Profit & Loss Magazine: H1 2020 by P&L Services Ltd.

H1 2020 VOL. 21 / ISSUE 181 www.profit-loss.com

Eye on the Client

The 2020 Digital FX Awards

HALVING IN THE TIME OF CORONAVIRUS THE GOOD, BAD & UGLY: A QUARTER TO END REMEMBER UNDERSTANDING THE BASIS BLOW OUT

PROFIT & LOSS

Managing Editor’s Note

o say we are witnessing unprecedented events in modern times is a massive under-statement, the only real positive I can think to make of it is to imagine what it would have been like in 2000 had a pandemic hit then. Modern technology, if nothing else, has proven its worth, both in terms of helping the fight against Covid-19 and in keeping aspects of daily life as “normal” as they can be. For FX markets, the new “normal” has been illiquidity, wider spreads, as well as huge volume and volatility spikes, followed by periods of relative calm. As we note in a feature in this issue, pretty much any order of substance is likely to have market impact – and not just the fraction of a pip that people were fretting over for the past two years. I can’t recall in my 40-plus years in the foreign exchange industry a time when it was so difficult getting deals done without upsetting the apple cart. Partly this is the result of structural changes over the past decade that have been driven by regulation – to which end another feature highlights the rising stress levels in FX swaps markets. Once the bastion of calm, these markets are just the latest in a long line to be permeated by a fear of liquidity disappearing – as witnessed by the basis blow out in March. Overall, though, it has to be said that the FX market is handling conditions as well as can be expected. Inevitably there are complaints about spreads from those areas of buy side to whom “entitlement” is a way of life, but this is the new reality. The world is having to get used to a new way of operating, why should the foreign exchange industry be any different? The suggestion, talking to people in the industry, is that some channels are working better than others – again this is to be expected – as is the fact that the best pricing and most popular channels are those that offer disclosed trading. More than ever, counterparties want to know with whom they are dealing, all of a sudden the need for anonymity has taken a much lower place

in the pecking order of importance – actually getting the deal done is what counts. This was the background to one of our flagship events of the year, the Profit & Loss Digital FX “Eye on the Client’ Awards, which we present in this issue. As we explain, circumstances meant this year’s approach was a little different to normal, but thankfully not extraordinarily. What hasn’t changed this year is the shoot out between Citi and JP Morgan for the Best FX Platform Award – if ever there is something that highlights the benefit of competition this is it, for both banks continue to innovate and evolve at an amazing pace as they seek to offer the best possible experience to the client. Given how the race for this award, as is the case with so many others, is so close, I will not spoil the surprise here, rather let me just thank everyone who contributed to the process for giving up their time and congratulate every winner. The overall picture is of an industry trying its very best – and largely succeeding – in helping their customers make informed decisions about something that has become very important as volatility returns to FX: their hedging. Attention will now start turning to what happens as the world exits large-scale lockdowns and FX businesses will also be pondering this. To go back to the beginning of this message, the great benefit is that the technology, by and large, worked sufficiently well and that hopefully means the transition back will not be too difficult. It is hard to see, however, how this doesn’t have a lasting impact on how businesses function – at the very least I suspect we will see upgrades, maybe even the permanent use of, disaster recover sites and more use of the cloud. A dispersed future, to some degree at least, seems to be our future. All that will be known in time of course, and so until then, on behalf of everyone at Profit & Loss, I would like to wish you, your families and friends, good health and we express the hope that we are able to meet in person again, at the appropriate, safe, time. Good luck.

H1 Inside: p.48 Halving in the Time of Coronavirus

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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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H1 Contents 20

Profit & Loss Forex Network @Profit_And_Loss

Awards: 20

Profit & Loss Digital FX Awards “Eye on the Client”

Features 40

FX Fixes and market conditions were in the spotlight at the end of the first quarter of 2020, and as Colin Lambert reports, while things could have gone worse, it wasn’t all good news.

Eye on the Client The 2020 Digital FX Awards

The Good, the Bad, and the Ugly: A Quarter End to Remember

Understanding the Basis Swap Blow Out With US dollar funding costs rising and the basis between money markets and FX markets blowing out in March, Colin Lambert takes a look at two Bank for International Settlements studies of the issue and concludes, this isn’t a problem that is going to go away quickly.

The Good, the Bad, and the Ugly

The halving of the number of bitcoins that come into circulation will soon be upon us. This is a known event, unknown is the state of the global economy post the global pandemic. Julie Ros caught up with a wide range of digital asset market participants to gauge their views on the role the digital currency may play in the future.

48 4

Halving in the Time of Coronavirus

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Crypto Corner: 58

FSB Releases Global Stablecoin Recommendations The Financial Stability Board has published for consultation 10 highlevel recommendations to address what it sees as the regulatory, supervisory and oversight challenges raised by global stablecoin (GSC) arrangements. Julie Ros reports.

CFTC Issues Final Guidance on Delivery for Digital Assets

Facebook’s Libra Outlines New Approach

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of working from home. Whilst working from broom cupboards, out on a balcony if the sun is shining, or on the kitchen table might work as a short-term measure, as a permanent solution, it’s not at all satisfactory. Partners, flat mates, children and pets all have a call on available space. From a confidentiality point of view, having two flat mates or partners in similar roles but at rival firms, makes a confidential work environment impossible. Feel the Force Spare a thought, too, for the responsibilities placed upon compliance officers. Whilst electronic surveillance of bank operated systems, official chat channels like Bloomberg and Eikon, and recorded mobile phones still functions smoothly, it becomes even harder to monitor personal phone usage, let alone encrypted apps like WhatsApp. Sales need to maintain contact with clients, and since many rely on the contact details available on, say, Bloomberg, it is difficult to enforce that only work numbers, not personal mobiles, are listed. Whilst VPN technology might prevent staff from copy/pasting confidential information from a work system into a non-work application, the ability to capture screenshots still exists. And they leave little trace of their capture on a personal device. If the last lines of defence are training and a strongly worded compliance policy, does distance from the office lead some people to feel distanced from being supervised fully? All by myself Social isolation and loneliness are an increasing problem in modern society, often acute in urban settings where we live surrounded by others, but not in real contact with any of them. Whilst the current Covid crisis has undoubtedly awakened a community spirit, is it wishful thinking to expect that to continue when the situation starts to revert to normal? So, for many, the workplace environment encourages that creative spark amongst colleagues which is very difficult to replicate virtually over a conference or video call. The end of the beginning It is clear that there will be no return to the ‘old normal’ in the FX market any time soon. It is also becoming clear that the current situation, whilst workable, is unsatisfactory for the majority of those employed in the industry. As for the ‘new normal’, what might it look like? Firstly, it seems likely that the existence of large disaster recovery sites will become a thing of the past. Often, they are in locations that are out of town, and not that easy to get to, especially with constraints on public transport. They are rarely tested under real

stress scenarios, and the success and speed of the shift to working from home has been one of the positive lessons of this crisis. The advances in technology even since the Global Financial Crisis of 2007-2008 have been huge – at the start of that crisis we barely had the first iPhone and now we have the ability to perform tasks on mobile devices that were unimaginable then. Secondly, working from home is clearly an impossibility for many people in many jobs. But we have proved that, that is not the case for the majority of people in the FX market. In a short space of time, we will have moved from employers discouraging the practice, to allowing it, and then, perhaps, to actively encouraging it as a permanent, balanced solution. Many other roles support a truly flexible work environment, using hot desking as a way of reducing the concentration of staff in the office. Thirdly, it is time to focus attention and investment on solutions that support work away from the office. Encryption, authentication and surveillance have improved immeasurably over the past years. Banks are increasingly offering mobile apps to clients, ranging from research portals to monitoring and execution platforms. It’s time this flexibility was extended to their own workforce. There are definitely challenges on the trading, sales coverage and support side, but increasingly, solutions are being discussed and proving workable. As market conditions demand that banks cover more clients with fewer staff, so the need to share relevant information, seamlessly and confidentially between members of a sales team becomes ever greater, highlighting the need for advanced sales dashboards, integrated into banks’ core systems. Clients can receive a highly personalised service from many members of a sales team, some working remotely, thus reducing key person risk at both buy and sell side firms. Fourthly, encouraging ‘working from home’ as an alternative to always being in the office, opens up a huge degree of flexibility to a labour force that can struggle with the additional burdens of lengthy office hours and unpredictable commutes. Juggling childcare and family responsibilities can deter some people from returning to the workplace or working part-time as a job share with a co-worker. Normalising ‘working from home’ and improving the systems that support this would be a valuable step towards recognising and celebrating a more diverse workforce. And lastly, this article was written on Earth Day, and so maybe it is fitting to consider the benefits to the environment of not mandating the mass commute and incessant need for physical travel previously thought essential to grow and support a global markets business. Less can be more. Performance can be measured by results rather than just attendance. A little balance can, perhaps, be restored. Keith Hill, Advisory Board, Caplin Systems

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Eye on the Client

The 2020 Digital FX Awards

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Profit & Loss Digital FX Awards

“Eye on the Client”

t is not over-stating the case to say that the process for this year’s Profit & Loss Digital FX Awards was unlike any other. For those of you who are unaware of how it works, the culmination of a year’s worth of feedback is a visit by Profit & Loss to the leading e-FX banks – firstly, to check what he have been told is accurate, and secondly, to get the very latest information on developments on the single dealer platforms. Every year we express our profound appreciation of the time people take to show us their wares and discuss plans for the future, but at no time has it been more heartfelt than 2020. The reason is that our visits took place at the start of the Coronavirus pandemic, when banks had already separated their staff into on/offsite facilities and markets were tremendously busy. We are humbled that so many busy people took time out of what must have been ridiculously busy schedules to share their efforts and ideas with us. On one hand, of course, this gave us an admittedly oblique look inside how banks were coping with the unprecedented conditions, very quickly you come to learn how to read someone’s demeanour during a meeting when the (often live) platform in front of you is spinning through numbers too fast to read! We should note from the start that the lockdown in the UK started towards the end of the fortnight put aside to visit the banks, and as such, BNP Paribas and Morgan Stanley did not have the opportunity to present face-to-face, meaning, inevitably, that we rely more on feedback for Cortex and Matrix than we do other platforms where we can back up that feedback with our own observations. There were also one or two follow-up sessions planned that may have changed the shape of these awards a little, that had to be shelved. Equally, Barclays declined to participate in the process and therefore, in the absence of substantial feedback from users, is, for the first time in 19 years, not part of this year’s awards, which is a little disappointing to us given the mood of optimism and confidence we reflected upon in the 2018 and 2019 awards write ups. Overall though, thanks to years of going in to see the banks and growing up with these platforms (there is not a single dealer 20

platform in its current guise at a major house that goes back further than P&L’s managing editor’s time in the role!) as well as to the many of you who happily share your feedback and, on occasion, even throw in a free demonstration of something new you are using, we are confident that once again we have been able to take the pulse of this segment of the FX market. So, what is that pulse telling us? Firstly, the platforms have largely proven robust and a major piece of work that we mentioned last year – the upgrading of pricing and risk technology – has really paid off. Yes, not every bank stayed in the market to the satisfaction of all their clients, but the platforms and risk systems did not break down. That is the good news. The bad is that the pandemic has probably delayed, maybe even put paid to, a lot of work planned for this year. We expect current work schedules to be disrupted by the word we confidently expect to dominate next year’s write up – “cloud”. There are many who have seen the benefit of the cloud but the sense is, in terms of the single dealer platforms, it is very much early days. Obviously not everything gets moved there – latency watchers would be a nervous wreck for example, but there is plenty that can be hosted there and if nothing else, this pandemic has taught us the benefit of a shared infrastructure. At time of writing, we are now into the second month of this somewhat eerie and unprecedented environment and it is still very much a question of all hands on deck to firefight and make sure that water gets to the pump, than it is of rebuilding, or in this case enhancing, the infrastructure. In terms of these awards, however, that is our problem and it can be faced next year. For this year we are taking our traditional approach and reflecting a year’s work, rather than performance over a few weeks. Yes that performance is absolutely critical when it comes to maintaining, or building, a reputation, but it is impossible to judge how well a price engine is performing in all conditions without actually sitting there sifting through the data – with comparable peer data alongside. We say it every year and it remains true now as it was all those years back in 2002 when we first judged H1 2020 I profit-loss.com

