when did that become a crime? FX prides itself on being a good example of a selfregulated market and generally it has done a good job. If, however, it decides that it can re-write history on multiple standard deviation events then it is, I fear, starting along a very steep and slippery downward slope. Yes, setting the low of the day to 0.85 probably reflected what the SNB itself thought would happen (plus the odd 15-20 big figure overshoot!), but it did not reflect in any way whatsoever, the reality of that day. I stand by what I have always said in these matters. We cannot proscribe for idiocy. If people are going to sell an asset at close to zero when all the evidence is that asset has a value then the rest of the industry should not have to pay a price in terms of an administrative nightmare. Because what happens next in this age of entitlement? Someone who forgot to sell at 1.20 suddenly being able to do so because they made a mistake? Responsibility should be a big thing in markets, I am not convinced it currently is – and to me that spells trouble…oh, and more money for everyone’s favourite profession, the lawyers. colin_lambert@profit-loss.com

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