the platforms, it is for clients to judge the quality of pricing with their business, we are concerned with the usability of the platforms and associated services. Last year we tapped into an air of optimism, budget was being released to bank technology teams and plans were aplenty. Roll forward 12 months and quite a bit of work has been done, but maybe not as much as the more optimistic hoped. The big factor remains the pivot to HTML5, which has been talked about for so long it risks becoming somewhat like the Northern Hairy Nosed Wombat of Queensland, Australia; we know they exist (115 of them apparently), but very few people have ever seen them. The pivot to HTML5 is taking a long time; some banks are five years into the process (although the majority are more like three) and for those further back, the road ahead has suddenly got a lot longer. Enough banks have rolled out at least part of their platform on the new technology, however, which allows us to see the benefits and the future. The difference is stark – one bank demonstrated their pricing page on the old and new technology and not only were the graphics so much sharper, the response time is seriously quicker. Feedback from users supports this observation, several also pointed out the benefits of unbundling that HTML5 allows. That last point is an interesting one also, because the single dealer platforms have had something of an upswing over the past two years as functionality, especially around the execution process, has provided a boost. That has not been matched with an upswing of GUI trading, however, more clients seem happy to consume content from one, maybe two platforms, and trade elsewhere – probably on aggregated liquidity. More than one user showed us how HTML5 technology has allowed them to build their own desktop, taking their favourite services and analytics from certain banks and having it there on the screen with the aggregated liquidity pool. The upswing we mentioned is also going to be challenged over the coming year as multi-dealer platforms seek to host the bank analytics packages – as well as the execution algos themselves – on their platform. Whether the banks roll over and

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

allow this to happen will be interesting to watch – probably the confidence a player feels in their pre-, inflight- and post-trade TCA tools will dictate whether they are happy to expose them to a wider audience (and their competitors). HTML 5 then, remains a big thing, but we are in a position now where the bulk of the work has been done by the major players. The other big things over the past 12 months have been further efforts to integrate into the client workflow – which of course makes the client ‘stickier’ – and, relatedly, the push of analytics to clients to help them manage their business. Something that was not a big thing, however, and this surprised us a little, was algo execution. Obviously it depends upon the business model – those banks that have built big agency-style businesses are still keen to push the benefits of algo execution, but even those players have changed their approach. Others acknowledge they have algos and that clients are using them, but there wasn’t much else – more on this in the Report Card for the Best Execution Award. Something that was interesting from this year’s judging process was how the thinking amongst banks was shifting yet again. The rollercoaster that is the perceived worth of the SDP is taking another turn, if not dip, as banks who have developed huge behemoths of single dealer platforms now seek to break them down. Yes, we are talking about HTML5 again, because the technology allows this unbundling, but it was a little surprising to hear some talk in somewhat downbeat terms about the unbundling efforts. Understandably there is immense pride in the full service platforms that have been built and in an ideal world (for the creators) customers would take the entire platforms and everyone would be happy. The reality is, of course, that nothing of the sort happens and huge platform deployments have become harder and harder to justify over the past two years – hence the unbundling. Our view is a little different, however, because, putting it simply, it is much easier to break something down than it is to build it. Componentising a platform can be technologically tricky of course, but at least it has been built on the same technology and as such does not face the challenge that so many (all in fact at some time) banks have faced over the past two decades when different tech teams have built different services, often on different technology stacks! The sense is that unbundling is a more efficient and effective

long-term play than trying to maintain control over disparate teams working on different channels (especially if remote working becomes a mainstay of our world). The single dealer platform world is not one that benefits from democracy and freedom of action – a (hopefully benign) dictatorship is the best path! In terms of products, the popularity of structured options has continued unabated – just about every bank is keen to show their pricers in this field and, in spite of the ubiquitous “unique” and “innovative” descriptions given to the products there is, to be frank, very little – if anything – between them. The structures themselves occasionally have different names, but they are really – as is the case with algos – a different name on the same product. Just as in 2013 we heard from 10 banks stressing how they were “differentiating themselves in NDFs” so we hear the same this year (and last) in structured products. All we can say is when 10 banks say they are differentiating themselves in such a narrow field, the difference rarely exists. These are important products for clients – and fingers are crossed that we don’t see the same sort of accidents with them we witnessed post the 2008 volatility spike that led to seriously large losses for some corporates – and the competition to sell them is red hot, and any time that is the case, picking a winner is very difficult. In all reality, it probably comes down to the relationship more than anywhere else, for so much has been spent by so many on this product that not only is the choice for clients superb, it solidifies in the minds of us at Profit & Loss structured products’ position as the number one money earner for the banks! It is also the case that the FX options market has become even more homogenous, although one or two banks are looking to push the envelope here, which is good to see. Overall though, the FX options space has stagnated – and has not been helped by the events of the past couple of months during which desks have struggled thanks to the lack of underlying product liquidity. Nowhere is this more obvious than in the schedule most banks have set for their HTML5 pivot, for in just about every case, FX options is going to be one of the last products to move over. Looking ahead, we suspect that the genuine differentiation over the coming years will not actually be in FX at all. Of course some institutions have FX USPs that will bear the test of time and challenges of current conditions, but as we go through the H1 2020 I profit-loss.com

next couple of years – especially as the HTML5 pivot ends and FX development work slows down – the opportunity set may be in fixed income. Yes, Rates markets have a different structure, but liquidity sourcing, execution quality and innovative products are still in their relative infancy here. The past couple of years have seen a small subset of banks develop their fixed income functionality alongside FX, but it has often been the poorer cousin when it comes to investment – after all, the thought was just a couple of years ago that most of these markets would go to an agency, CLOB-style, model. Prolonged and frequent periods of illiquidity have seen customers shy away from that model (which was largely regulatory driven it has to be noted) and are now going back to their banks for help. Any time that happens, the opportunity set is good – hence why we think there will be more competition and more wares on show, in fixed income products over the next couple of years. As for the awards themselves, this is the second year of our new format, and it was heartening to get so much positive feedback from the change instituted last year (although that change was originally due to reader feedback so it would have been disappointing had it been otherwise!). To reiterate, the change has been brought about because the e-FX space is becoming more mature – certain services look similar on many platforms and as such it becomes even more difficult to pick winners and losers. The idea behind the Awards for e-FX Excellence is to highlight to readers where certain banks stand out. It is not to say that other services aren’t good, just where we, and often their customers, feel they go the extra mile. The idea is not to give banks awards for everything they do, merely the outstanding stuff. By doing this we hope to paint an accurate picture of where the investment dollars have paid off, where great ideas have been brought successfully to market, and where a bank can, in a very small way, actually differentiate itself. In previous years we have provided a Report Card for every category presented, last year this was trimmed down to just the top group of awards, and this year we have nuanced it further by providing something of a Report Card on the bank itself – hopefully it works as well as last year’s changes. With that said then, and with a reiteration of our thanks to everyone who gave up their time to present, here are the 2020 Profit & Loss Digital FX “Eye on the Client” Awards. 21

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Best Multi-Asset Class Platform

P&L Report Card

hilst we seem to be in the midst of a shift on the buy side to multi-asset class execution desks it’s probably too early to say whether this represents a short term trend on the part of managers desperate to trim costs or the start of a bright new future. It is easy to say the latter, but as firms continue to find out (and, we are amazed to say, are surprised by) the very different market structures involved, it becomes a little harder from a technology standpoint, if not human resources. This represents something of a challenge for banks seeking to match this shift in customer thinking and while there is one exception to the rule, the only serious moves so far have been to put the more liquid fixed income products on the same technology stack (and GUI) as FX. As an example, US Treasuries have been on Citi’s Velocity and JP Morgan’s Execute for some time now, as have futures in the case of Citi and commodities in the case of JPM. Equities still seems a stretch too far, and there have to be questions over whether it is worth the resource outlay to bring a pure agency product into a predominantly principal offering. Elsewhere, Goldman Sachs and BNP Paribas offer a strong platform in commodities especially, but that really is about it. Last year we questioned in this report whether the banks collectively, were serious about wanting to expand their product set, in spite of the advantages to the client of having multiple products delivered through one main connection. It has to be said, as far as what we have been shown and been told by users is concerned, that remains a valid question, because competition across a broad range of products remains thin on the ground. Some banks are still racing to fill important gaps in their FX offering, others continue to plough the field that is parallel business lines (and technology stacks), and others are targeting specific, and often historic, product strengths for their investment dollars. Nowhere do we really see a broad-based push to develop a onestop shop to rival UBS’ Neo for example. This is not to say banks are not extending beyond FX, however. The development cycle, such as it is, appears to be following the business model as banks are building e-FICC platforms, rather than a true multi-asset class offering. One of the challenges for those banks seeking to build a true multi-asset class platform is that regulators globally don’t 22

really seem keen on the idea of bilateral trading in many asset classes, or at least that is the impression most often given. This means that building such an offering has complications, not least providing agency services in one asset class and principle-based services in another. It is this complexity that suggests to us that the next moves will be made in the algo space, but even here there will be challenges. It is fair to say that, generally speaking, algo strategies adapted from the equities world have not worked in FX – at least not without a lot of work, so much in fact that they end up as totally different offerings. This has left a lot of banks with two algo product suites, most often on two different technology stacks. The interesting move over the next year will be what suite is deployed in fixed income markets – will the first generation be from the FX or equities world and, more importantly, will it succeed or will a third line of algo products need to be developed? It could be significant that in commodities, the main players have rolled out bespoke algo strategies but that these have been overlaid onto a standard GUI that is integrated into the FX platform. The likelihood of fixed income becoming the next battleground was mentioned in the introduction to these awards and if that is indeed the case, then JP Morgan has managed to grab a head start, for the Rates offering on eXecute is superb. The UX when it comes to Rates products on most screens has always been a tough experience, there are just so many the screen always ends up looking too “busy” and it is hard to follow markets. The smart use of colours and the HTML5 stack make Rates on eXecute a comfortable – and for FX users a recognisable – experience. JPM is a repeat winner of the commodities award and it continues to build its already impressive product set in this segment, adding diary strips and commodity indices to the desktop for example, and hosting a series of existing products and services, such as fixing and timed orders, on mobile., Again, being on the new platform means the UX is so much better for commodities users. Interestingly, as part of its options roll out, JPM is adding Islamic forwards to eXecute, as H1 2020 I profit-loss.com

well as dual currency securitised notes. Already in advanced development are initiatives in credit and repo markets as the bank continues to build the e-FICC model out. Before closing out this section, we should note the progress at Nomura, our One to Watch in last year’s awards. As is often the case with this award, we have been overambitious with our 12-month timeframe and the bank remains on track to deliver a platform spanning Rates and FX, but at the moment has not done so. What has been achieved is connectivity to a group of third party platforms so the bank can roll out its highly praised algo suite, as well as the continuation of its work with Brevan Howard in Rates, something the bank is looking to push into the FX space. This cross-asset class approach could help propel Nomura back into the top echelon of providers, but to get there the sense is it really needs to get the single dealer platform up and running to deliver richer analytics to clients. Overall it has to be noted, however, that the jury remains out on whether a true multi-asset class single dealer platform is a requirement or merely unnecessary complexity and one other factor will play a role as this issue plays out – the evolution of desktop technology. We have already noted the desire on the part of some players to unbundle their single dealer platform, well the latest desktop technology will allow users to mix and match even more efficiently than they used to – the days of an SDP making a client “sticky” may be over, what we will see now is individual or small groups of apps or tiles becoming sticky, rather than the platform as a whole. We would reiterate, however, that it is still better to be in the unbundling position than it is having to build multiple different products which can then be deployed. All of which leads us to our winner…

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Winner – UBS

t is probably valid to ask the question, ‘will we ever see the likes of Neo again?’ such is the scale of the project undertaken by UBS in 2013. Even now, the bank is in the midst of a full pivot to HTML5, which in turn is becoming crucial to its efforts to unbundle the service – for such is the scale of Neo that the number of clients that would use every aspect of it can probably be counted on the fingers of one hand. The easy answer, given our thoughts in the Report Card, would be ‘no’, it is hard to see in such a fluid environment as financial markets represent, how such a huge scale investment in one project could pay off. Indeed, we see UBS’ efforts to unbundle Neo as critical if it is to continue its growth trajectory. The private/wealth clients were the big addition to the platform that justified all the work, the sense now is that the bank needs to unbundle to enable it to compete in specific fields – FX being one of them. Something we hear from competitors in the FX space is “we don’t see Neo on desks”. This may be a fair observation, but it at once misses the point of what remains one of the more ambitious projects undertaken over the past decade in the banking industry – it was squarely aimed at a pretty unique client base – as well as the fact that in the new world what will be seen on desks is a mish-mash of different platforms and services. Neo could at the same time represent the pinnacle and the end of the one-stop shop single dealer platform. If it is indeed a pinnacle, then it is one with pretty spectacular views, for Neo remains a triumph in terms of the breadth of product supported as well as in the depth of content provided – it is hard to think of an aspect of financial markets that is not supported on the platform, from the smallest stock to the largest FX transaction, Neo provides the tools for analysis, decision making, trading and, of course, the posttrade reporting and management. This is the seventh year in succession that UBS has won this award, which is testament to the original vision and build; all that has really happened over the intervening years – the HTML5 pivot aside – is the bank has added products to it. That is also the case this year, although as mentioned, the pivot is gathering steam. A much-improved FX options experience is probably the headline addition this year, although, as always, the actively managed certificates (AMCs) in the structured

products area remain a stand out and have undergone another innovative evolution. What UBS has done really well – and it is best highlighted in the linear options products – is integrate the idea generation process into trading, a real workflow enhancement. Clients can run an idea through UBS’ analytics, the bank’s systems analyse the suggested trade according to the desired outcomes input by the user, and displays suggested variations. The original idea from the client can be anything from the most complex with multiple triggers and targets, to the simple “bullish EUR”, but the platform will generate multiple trade scenarios for the client to consider. As noted, clients can establish trigger parameters for the option strategy to be executed, that quasi order book model also works on the way out. A client can upload existing strategies and Neo analytics will analyse how it is performing. If conditions exist where the strategy has hit an optimal point, or if the client enters a parameter at which they are comfortable to either exercise/sell back the option, the system manages that process as well – as it does if the client will benefit from a restructuring of the trade. Other initiatives on Neo over the past year include further enhancements to its Live Desk content delivery, which has been streamlined to make it faster paced with a better, cleaner look into the ideas generated from the bank’s trading floors. Also enhanced has been the product range supported by the Rates module, the bank’s work on its pricing engine in FX has also paid off in better pricing and reduced latency in fixed income, it has also rolled out more algos to the Rates space, which sits nicely alongside BondPort, UBS’ aggregation platform for clients. This is a pure matched principle model using the bank’s smart order router (SOR) logic, which is open for 22 hours a day and covers something in excess of 30,000 bonds across 18 currencies. More trading strategies have been added and the bank reports huge percentage increase in both trade count and volume, with average trade sizes also rising. Something that acts as an umbrella for all the products on Neo is UBS’ always excellent AMC offering, which effectively allows a client to invest in any product they like from the thousands available as part of a basket. They can also establish a targeted return and let UBS’ algos work out the best basket for them. The client sets the benchmark and a dynamic H1 2020 I profit-loss.com

rebalancing algo creates strategies of its own and invests on the client’s behalf using equities, bonds, commodities and, yes, foreign exchange products. The past year has seen Neo provide the ability for clients to create and manage a portfolio of dynamic strategies and the bank is about to test a very innovative settlement method for these products involving a Distributed Ledger – more on that to follow. Other work has seen a huge improvement in the bank’s mobile offering, thanks to the HTML5 development process, as well as efforts to increase personalisation. Neo also remains the perfect staging post for UBS’ excellent Knowledge Network, which supports the efforts of its Data Solutions team, as does its Evidence Lab. Last, but very much not least, in that perennial strength of UBS, post-trade, the bank is now at the stage where it is truly an exception-based process and much of the work of its teams is now about pre-empting client issues before they even arise. This is done through what the bank terms its “hybrid pod” concept, which brings together skill sets from different parts of the business – a SWAT team for post-trade if you like – that conducts a war on touches. This concept seeks to improve collaboration across the different teams at the bank to problem solve more efficiently. In an admittedly more mundane matter, UBS has also, in the post-trade space, managed to pull a lot of documentation online, thus reducing the huge amount of paper work that flows between clients, brokers and banks and saving the rain forest at the same time! It is hard to understate how seriously UBS takes processing efficiency – we have said this before but it remains appropriate, the bank takes an approach to this issue that would make the world’s biggest production line proud. Inevitably, given the scale of the platform, the pace of product development has slowed down on Neo as more work is done behind the scenes – it is hard to really decipher the work of a machine learning algorithm for example, but it remains a visually rich experience, one that the bank has made even smoother to move around. The strength of the platform remains its design and the scale of content and product delivery mechanisms it can support and it is, quite honestly, difficult to see another platform coming close to its breadth in the coming years. That may happen of course, it wouldn’t be the first time we have had a prediction go wrong, but for now, UBS’ Neo offers the best multi-asset class experience going, and as the HTML5 shift finalises, it is hard to see how that will change. 23

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Best FX Platform

P&L Report Card

t may be a surprise to some that we do not view this is as the most competitive category in these awards and that is thanks to the sheer scale of two platforms in particular, Citi’s Velocity and JP Morgan’s eXecute. That is not to say that other excellent platforms do not exist, they do, but not on the scale of those two behemoths. The good news is that it’s been a pretty good year for investment in FX platforms – a lot of it filling gaps, but enough about creative ideas to help clients manage their businesses better. The competition in algo execution has probably increased, but it is interesting how there didn’t seem to be a commensurate rise in interest from clients – there has been a bump, anecdotal evidence tells us – in algo usage, especially in smaller tickets, but bigger tickets still seem relatively rare. Time will probably tell if that will change, but we remain optimistic that algos will come into their own, especially when clients seek more control over their orders. The other big area for competition remains structured products, as we have noted. Probably the prime mover here has been Deutsche Bank, which has very much focused, as part of its return to being a corporate bank, on delivering simple, bespoke, solutions to solve clients’ complex problems, but competition in this field is red-hot and likely to remain that way. We have already noted how UBS has enhanced the FX component of Neo over the past year and we have noted before in these features how FX on Neo seems to have, to a degree, taken a back seat to other asset classes. We would argue, however, this is simply a question of how big the “other” is. When it comes to Neo, FX is not just on the platform with US treasuries and commodities, it also has to compete for screen real estate with bonds, credit, equities and structured products. This means it inevitably gets overshadowed at times, but that does not mean it lacks quality. The confidence the bank’s reengineered pricing and risk engines provides is starting to pay off, not least in how feedback from market participants has made clear how competitive UBS’ pricing has become. If there is one area that UBS needs to continue to play catch up we would suggest it is around the algo offering. The algos themselves are excellent, but there is a lack of pre-trade and in-flight analytics that are

providing clients with so much comfort elsewhere. This is probably not a big lift for the bank, but for now it represents a small gap in the offering. The same can be said for another bank that has long represented excellence in FX algos, Credit Suisse, for while the bank has continued to reinforce and strengthen its infrastructure and focus on improving execution performance, it is yet to really nail that pre-trade analytics piece on Edge FX. We tend to the view that Credit Suisse continues to be impacted from a prolonged pause in investment in the FX business five or so years ago and that it continues to play catch up. The work the bank does is excellent and it remains competitive, which is testament to its efforts, but in such a competitive market the incremental gains tend to be smaller than hoped. The bank is coming back – the latest helping hand comes from the support given to rebuilding a serious principal FX business – but it will inevitably take longer than the bank wants. If we were to pick a third platform to sit alongside the top two of Velocity and eXecute, it would be Goldman Sachs’ Marquee, which continues to impress and is at the front of the race to deliver a fully functioning HTML5 experience. The UX on Marquee is noticeably sharper than it was, and in a pleasing development for this reviewer, a couple of old favourites have reappeared on the platform, not least the small bar that indicates the day’s range and where the market currently sits within that. It is simple, but informative, functions like this that really help GUI users navigate the markets. If we were looking at a bank making a move, on the other hand, we would point to Deutsche Bank, for we continue to hear H1 2020 I profit-loss.com

very good feedback about its FX business generally and especially through the recent troublesome times. We noted last year that Deutsche was staging a comeback and 2019 and early 2020 have seen that accelerate. The FX business has clearly been identified by the bank as a key function and the investment dollars remain available. The development will be limited by the bank’s narrower ambitions more generally, but expect Deutsche to play an even more competitive role going forward. The point about narrower ambitions is actually an interesting one, because we are wondering, with one or two exceptions perhaps, namely Citi and JP Morgan, whether Deutsche Bank is in front of the curve when it comes to its focus. It rejected the “universal bank” model two years ago and has decided to focus on a few key areas in which it excels – FX being primary among them. Feedback suggests the bank has been successful in its client reengagement after a tough couple of years when the bank’s very survival was in question, and this reconnection will be critically important as it evolves to a corporate bank – more pertinently who it reconnects with matter. The sense is that in not being all things to all people, Deutsche will broaden and maintain a very focused client base – it will be working with the clients it wants to – it should not be underestimated what a change in psyche that represents for the bank, even if it has perhaps been driven by broader financial concerns. It is unlikely to be the only bank to make that decision either, others will surely go the same path, indeed they probably already are. We have noted in the pages of P&L’s Squawkbox how “difficult” clients are finding it harder to

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

maintain existing service levels with banks and other LPs because, quite frankly, their modus operandi no longer suits institutions less focused on risk absorption and more on being a facilitator. On which note, we will close out this Report Card with an appeal that has little to do with these awards. It was interesting to note that some of our later feedback (ie, during the volatility spike in March), reported that some banks that have been busy touting themselves as a one-stop shop for all FX products suddenly decided they were specialists – and in the G10 at that. This is neither helpful nor healthy for the FX market because it highlights the dangers of a squeeze on the regional, or specialist players. In the past, in certain currency

pairs, local banks would have had the technological capabilities to cope with volatility and volume spikes, but as they have been squeezed out by the “global” players their investment levels have dropped and their own reliance upon that top group, has risen. Through the prism of these awards, that should matter little, but if there is anything good to come out of the pandemic that is not revenue related, it is to be hoped that more regional banks return to an investment cycle aimed at enhancing their own capabilities, especially around pricing and risk management. It doesn’t have to be a huge investment in building something Velocity or eXecute like, but it would be helpful if regional players had the resources

to fall back on if their “global” partners suddenly decide they are anything but. So, to decision time; do we go Velocity or eXecute? The choice is extremely difficult because they are very similar in so many ways and both have very loyal supporters. The past five years or so has seen Citi and JP Morgan engage in a virtual game of leapfrog when it comes to our Best FX Platform Award, driven largely by the development cycle. The last leap forward was Velocity 2.0 and that has seen Citi win this award for the past two years. However, the past 12 months has seen JP Morgan edge ahead with eXecute – of course, we cannot fail to note that Velocity 3.0 is due in the next 12 months, so what price another swapping of positions next year?

later – are how the superb desktop experience is replicated on mobile. As a repeat winner of our mobile award it is inevitable that the bank remains in the top echelon of providers now, however, much of the product addition work has been away from FX, with Rates and precious and base metals leading the way. The coming year will see FX options added to mobile, which will be a giant leap forward for the channel. While JPM has been a pioneer in the execution field for a few years now, there were a couple of gaps in the service, two of which have been more than adequately filled. The first is what could be termed a quick strategy execution function, as pioneered by Morgan Stanley three years ago. The client is able to build strategies for certain scenarios, establish parameters around slippage for example, and then, using a series of orders using the bank’s Panther execution strategy, one click executes the basket of orders. StratX, as the JPM product is known, was around last year, but the past 12 months have really seen it taken up and fully rolled out. The second addition fills a gap that has been an important factor in its never-ending battle for supremacy with Citi. Imitation is the sincerest form of flattery as we all know and where Citi has scored for several years with Command Centre, so JP Morgan has now fully rolled out its own client administration tool in Control Centre. We have for some years now expounded the importance of having something like

this to provide clients with control over their activities on the single dealer platforms and it is probably even more important in the current environment with workforces so dispersed. Control Centre does exactly what it needs to, and while it may not be a headline-grabbing aspect of eXecute, it is without doubt a very important addition to the overall service provision. One final aspect of JP Morgan’s FX offering we would like to highlight before we move on to our Best Execution Award is a small but positive token gesture, FX Codeonly liquidity pools where the client can interact with an aggregated pool of liquidity, of which LPs have signed a Statement of Commitment to the FX Global Code. JPM is one LP in this pool, which is managed by FXSpotStream, and eXecute users can select this pool only in which to execute with one of the bank’s algos. This represents an interesting trade off – the client gets an aggregated pool of liquidity, thus helping them to retain the benefits of a single dealer platform, but that pool is subject to last look, something that for many clients is not, or rarely is, an issue on a single dealer platform or direct bilateral feed. We have been writing about, and waiting for, evidence of the benefits from the great migration to HTML5 for some years now and in JP Morgan’s eXecute we have the definitive example of why the work has been done and how well it works. In truth, there has not been much to criticise about JPM’s FX offering on JP Morgan Markets for some time now, but the last year or two has seen it not only fill in the few gaps it had, but develop fully into what it is – the best FX platform out there.

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Winner – JP Morgan robably the first thing to note about eXecute 2.0 is that, thanks to HTML5, it looks really good. Information is easy to pick out and digest, and, unlike some previous iterations of JP Morgan Markets, a lot can be put on the screen without inducing a headache! The UX is an absolute triumph and the reward for quite a few years’ hard work by the bank’s teams – it just looks cool! Of course, this is about so much more than how good something looks – we recall the early struggles of a pioneering platform in this field, Matrix, which looked great but took some time to match that look with working functionality – and eXecute 2.0 doesn’t disappoint. Aside from the behindthe-scenes work to improve the performance of the platform and to enable the bank to unbundle its services, JPM has simplified its algo order entry process and quick order entry; rationalised how it uses one of last year’s outstanding product developments, Algo Central, and added to its product range in structured options. As is the case elsewhere, the migration to HTML5 is not quite complete, and again, as elsewhere, FX options is the product last in the line for the change. Notwithstanding that, JPM has enhanced the pricing tool for multi-legged and multi-product strategies. Looking ahead, given how FX options appear to be struggling to really take off in the multi-dealer space and the opportunities for building client stickiness through analytical tools, the migration of FX options is an important step in the journey. Other factors driving this win for eXecute – and we shall get to the execution tools

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EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Best Execution

P&L Report Card

f the Best FX Platform Award was not the most competitive in the 2020 Digital FX Awards, it is because competition in the execution space has become white hot. While some players may not have had the time and perhaps the resources to develop their single dealer platforms fully, they have most certainly had time to build their execution services. Partly this competition was empowered by some institutions deciding in 2016-17 to go the route of agency, thus making their development path a lot simpler – build some algos, roll them out, connect up to the market and away you go. Of course it hasn’t turned out like that – and at this stage we would like to engage in a little selfcongratulatory nonsense for predicting this – because, as noted in previous years, an algo is only as good as its liquidity pool so why would a strategy ignore the biggest liquidity pools in the market, the major dealer’s internalisation programmes? It is noticeable over the past two, maybe three years, that some banks have started investing in their principal businesses to bring them up to speed with their execution services. BNP Paribas did this three years ago after a short period in which it looked like the bank was going fully agency and over the past two years, the last 12 months especially, we have seen Credit Suisse engage in a solid effort, backed by the latest machine learning techniques, to build its principal business. Nowhere more is this effort noticeable than in how the bank likes to tout its streaming capabilities in large amounts – up to EUR 500 million in EUR/USD for example. Of course, this is not a one-way street, because we have also noticed how the effort on the part of some banks to deploy algos developed in their equities business haven’t worked, or that those strategies that just say “hand the order over to us and we will execute using our own algos” haven’t gained traction. We suspect the latter instance is a case of customers wanting to know more about how the strategy operates and the banks not wanting to reveal any of the secret sauce. That is their right of course, but it is hard to see that approach working in today’s transparency obsessed world. That all said, if you are a client looking to execute large or small tickets in this market then there is not only a solution for you, there is a range of choice, although it is

interesting to note that the one area of feedback that is not universally positive over Citi’s Velocity is around algo execution. The analytics work – and will work better in HTML5 – but user feedback suggests that many of their customers looking to deploy an algo, go elsewhere. The pricing capabilities of the bank are beyond doubt and have re-established Citi as one of the true top players in FX, it is surely only a matter of time before this spills over into the algo execution piece. Elsewhere, Credit Suisse’s AES remains tremendously popular, although as we noted earlier, in the tremendously competitive space that is execution services, the bank is suffering from a couple of product gaps, namely pre-trade analytics. The past year has seen the bank enhance its execution dynamics, but again, to highlight the problem of a bank seeking to make up for a period of underinvestment, the work it is doing on, for example, using AI and ML for directing the child orders, has also been done elsewhere. AES is excellent, but unlike eight years ago perhaps, it is no longer a clear leader in the field – pausing investment or having to invest elsewhere will do that. To us, BNP Paribas has taken on the role of something of a thought leader in this field. It was very early to develop adaptive algos of the type now rolled out by several of its competitors, it also led the way in taking a portfolio approach to post-trade TCA. Do the immediate measurement via an independent provider by all means, is the message, but if you really want to learn about your execution framework, step inside. Last year saw us tease the rollout of Alix, a virtual execution assistant, which actually occurred a couple of months after the awards were judged. This has proved to H1 2020 I profit-loss.com

be very popular with busy execution desks because it allows them to engage the algo but retain the ability to interact with the order in flight, but on an exceptional basis. We have already noted Deutsche Bank’s move forward in FX and its analytics suite, Market Colour 2.0, continues to offer ground-breaking analysis tools to inform the execution process, both pre-, intra- and post-trade. As the bank invests further and its confidence grows accordingly, we would expect to see even more participants turn to the bank for their FX needs. If there is one area that feedback suggests the bank can enhance its execution experience further, it is one or two more algo strategies. Currently the bank relies, as it has done historically, on the algos its own trading desks use and while there is no doubt this is the best the bank can offer, as noted, some clients prefer to have a little more control. The suggestion from these parties is that perhaps Deutsche can offer one or two “plug and play” strategies with the ability to alter the path if the client so desires. Other banks that are very much part of the competitive landscape here are Goldman Sachs, thanks to its portfolio algos and work with Bloomberg, (another tease for that!) as well as Morgan Stanley, which continues to innovate in the execution space thanks to its QSI team, and a relative newcomer to this segment, HSBC. The latter is an interesting one for us because we have yet to see the algo offering for ourselves; however, feedback from users is universally positive and who are we to argue with that? Before we move into the winner of this award, one thought bubble about how this segment will look next year. This publication’s managing editor has long had a problem with excessive liquidity recycling and is now starting to wonder about algo

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

execution services. We live in a white label world the minute we step outside the top group of banks, so at what stage do we start to ask who actually operates and manages the strategies and infrastructure? During the demonstration part of this process it was noted on more than one occasion that on platforms such as Bloomberg, there are 25-plus algo providers. Using all the brainpower available, we are struggling to come up with

half that number in terms of serious providers, although of course it should be noted that algos do come in many flavours and some of those are for executing smaller orders in niche markets. It is hard, however, to believe that there are more than 25 providers of unique algo execution strategies – some of them have to be white labelled surely? If that is the case, then does the debate shift to some form of certification process wherein

providers have to detail who owns the IP behind the technology and the strategies, and perhaps most important of all, who is accountable if and when things go wrong? No doubt this is part of the work of the Global FX Committee working group on algos, but we suspect it will become a bigger issue in the coming months, especially if market conditions continue to be as challenging for people trying to execute hedges as they currently are.

The bank has also, as part of the reintegration, made the entire order entry process much simpler and therefore quicker. Still available are the superb pretrade and real-time TCA tools, the bank has also added NDF algos to its existing limit order functionality, using internal and external (on and off SEF) liquidity pools. Finally, when it comes to execution tools, and not forgetting the aforementioned StratX, is DNA, the bank’s Deep Neural Network for Algo Execution. DNA applies machine learning to optimise every child order within the larger ticket. Where most algo strategies continue to offer a pre-ordained execution path, DNA is all about optimisation at micro order level using its own observations of the market and experience. Underpinning everything is a truly excellent analytics suite, something that has been a strong suit of JP Morgan for some years now. From ECN liquidity estimation, through predicted execution paths, to an alerts-based service that reacts to changes in market conditions, eXecute offers clients the fullest possible picture of FX market conditions in an easily digestible format. Part of that suite is Aggregate TCA, the bank’s performance analytics package.

From high level statistics such as volume traded and number of orders, Aggregate TCA provides a holistic view of clients’ execution performance, thus filling another gap in the bank’s service. The service provides overall and key metrics for this performance over a period of time (peer comparison is very close to roll out as well) and clients can drill down into the data to great depth and analyse performance by such things as time of day, strategy, currency pairs, market impact and liquidity sources. What we especially like about Aggregate TCA is how it offers great graphics for the high level performance data, but also provides the really detailed data for clients’ own quants to dive into. Unlike some other of our top awards where we see change coming slowly, the execution services space is very fluid, innovative and fast-developing. It is a testament to the commitment of JP Morgan that not only has it maintained its leadership position in this crucial area, but it has, if anything, extended it a little. That may not remain the case, there is a lot of work going on in this field at this time, but something we have identified in recent years about the bank’s FX business – the absolute refusal to accept or condone complacency in any form – means for the third year in a row, if you want the best execution experience, you go to JP Morgan’s eXecute.

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Winner – JP Morgan hree in a row for JP Morgan in this category as the bank has taken the hard work of the past three years and built on it. The key to this win, probably the factor that kept JPM just ahead of the field was how it took one of last year’s outstanding products, Algo Central, and folded it back into the main eXecute platform to help inform the micro decisions. We remain big fans of the Algo Central concept, the canister from which a client can build a portfolio of strategies, but the reality of the world, as JPM has discovered, is that there is probably more growth potential in using algo strategies for what would normally be called mundane orders of modest size. We should stress that the need for a flexible and granular approach to the execution of large orders is not going away, rather what JPM has done is take the logic involved in Algo Central and provide it for smaller tickets. Still available is the ability to break a ticket down across strategies and the ability to interact with the various strategies at any time. Equally the vitally important “get me out” button, more accurately using JPM-speak “Quickfill”, allows a user to execute the balance of an order against the bank’s streaming price for the appropriate amount.

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EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

Best Prime Brokerage

Report Card

t may have been the circumstances at the time the demonstrations were scheduled, but prime brokerage definitely seemed to have a lower profile this year. Obviously in such an uncertain world, credit strings inevitably tighten and there is a school of thought that the next evolution will actually be a step back, with the major firms again cutting their client tail. We are less sure of that because another factor in the low profile could be that banks are generally satisfied with their current client base and offering and see no need to change. Although it was around this time last year (in terms of when most of you are reading this) the reverberations from Citi’s decision to trim its FXPB business and roll it into a broader prime services model continue to be felt, for we still found users of prime services this year that were being serviced by a prime-of-prime provider rather than one of the major banks. The sense is that some clients discarded by Citi were snapped up, but others have found it more of a struggle to get back into a bank PB – it could be the business model, it could be they were too late out of the gate, whatever it was, the prime-of-prime industry gets more good clients. On the subject of Citi, it was heartening to us that last year there was not huge surprise when we didn’t unveil the bank as winner of this award – and spoiler alert, it doesn’t win this year either – call it a sense that the bank was in the throes of the revamp of its business or just luck on our part, but there didn’t seem the direction in February 2019 that exists now. The decision was made to refocus PB and while it is for others to debate the benefits or otherwise of FXPB not being part of the FX business – to date we would argue that clients seem to prefer it “in” rather than “out”, but we are facing a whole new world post-pandemic – Citi knows where it wants to go and how it wants to get there. We should stress that Click has not become a bad product overnight, it remains

one of our favourites, rather that development work has obviously suffered a hiatus as the revamp of the broader business takes place. Click remains a pioneering solution for FXPB with its rich mix of graphics and data and over the past year it has worked with third parties to build efficiencies into the process – not unlike FX businesses of seven years ago, the work is largely about connectivity at the moment and embedding these services into the client business model. We confidently expect Citi to rebound strongly in the FXPB space, but it will be a targeted approach, and the new model will not be FX-specific and it will embrace clearing, futures, options as well as solutions to help clients better manage their margin. When will this happen? That is an interesting question to answer – the ambition is clearly to be well on the way by the end of this year, but with the current upheaval in the world the work may be drawn out, meaning that Citi’s peers will have a little more breathing space without a real giant of the space breathing directly down their neck. On the subject of third parties, it would be remiss not to mention how two more firms are inexorably creeping into the infrastructure of the PB world to join Traiana. Multiple PBs openly discussed how

they are working with Capitolis and Cobalt on various solutions aimed at both simplifying the risk management as well as the balance sheet impact of supporting the business. We confidently expect both firms to play much larger roles in the FX market’s infrastructure as the years progress. Elsewhere, and back to the banks, HSBC, as we shall detail later, made a huge move forward over the past two years and has built a really strong PB offering that, coincidentally enough, reminds us of Click in its look and feel. As the broader Deutsche Bank continues to recover from its financial woes, we also expect to see this institution become a more prominent player in FXPB. Deutsche has always, and this is a very geeky thing to write, been very strong in the area of blotters, a key element of a good PB offering, so we expect big things in the year ahead. UBS and BNP continue to have their supporters amongst users. Overall though, it was noticeable, as we mentioned earlier, how many users now talk about their prime-of-prime providers. These firms don’t qualify for these awards (and rely upon banks for their services so are clients themselves); however, we expect strong competition in our Readers’ Choice Awards later this year! For now though, not for the first time in these awards, we have a repeat winner.

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Winner – NatWest Markets

e noted in these awards last year when unveiling NatWest Markets as our winner, that the bank tends to think differently about prime brokerage, and 28

the last year has reinforced that notion. The strength of the bank’s offering remains its proprietary technology which has led to several different models under the broader H1 2020 I profit-loss.com

risk umbrella – just as some banks are seeking to unbundle their services so NatWest has effectively done so in PB. There are different flavours, which one suits you? A very interesting development we caught whispers of this year is that other banks that do not have a prime brokerage

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

business, are actually entering into white label agreements with NatWest to use its PB technology. We have said in these awards before, that peer recognition is often the best form of feedback and that seems to be the case here. It is, again, testimony to the genius of the business design that a plug and play model suitable for other banks is readily available. Many years ago we noted the open, flexible nature of Agile Markets, NatWest’s technology platform, those strengths continue to help the bank build its FX business thanks to the platform’s reusable technology. In short then, NatWest continues to deliver a PB service to a tremendously broad range of clients, from retail aggregators and prime-of-primes, through HFTs and asset managers, to some pretty big banks – that is some range of clients for a prime brokerage offering. The bank has over the past year added more complex options to the list of products the PB business supports. This is no easy lift for a PB provider, not least because Target Forwards, for example, often go by different names and have a range of product nuances across providers. To help solve the problem, NatWest has developed a template to standardise as much of the trade details as possible, thus cutting down

the number of things that can go wrong – and in the structured forward space, such is the breadth of offering, there is a lot that can go wrong! The bank has also rolled out more services to allow clients to deal via interdealer brokers, especially in “covered” products where the regulatory burden can be onerous, this especially helps the bank’s non-bank market maker clients become more embedded in the “core” market function and could, just could, have a significant impact in the FX swaps market going forward. An example of how NatWest thinks a little differently can be found in how it handles what rapidly became a bete noir for PB, high frequency trading firms. Instead of trying to monitor the risk from every single one of the thousands of transactions given up by these clients, NatWest has instead built an internal ledger to which these trades are directed. Given how the market risk profile is often minimal on the client side, this makes sense and allows the bank to effectively risk manage these firms in a different manner to other clients – again the benefit of the hydra approach to PB – while at the same time freeing up other parts of its FX business from having to try to keep up with the rapidly changing risk

picture. It just unclutters the FX business, which can only be a good thing. Last year we observed that if there was one area we would have liked to see a change in the business it was in more visualisations – in such a data heavy business being able to identify the KPIs and key issues quickly becomes more of a challenge. We are pleased to report, therefore, that another enhancement over the past year from NatWest has been better use of visualisation tools. It doesn’t have to be complex, but being able to identify that there is a problem quickly is the best way we can think of to solve it quickly. NatWest has always had a loyal client base for its PB business and while that support was shaken during the aftermath of the financial crisis, it was not broken. Those clients and the hordes of new customers that have flocked to the bank have not been disappointed, for NatWest Markets has what we – and many others – consider to be the best FX prime brokerage offering on the street. It has achieved this by being innovative, open to collaboration with third parties, and cognisant that clients come in many different flavours. At a time when banks continue to be very careful over the clients they accept for the PB business, the best in the game has opened its doors – and proved it can cope with the influx.

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The 2020 P&L Innovation Award

P&L Report Card

s we predicted last year in these awards, 2019 turned out to be a good year for ideas and product innovation and with some of the work ongoing and projects still in their infancy elsewhere, 2020 could prove to be the same. Inevitably in such a mature industry as e-FX, the innovation – as it has been for several years now – tends to be in the detail rather than a broad brush stroke that changes how the entire industry operates, but nonetheless there were some really interesting initiatives. As we note elsewhere in these awards, Citi has become a real thought leader in the industry, not least because it has challenged conventional wisdom in so many ways. In terms of product development it remains early days and much of the thought leadership is more about the business model than product, however we really like how Citi has built a universal adaptor as part of its efforts to

build efficiency into asset manager workflow. Away from there, the most recent, and ongoing developments that interest us are at UBS, one project is up and running, the other not quite there yet (at time of writing, and we are disappointed because it could have been a shoo-in for this award). We will focus on the existing, and the models the bank is building for its options clients (for more on this please refer to the Best MultiAsset Class Platform Award). Suffice to say that anything that helps the client more effectively manage their hedging programmes and take advantage of positive market developments has to be a good step forward. “Advisory” appears to be the acceptable word for the service banks are providing around execution, this offers that service for FX options. Elsewhere, Credit Suisse continues to think innovatively over how it further embeds its AES product set into the H1 2020 I profit-loss.com

business and this year it has created products that bring together elements of algo execution, netting, fixes and (agency) FX swaps that we think really offers clients an excellent and efficient solution to help them manage their business. More on this later, as there will be on another initiative we really liked this year, Goldman Sachs’ integration of its algo execution product suite with Bloomberg, effectively bringing the multi- and single dealer experience even closer together. 29

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

We are not sure what this means for the single dealer platform business if banks are going to start giving product away on the multi-dealer platforms, but this decision

probably reflects the reality of the client base needing to operate on an independent venue, as well as the need to make a statement. Either way, it will be interesting

to see if, and how far, other banks follow this move, which is in itself a step further than BNP Paribas’ “view only” service for its algos on Bloomberg.

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increasingly lost in an ocean of firms claiming to be LPs, and that means where a client executes, and with whom, has become crucially important. Thanks to there being a degree of a “known-unknown” about conditions in the market we are not seeing flash crashes as such, rather there are plenty of sharp moves and the occasional gap. Whether they be called flash crashes or just a market move, the fact is that the nature of liquidity in the modern FX market structure reflects that well-worn adage, “you can get as much done as you like when you are wrong”. The second half of that adage is the important factor, however, and that is, “when you’re right, good luck!” Another relatively recent market phenomena – at least in terms of how often it happens – is the market reversion. Whether a move is a factor of more algos

jumping on an already moving train or LPs stepping away is largely irrelevant to many players in the market, especially those looking to execute hedges – and it is here that our winner comes up trumps. Around the time we were actually presenting these awards last year, Deutsche Bank started rolling out its Seismometer on Market Colour. Created from academic work, the Seismometer is a ground breaking analytical tool that helps clients understand the nature of a sharp directional move. Based upon statistical analysis (a link to the underlying academic research is available from within the app), the Seismometer indicates exactly how stressed market conditions are and, importantly, whether there is a likelihood of a reversion. Allied to other analytical tools available in Market Colour 2.0, the Seismometer represents a great example of how a bank can take genuinely unique and innovative thinking, and structure it into a technology solution for clients.

great deal of room for manoeuvre. We should state up front, as we do elsewhere in this report, that Citi and JP Morgan remain at the head of the field here, as they have done for the best part of a decade. This year, however, has seen Deutsche Bank make a serious move into the mobile space, so positive in fact that we would now place Autobahn Mobile up there to make a triumvirate. Key to what Deutsche has done is bring the excellent Market Colour into the mobile app to sit alongside the trading functionality – it has also caught

up by adding orders and algos and an enhanced blotter. The latter also offers business managers a blotter view by trader,

Winner – Deutsche Bank ast year we gave one of our Awards for e-FX Excellence to Deutsche Bank for its thought leadership – specifically how it was using academic research to help clients build smarter liquidity pools and execution mechanisms. At the time the work was still progressing in terms of actual product roll out, however in the same section of this report we also noted the high quality of the bank’s Market Colour analytics package. This year, the two have been successfully welded together and the result is an analytics package that uses cutting edge analytical techniques to deliver the best possible picture of market conditions to clients. This publication is often highlighting the most crucial aspect of any market – liquidity – and the events of early 2020 have only served to reinforce the message. Genuine liquidity providers are getting thinner on the ground, or at least they are being

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Best Mobile App

Report Card

ell, we thought we were done with this as one of our top awards thanks to there really only being two major players – Citi and JP Morgan in the game – but, not for the first time, how wrong we were! Global lockdowns have led to a surge in working remotely, obviously, and while many have desktop capabilities at home or at the disaster recovery site, more still have turned to mobile apps (especially as the weather turns nicer in the northern hemisphere!) This has seen a surge in demand for mobile functionality with banks reporting 150% plus increases in log ins and trades via this mechanism. In a particularly fortunate piece of timing, this has also coincided with more banks rolling out dedicated mobile apps for clients – again this is a benefit of the pivot to HTML5. So, here we are again, trying to decipher the best mobile app in a market that reflects the screen size – there’s not a 30

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EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

something that has to be helpful in the current environment especially, but will also make managing a large execution business easier during more normal times. Elsewhere, Goldman Sachs, Morgan Stanley and UBS all offer really good mobile experiences, although often the ease of that experience is dictated by how

far the bank has got in terms of pivoting to HTML5 and actually delivering product and content to it. The sense is that to provide a really great mobile experience a bank needs to replicate the desktop experience, but do so using much less screen real estate. For content the tablet can help – and it was noticeable this year how many

banks have upped their game for the tablet, but for the trading and order management experience it needs to work effectively on a phone – something that has been understood for more than a decade by the only winner of this award, JP Morgan. Of course, we say the only winner until now, because…

tablet experience is just that little bit better. One of the factors that makes it better is the text-to-speech functionality, simply put, mobile users can have the content read to them, it’s not a huge innovation but it is an important one for those clients that prefer to consume content that way, and in the age of the podcast (quick plug for our In the FICC of It podcast here!) who doesn’t? Also delivered this year has been a simpler order entry process on mobile – swipe left-to-right and away you go, and easy access to the search box (swipe down) as well as the ability to delete currency pairs (swipe right to left). A very popular addition to the mobile app this year has been order wings. Available on the desktop version of Velocity, this is now on mobile, the wings minimise intuitively once the client activates the price tile to trade. Also available on mobile is the

Launchpad for quick trade of baskets functionality and a useful function of the direct link between desktop and mobile is how a client can simply have the tablet open on Launchpad for trading without taking up valuable desktop real estate – it’s effectively a stand-alone, but connected, dealing pad. Finally, and again this is important in the current climate, Citi’s groundbreaking and pioneering Command Centre is available on mobile, meaning even if the administration/oversight function of the client is working remotely, as they most probably are, they can still effectively manage access to Velocity (and mobile of course) on the go. Put together, this all means that Citi has created the ultimate mobile solution that works superbly across content, trading, reporting and surveillance. It is Velocity in the palm of your hand, and for that reason, it has justifiably taken top spot in this category.

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Winner – Citi t is hard to describe such a huge institution as Citi in terms of Cinderella, but when it comes to this award that is definitely the role the bank has played. The excellence of its mobile app has been there for all to see for many years now, but somehow JP Morgan managed to stay just ahead – this year, however, that has changed, and we are probably not the only ones to see the irony in JPM topping Citi for Best FX Platform at the same time as it loses out on what was rapidly becoming its exclusive award for mobile. So what has Citi done this year to tip the balance? Well quite a lot actually, but probably we would highlight a better offering on the tablet. The quality and richness of Citi’s content was established as a firm favourite in these awards two years ago, it is now available, in all its glory, on mobile. It works on the phone, but the

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Special “Decade” Award – Best Corporate Platform – Citi

o report card required here, for what we are describing is a remarkable achievement, one that has one been accomplished once before in the last nine years of these awards, a decade at the top of the tree and one of our gold plaques. It has to be said that in 2011 when we gave the first award to Pulse we saw a very competitive field, meaning it was likely to be challenged from many different directions. Those challenges did indeed come, but all have been seen off by what remains the ultimate solution – one that simply refuses to stand still and is also looking for a new problem to solve – be it jurisdictional, workflow, or technology derived. Back in 2011 in the first write up, we described Citi’s Pulse as “an exposure management tool that allowed users of all sophistications to interact with it”. In 2012 as Pulse was more closely aligned with

Velocity, we noted the increased functionality and content this provided and observed, “It is the most flexible, intuitive tools for corporate treasuries.” Underpinning both of those awards was something that has only become fashionable with many banks over the past three or four years – Pulse is a workflow solution first and foremost. More than that, it is the ultimate solution for the corporate treasury. There is a real challenge, when describing a “Decade” Award in trying to pick out the H1 2020 I profit-loss.com

important aspects of the service – otherwise the write up will go on for pages and pages. For Pulse the highlights for us would be the exposure management tools, especially the graphics and functionality 31

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

therein; the order functionality, which provides corporates with more control over how, where, when and by whom their hedges are executed; the centralised and decentralised treasury models available; the Gateway connectivity solution, the bank’s STP solution; and the detailed post-trade reporting and blotter solutions. We should also mention that all of this is done not only on a global or regional scale, but in more than 80 individual countries

where solutions have been adapted for the local rules and regulations. Just in the last year alone Pulse has added functionality in some shape or form for (deep breath); Bangladesh, Brazil, China, Colombia, Ecuador, Egypt, Hungary, India, Japan, Lebanon, Malaysia, Mexico, Pakistan, Peru, Poland, Singapore, Sri Lanka, Thailand and Vietnam. Just in 2019. Probably the best indication of how good Pulse is can be found in the proprietorial

mood here at Profit & Loss, because we feel we have been part of that journey over the past decade. We must have written this somewhere before, but the fact is Citi’s Pulse is the ultimate corporate solution – not only because of its huge breadth of products and services, but because no matter at what level the treasury is in terms of its experience with FX markets, Pulse has a solution to help guide them safely through what can be a tricky world.

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Editor’s Choice Award – Citi

ather than, as it has been in previous years, this award reflecting the editor (in this case managing editor’s) view of the platforms, we have decided to make it a recognition award. Our thoughts on the various platforms are littered throughout this feature so there is no need to go over old ground, therefore the Editor’s Award will henceforth be given, where necessary – it may not be an annual event – to a bank that we at Profit & Loss feel has changed the dialogue in the industry. It could be thought leadership, it could be a truly groundbreaking technology development, or perhaps, as is the case this year, it could be for a business decision. To be fair, this award is bestowed upon Citi for multiple reasons, but let’s start with its decision around this time last year to cut the scope of its prime brokerage business. You can argue long and hard, and believe us people do, about why Citi was driven to that decision; our sense it was not a single event, rather a build up of pressure on the business to the degree that the risk-reward equations were simply not adding up. By suggesting, as the bank did in a white paper last year, that prime brokerage was tremendously under priced, it was stating the unthinkable to many. PB had always been priced in a certain fashion, why would people want to think about changing it? The debate that followed continues to this day, but one thing was triggered by that paper and the move to remove some of its highest volume clients – people started talking about the sort of technology outlay required to manage such a large client franchise. The result, to date, has been a more diffused PB industry in terms of clients, something that we believe should act as a buffer in times of stress. The second, and, to us, linked decision, was to cut the number of connections to the bank. Yes, it can validly be argued that Citi 32

went too far initially in terms of where it connected, not all followed them, but the decision to take a look at the value offered by so many of these channels was again a brave one for what remains in most people’s eyes (justifiably) as one of very few truly universal banks. The fact is, thanks to fragmentation, the liquidity mirage in FX has become even bigger. We have prime-of-primes doing the right thing and being a credit conduit and we have others doing the wrong thing and proclaiming themselves liquidity providers. These models have one thing in common – they are all liquidity recyclers and if Citi’s decision means they have less oil to run their business, then it should be a good thing, if for no other reason than we will be able to better work out exactly what liquidity levels are in FX (and don’t get this writer started on last look!). Probably the biggest compliment paid to Citi over this decision comes again from its peers. While not all had followed them in having so many connections, there was a H1 2020 I profit-loss.com

realisation that there were still probably too many, thus other firms started, and continue, conducting the same process. These decisions exercise leadership, indeed more than one platform head has told this publication they found the questionnaire delivered by Citi thoughtful and fair. There is a recognition, finally we may add, that liquidity – genuine liquidity – has tremendous value and banks are moving to protect it. This also represents a good example of how AI for example is changing the FX world, for we doubt that deep enough analysis, across the bank’s business, could have been conducted to justify such a decision even three years ago. Above all, what these decisions represent is a bank thinking the unthinkable, and that approach is in the DNA of FX markets that have long innovated around market structure (both good and bad). Not everyone will agree with Citi’s analysis, but few will deny it was well thought out and could have a radical impact on the market structure in the months and years to come.

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

Awards for e-FX Excellence This is the second year we have presented Awards for e-FX Excellence. As we noted in the inaugural presentation, the previous format allowed us to offer a high level view of what is considered excellent rather than identify, in a little more detail, products and services that headline a bank’s offering. This is what we hope to achieve here by offering user feedback and our thoughts following the demonstrations on each bank’s single dealer platform along with those areas in which it excels.

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BNP Paribas s we noted at the start of this article, the calendar was unkind to BNP Paribas in that our scheduled inperson demonstration was cancelled due to the accelerating pandemic. As such, our views on the platform are necessarily limited. That said, there is plenty of feedback to share and, thankfully, our observations from looks at the platform we have had previously, both in BNP and on user desktops. In terms of broader development, BNP continues to migrate its Cortex platform to HTML5 from Silverlight, which we know from experience is not a quick process, but the bank is also rolling out some interesting new products. Our feedback, and our own previous observations, confirm that the calling card for BNP Paribas remains execution services. Not only are they popular with clients, who tell us the pretrade analysis packages are superb but they are also widely respected by that toughest of all groups, its peers. A lot of what has been developed at BNP over the years has had some sort of genesis in the algo business and this year’s major development is no different. The bank officially rolled out Cortex Live in 2019 which featured a product we teased in these awards last year and then wrote

about a couple of months later in some detail – Alix. Alix started life in 2019 as an execution assistant that provided a live running commentary during order executions, alerting users to changes in market conditions and upcoming events, for example. Since then, however, its role has expanded to make it core to Cortex Live, alongside the bank’s Insight Live, BNP’s real-time intelligence portal. We have always been fans of BNP’s execution services, it has won an award for them every year since 2013, but Alix is a really strong step forward in that it provides the opportunity for exception-based trading. We mentioned earlier how execution desks on the buy side are moving towards a multiasset class model, well we have to be realistic enough to accept that FX is not necessarily going to be the number one priority for such a desk. If an execution trader can do the pre-trade analytics, set the algo operating, probably for a longer period of time in the current illiquid conditions, and only come back to it if alerted, then that is a huge efficiency gain. That is what Alix provides. It also offers the opportunity to “hand hold” those customers less experienced or comfortable with algos, something that could help BNP further penetrate its client base with its algo suite. The other big development at BNP fills a

gap we have observed for some time now – access to principal liquidity. As we noted earlier, for an algo to work really well, surely it has to have access to the best possible pools of liquidity and that means more private and internalised pools. The challenge, of course, is that customers still want to know that their orders are not too exposed, something that is especially important for a business like BNP which grew up as an agency model. The solution is BIX, BNP’s internal exchange. BIX is effectively a mini-ECN that has been built with a strict governance framework to prevent that information leakage. It is controlled by the algo business, thus ensuring the principal business has no other interaction other than to post interest or stream. BNP has long had, for example, a strong FX options business; connecting the algos with that flow is a huge step forward in improving performance. Away from execution services, if our sense is correct and FX swaps is to be the next big development area for single dealer platforms then BNP will be in a strong position thanks to its previous work in enhancing the price and risk engine.

Awards for e-FX Excellence Execution Services Alix

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Citi

uch of what we could say about Velocity has already been written, so we would refer readers to the awards for Best Mobile App, Editor’s Choice and the Special “Decade” Award to reinforce this section, which will look at the pieces of this superb platform not already covered. It is hard to know where to start with Velocity, there is hardly a weak link on the platform, and we are keenly awaiting next year and the release of Velocity 3.0 which is likely

to raise the competitive stakes once again. We have noted previously that feedback on the algo execution suite is not universally flattering, so there is perhaps something there to consider while the pivot to HTML 5 completes, however the TCA dashboard is a story of excellent performance analysis on both a pre- and post-trade analysis. Otherwise Velocity is a story of rich graphics aligned with robust and innovative functionality. A perennial winner – this is the fifth year it has been recognised – is the FX options offering, for the cube concept remains very popular with users desperate for screen real H1 2020 I profit-loss.com

estate. The design of the cube means users have a familiar grid concept for their data, but they also have clear and easy to read graphics to speed up the decision-making process. More products have been added in 2019 and the ability to share strategies remains popular, as does the executable trade ideas published by the bank’s FX options desks. The calendar spread pricer and customisations functionality has also been enhanced and the cube redesigned for structured products. Next up, something else that has established itself as the one to beat for many years, seven to be exact, Citi’s

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

research effort. The Wire remains the original and probably the best of the “news” feeds from bank trading desks, although the field is closing there, while one of the great visualisations of the past few years, the mind maps from the platform, have been adopted by Velocity.com, Citi’s research portal – what was it we were saying about peer recognition? The FX Overview app remains a triumph, the best out there, with its interactive and intuitive functionality allowing users to go on a journey through markets click by click. The last year has seen quant analytics added to the overview page, the search function enhanced on the Wire and a redesign of the technical analysis offering to give a better consolidated view of the market. As always, drill down for the details is available. A small, but important, change has also been the addition of the ability to change font size on the FX Overview page – this small attention to detail highlights the approach Citi’s dedicated UX teams take, no aspect is too small to consider for enhancement. Also fully released are the Hoots, alerts of live market commentary delivered by Citi’s analysts – these are available for replay up to an hour after the event. We have mentioned the bank’s market leadership in terms of thinking about the

structure and a manifestation of that comes in the universal adaptor, built initially for FX Connect, which automates client documents, balances and confirmations for example. This is effectively a common FIX spec for pre-trade allocations, execution and post-trade rolls and much more. Finally of note, we cannot ignore, yet again, Command Centre – if Profit & Loss had a product Hall of Fame this would certainly be a strong contender for the first inauguration. Command Centre has proven itself over and over again and has been enhanced over the years since launch five years ago, and in 2020 the story is no different. With the dispersal of teams everywhere as firms defend against the pandemic, control and oversight has become both more challenging and more important – step forward Command Centre. Aside from the obvious benefits of it being available on mobile, as we discussed earlier, we think it fair to argue that without Command Centre, Citi would not have seen the surge in trading over mobile that it has. In many way, it has been the key factor in mobile trading’s validation as a concept – the big concern was always, and remains, control. Here at least, that problem is controlled and often solved. The last year has seen agreement

documentation electronified on Command Centre and, interestingly, the addition of Beacon reports. Command Centre monitors trading activity according to a set of rules for both desktop and mobile to help identify and alert oversight to outsized trades, new currency pairs or products traded and new longer tenors traded. The thresholds for reporting are customisable by the client and the reports can be generated according to a schedule or on an ad hoc basis. The feeling as Citi approaches Velocity 3.0, is that years of heavy technology engineering work and a focus on the user experience is about to pay off. The work schedule for 3.0 is impressive – and heavy. It is fair to say, however, that the building blocks that will be placed upon these new foundations, the product offering, remain one of the best out there. It is hard to see how anyone can go wrong in choosing to use Velocity.

Awards for e-FX Excellence FX Options

FX Overview

Real Money Blotter Command Centre

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Credit Suisse

redit Suisse is another institution that appears to be taking its strong suit – AES – and using aspects of that business unit to build its offering elsewhere. Most obviously this can be seen in how the quant teams at AES have collaborated with their colleagues in the principal business to create a smarter pricing and risk engine that gives the bank sufficient confidence to stream liquidity in extremely large amounts. Of course, by streaming EUR/USD in 500 million there is an element of competition between the two businesses, after all that amount sits in a sweet spot normally occupied by the algo execution teams, but it highlights how much work has been done at the bank in this area. In the middle of the first decade of this century, when banks were very worried about the negative impact of latency arbitrage strategies, Credit Suisse stood out as a bank that could handle that flow comfortably (and profit handsomely from it) thanks to its pricing technology – the sense is the bank is back at that level now. The challenge for Credit Suisse remains Prime Trade which is badly in need of an 34

overhaul, although it is not as important as it may be elsewhere in the industry, because the single dealer platform functionality that is most prized by users is the execution analytics – and they are already available, and being enhanced regularly, on the AES site. There, along with the issue of quoting in larger size, lies the conundrum with Credit Suisse – feedback suggests it still hasn’t quite got its messaging right on how its agency and principal FX businesses sit together and it is here, perhaps, that a revamped Prime Trade, with the AES analytics built in, would help. Generally speaking, the users most positive on Credit Suisse’s offering also preferred anonymity in markets when executing, that suggests the bank is still very much seen as an agency house, whether it likes it or not. The bottom line is that at senior management level there has been a lack of direction at the bank over where its FX business should go. The latest restructuring effort from two years ago, however, seems to be working out so there is reason for optimism, for as good as an FX offering can be, it will not last long without the financial and resource backing of the board. H1 2020 I profit-loss.com

Of course, it has to be stressed that AES FX remains one of the standout services on the street – there is a lot to be said for having a business unit that thinks about nothing else than execution and how to squeeze the last percentile of performance out of it, and that is what Credit Suisse has, and does. The last two years has seen a workstream continue at the bank to embrace cutting edge machine learning and data science techniques, across both AES and principal businesses we should reiterate and this has, in technology terms at least, brought the two businesses closer together. There has been a lot of work around NDFs where Credit Suisse, along with two or three other algo providers is firmly entrenched in the leading group – all of whom continue to develop their offerings in what could be an interesting space over the next few years. The last year has seen the bank add NDF swaps and a clever solution for cash settled G-10 NDFs to its supported products, it has also provided access to the algo product suite for the bank’s private wealth client base, something that could be very important. As is often the case with AES, so much of the work done over the year has

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

been under the hood in terms of improving execution performance, the bank continues to enhance its analytics package, but as noted, the feeling is the pre-trade piece is a crucial gap in need of filling. A standout offering from Credit Suisse that we recognised last year, agency swaps, continues to impress. Clients are able to execute their original order through the bank’s algos and then roll it forward on an even or uneven basis, using an agency swap – thus extending the best execution concept further down the chain. This remains a relatively unique product in the FX world at the moment, but we suspect others will pick up on it, as they always do very good ideas. In the case of NDFs or cash-settled G10, the client can run an algo on day zero and get the benefits of a fixing algo on the preferred maturity date. Clients can also net forward exposures and autoexecute the balance. Edge FX, the bank’s analytics package, remains very strong but the pre-trade

element, as noted, is still to be completed, however Market Colour, the bank’s static analytics offering is live, as are the in-flight analytics that allow the client, who can also run multiple strategies simultaneously, to monitor execution performance. It is difficult to pin down in product terms where Credit Suisse’s strengths lie in execution analytics because so much of its work is bespoke. That said, the post-trade piece, which allows benchmarked performance against a range of parameters, and the reversion stats amongst others, is very impressive. Probably the best way to describe Credit Suisse’s FX business at this time – and this again goes back to the challenge of changing the perception that it is primarily an agency business – is to observe that of all the banks offering algo execution services it probably offers the best view of the market thanks to its connectivity network which includes, of course, some of those competitor banks. This makes the

routing tools among the best there are and it is clear by the amount of work the bank puts into this aspect of the business, that it understands it has an edge there. Credit Suisse in FX terms at least, remains a work in progress for us. The bank has recovered from an investment hiatus really well but inevitably full recovery takes time, which means comparative progress is slower. We are optimistic, given the work the bank is doing using machine learning especially, that the comeback will continue and that the coming years will see it creep further and further up the table. The pieces are in place and, hopefully, the investment dollars will continue to flow, as such it should be merely a matter of not if, but when.

Awards for e-FX Excellence Edge FX

Agency Swaps

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Deutsche Bank

gain, much of what we have to say about the impressive progress made by Deutsche Bank’s FX business can be found in our Innovation Award write up, so we shall avoid some aspects of Market Colour 2.0 here. That still leaves a series of impressive developments at the bank, however, which is pretty unique in not being in a rush to HTML5 thanks to it being built on a technology that is still supported in .Net. That should mean that the investment dollars, which seem plentiful for the FX business at Deutsche, should continue to flow and the leaps forward we have already witnessed should also continue. Market Colour 2.0 is, as we noted in our Innovation Award, one of the best product roll outs of the past couple of years and we have already discussed the impressive Seismometer function. That still leaves a seriously impressive suite of execution analytics that complete the app, though, and this has been reinforced over the past year by a new TCA engine and more flexibility in how users view the data. That latter development highlights the change of thinking at Deutsche over the past couple of years, the sense is that eight years ago at its FX height the bank would have said “here’s the analysis we use and our recommendation”, now it is more about, “here is the analysis, how do you want to look at it and can we help you slice and dice

the data to meet your requirements?”. The real time TCA is just excellent, all the aspects of the execution are in vision and at a user’s fingertips and we look forward in the coming months to a new product that is currently in beta testing that will enhance the data available to the client even further. Given our bias towards anything trading, what we will term the second biggest development behind Market Colour 2.0 (it is anything but second best of course), the full roll out of the revamped Autobahn OTC Structures (AOS). This product democratises structured products and while the bank is certainly not alone in developing great solutions in this field – we would suggest structured products is the competitive arena in the 2020 awards – Deutsche’s aforementioned strength in blotters offers a small but important point of differentiation. The autoblotter on AOS allows a client to receive live updates of its positions and sensitivities to moves in the market, they can also see how a potential new trade, or restructuring of an existing trade, will impact their risk profile at portfolio level. It also allows clients to better understand the impact of positive market moves, allowing them to take advantage of what may be fleeting opportunities. This underpins the offering that is AOS, which, unsurprisingly given Deutsche’s broader FX penetration, offers a range of products in an evenbroader range of currency pairs. The flexibility of AOS means that clients with all levels of sophistication, can H1 2020 I profit-loss.com

establish their goals and leverage robust and intuitive structuring solutions backed up by big data. The customer provides the often complex challenge and the bank solves it with what is, generally speaking, a simple solution – and that appears to be a mantra at the “new” Deutsche Bank – simplifying the complex. AOS is a great product for the re-focused Deutsche, it meets the demands of a client base that has various levels of sophistry and that wants to take a more proactive approach to hedging in what are undoubtedly more volatile times. For the super-sophisticated clients it represents a powerful structuring tool with huge product capabilities, for the less sophisticated, every stage of the pricing and trading process on the screen is accompanied by a summary panel. We have already noted the massive step forward by Deutsche when it comes to mobile, specifically how Market Colour is now embedded to offer users a complete picture of market conditions on the move. The trading experience is simple and quick and standard orders are supported as well as the more complex contingent orders, and the blotters, that aspect of the business again, intuitive and easy to access. The bank has, as it has to, taken security issues seriously and on top of the standard settings to reduce the chances of mis- or mistaken use, it has installed IP and GPS blocking to protect users from trading, frankly, where they shouldn’t. Yes there are ways around

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

this, but a provider can only do so much to protect the user from themselves! It will be interesting to see what Deutsche does next with Autobahn, because for its new focus, it is already close to offering the complete solution. No doubt there are product areas it may wish to fill further

around FX options and maybe order management, including algos, but overall it feels like the bank is comfortable where it is, and can start to look and invest in getting to where it wants to be. This makes Deutsche an interesting focus for industry watchers like ourselves.

Awards for e-FX Excellence Market Colour 2.0

Autobahn OTC Structures Autobahn Mobile

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Goldman Sachs irst up, Marquee is definitely benefiting from the HTML5 deployment, it has always been a good platform visually and that has only been enhanced with the sharper graphics and more flexible functionality that move has allowed. As we have already noted, the GUI remains uncluttered by the bank reintroducing some of the popular features of previous iterations and the order entry process, and order book depth, have been enhanced, and more analytics integrated into the chart functionality. The swaps functionality has been improved visually, reinforcing our belief that going forward there could be a serious competition to lead the way in this vitally important FX product set, and FX options, something that was let slip by the bank a few years ago, is being upgraded and reintroduced, but is still to go to the HTML5 version of the platform. The GUI for the swaps in particular appears to have been built by a STIR trader, therefore should prove popular. The bank has also relaunched its mobile app, however at the moment it is content based rather than trading. The outstanding feature of Goldman’s offering in more recent times has been the portfolio basket algos and indeed one of the outstanding developments we saw this year involves the algo suite. Aside from product enhancements, the market activity check while running the algo is excellent, as is how, when an algo is operating the

screen is split to offer the client real time analytics. This sounds simple, and is a simple idea, but it is incredibly effective and allows a user to monitor algo performance without flicking around screens. NDFs can now be included in the basket algos. A key focus of Goldman’s work over the past couple of years has been workflow integration and, like many of its peers, it has rolled out products and services on its single dealer platform to deliver just that. Now though, the bank has gone a stage further by extending that into the Bloomberg terminal. In spite of the richer functionality available on the single dealer platforms, the fact is that many clients can only operate in a multi-dealer world. They want, of course, the same analytics experience as they get on the SDP – Goldman Sachs now provides this. Clients can access the full execution experience from pre- to post-trade from Bloomberg. This is the next step in an evolution that started with BNP providing “read only” access to its analytics while using the Bloomberg terminal, and the same model will probably be deployed on other platforms. As we have noted, however, there is a question mark here of a bank giving away the IP that is usually only available on its own platform, but the counter is, naturally, this is giving the client what they want. These awards are sub-titled “Eye on the Client” and therefore we can only applaud the development – it was a heavy lift no doubt, but it’s done. The other product area that Goldman excels in, and indeed is a previous winner in

these awards, is commodities and this year it has taken a huge step forward by combining its principal and agency models. On the GUI, it has exposed two of its proprietary algos to clients and the latter are able to access multiple pools of liquidity – that from the bank’s proprietary trading business, e- and voice, and from public exchanges – this is especially useful in a fragmented market like energy and continues the work started many years ago when the bank was the first to offer synthetic energy products to help clients hedge risk out of hours. Clients get an enhanced view of the market by seeing the risk transfer liquidity, the prop algo liquidity and a combination of the two – an added bonus is this means clients get to see all Goldman axes, whereas before they could only do so if they were interrogating the principal price. This enhanced liquidity pool is easy to navigate, which is not always the case in such product-heavy markets like commodities, and indeed that is the case with Marquee more generally. Compared to previous iterations that, for example, meant an onerous journey from content to trading, this platform is sleek, efficient and looks good. Marquee has always promised much and now, thanks to Goldman Sachs filling some important gaps in its product set, it is starting to deliver.

Awards for e-FX Excellence Algo Execution Commodities

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HSBC

SBC’s rather mercurial relationship with these awards continues in that the bank persistently wins prices for aspects of its e-offering but is yet to really hit the bright lights with the overall platform Evolve. As that venture is the first single dealer platform to be built from the start in HTML5 the wait may be long, but it will probably be worth it – and as we note every 36

year, HSBC’s build is probably the most complex in the industry’s history thanks to the structure of the broader bank. That said, progress at the bank is continuing and after winning the Innovation Award last year, this year it is scoring in two business areas: one at which we took a good look, the other, for the second year in a row, we were told about by plenty of users but never got to see! So to what we know for sure – HSBC has built a very solid and impressive prime H1 2020 I profit-loss.com

services platform. It is important to reiterate that the bank has a specific client base in mind and does not stray from that, however that means that it can create a very focused product that fulfils all that these clients would need, and more. It is of note, while we are on the subject, that both of the awards presented to HSBC are for its Global Intermediary Services business which focuses on non-HSBC trading activity. Of course, given this is a clientfocused feature, this should be the case. HSBC’s prime service business feels like

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

a scaled down version of the winner of our Prime Brokerage Award in that it is all about carefully managing the risk. This means investment in capacity, monitoring tools, throughput and database management, something the bank has committed to strongly. Of particular note is the options capabilities and this is important given the target clients of the business, a certain subset of large hedge funds that are such big users of options. The bank has enhanced its offering around the management of Pin risk especially. The graphics on the platform are excellent with good visualisations of top level KPIs and drill down functionality to take the client on a journey anywhere

they like in their business – throughout there is a focus on delivering clear and precise information to the client. There is no room for ambiguity in this business and HSBC is ensuring it is kept to a minimum or eliminated. Real time margin calls, exception-based limit utilisations and a comprehensive reporting framework round out what is an excellent PB platform. The second area of note is the persistent feedback we have received from users over the quality of HSBC’s algos. Clients can deploy multiple strategies including the Liquidity+ function that allows them to run two strategies simultaneously. Probably the differentiator for HSBC in its

algo offering, as it is with its prime services business, is the bank’s reach into so many local markets and the market access that can provide. In the past perhaps, HSBC did certain things well and that was it. Now, however, the bank is steadily filling out its service proposition and with the prime and algo businesses it is offering a full service solution – one that allows the client more room to do what they want to do – trade.

Awards for e-FX Excellence Prime Services FX Algos

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JP Morgan side from the multi-award winning mobile solution, everything we want to say about JP Morgan’s FX business has already been stated, so we will focus our attention on other aspects of this superb platform’s offering. Before we do, however, it would be remiss not to detail exactly how good the mobile offering is, although of course that is about much more than FX as well. The mobile capabilities of eXecute are many. Obviously, we have tracked the evolution of simple spot trading, through the addition of orders, into algos. With excellent content delivery, aside from FX options – scheduled for this year – the offering is complete. The bank has continued to revamp the tablet experience, something that started

in 2018, but generally speaking, the JP Morgan mobile experience is a great one. It is, of course, multi-asset class and last year streaming prices for outrights, curves and butterflies were added on US Treasuries, as were single and multi-leg order and “tap to trade” functionality. Precious metals fixing orders were also added, as were orders on base metals, including one of the algo strategies, Sliceberg. A private bank white label app was also launched as the bank continues to build to a best-in-class solution. The Rates experience in eXecute is as good as the FX, which is no mean feat for an asset class with so many underlying products. Thanks to the new tech stack the GUI is clean, sharp and easy to navigate and, of interest to those multi-asset class execution desks, the dealing tiles are easily intermingled with FX and commodities. Order functionality is excellent and users have the

ability to stream multi-leg curves and butterflies with their own defined spreads. It is the same story for the commodities franchise, the migration to HTML5 is largely complete with all the benefits that brings. More products have been added across metals and ags and clients can also build their own custom indices. There is not much we can add to what we have already written about eXecute, so suffice to say that the best FX experience on the street, is just as good in Rates and commodities.

Awards for e-FX Excellence Mobile Rates

Commodities

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Morgan Stanley

organ Stanley was another bank with whom the in-person appointment had to be cancelled, so again feedback played a big part along with our previous observations. The first thing to note is that Morgan Stanley was picked out by several users who observed the algo strategies had been enhanced. In many ways this is not, and should not, be a surprise given the lasting excellence of the bank’s QIS team which has for more than a decade now been at the forefront when it comes to execution analysis; however, we have noted – many years ago admittedly – that there had been a tendency on the part of some clients to use the bank’s analysis tools and

another provider’s algos. That appears now to have changed once and for all. A big part of that shift could be how algo strategies, market access and smart order routers have become somewhat homogenised – not for the first time we would observe that the real differentiator in the algo world is the quality of the internal pools it can access, although it has to be noted that several algo users report using dark pools or mid-books a lot more than they used to. If, however, the world is about understanding the market dynamics, then this speaks to a long term strength of Morgan Stanley. The bank also has another factor in its favour, Fusion Edge, the solution that allows clients to not only access internal flow, but also that from other clients. Morgan Stanley has taken a very bespoke approach to the H1 2020 I profit-loss.com

issue of creating liquidity pools for its clients and the word is it is one of the most efficient client-to-client mechanisms on the street. One of these initiatives has been the development of a mid-book for clients, meaning even less flow goes to the lit market, meaning, in theory, less market impact. Throw in the ability to front and rear load the orders, to effectively build into a strategy and pre-empt market impact in the case of the former, and you have a very popular solution for clients. A big decision was taken at Morgan Stanley a few years back when it decided to reverse what looked to us, and many others in the FX world, as a shift to bringing equities and FX together through the adoption of a quasi agency model. The reversal means that the bank has a strong FX business that

EYE ON THE CLIENT AWARDS FOR e-FX EXCELLENCE

stands on its own, and in turn this has meant that the IP is shared between the principal and agency businesses. It’s becoming a familiar story on the street where banks have woken up to the power, and often uniqueness, of the internal pools – and the subsequent need to have a strong principal offering, but by having the work of QSI to fall back on, Morgan Stanley seems not to have been hit as hard as some others by what now looks like a mis-step in the middle of the last decade. The driver of this resurgence in the algo business, and indeed of the success of Fusion Edge, has been QSI React, a tool that builds workflow efficiency and simplifies what often looks at the complex matter of strategy selection. Not only that, but it offers protection in terms of the predictive models under the hood that look for potential obstacles on the execution path, such as a drop in liquidity. The last year has seen the bank further

enhance React with more visualisations after the algo has been submitted, as well as the introduction of a Sharpe ratio, which further enhances understanding of the performance of the algo by giving the clients another metric to use. QSI React is about more than just giving the client the tool and letting them go, however, the performance score provided in real time helps them understand how well the algo is going and, importantly, how the bank thinks it will continue to progress. In terms of analytics, the visualisations have always been strong in Matrix, to this day it can often be forgotten how this was the first single dealer platform to take what was the radical step of having a “dark” view, and the last year is no different. It is easy for the client to understand how the liquidity regime looks, we also like the pressure index which gives a good indication of where the motivated (ie, aggressive) trades are coming from. Of note, the bank also provides

analysis that offers different views of liquidity regimes across client-defined periods of time – and again the graphics make this complex data easily understandable. There is still work to be done; our feedback is that the Matrix GUI can still look a little “busy” when too many tiles are on the screen, and some of the QSI work needs to be better integrated into the client workflow – this is being addressed now. Overall though, Morgan Stanley has achieved no small feat in bringing its execution tools even closer to its superb analytics – the details of which are exposed to the client. This builds trust and transparency in the process, which could be a key factor in the popularity of the bank’s execution product suite.

Awards for e-FX Excellence Fusion Edge QSI React

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NatWest Markets uch of what we want to say about NatWest Markets has been written in the Best Prime Brokerage Award, so here we will focus on one other aspect of the bank’s service – order management. Orders have long been a strong suit of NatWest, including under its former guise of RBS, starting with basic order books early in the century, through what was the first Gamma trading tool on a single dealer platform, to the segregated order desk launched three years ago. We should stress that the Gamma trading ladder remains tremendously popular amongst clients, but it is moves on the segregated order desk that have intrigued us. The bank has expanded its technology solution to handle all orders, not just algo types, so the same technology is applied to limit orders and stop-losses. By having a

segregated desk, NatWest is able to build a curated pool of liquidity – effectively any client order gets the benefit of internal as well as external pools because there is no question of the information being used, or the order being “triggered”. There is nothing in it for the desk either, which means the whole process, which remains one of the bigger friction points in the bank-client relationship, is much cleaner. We actually think that more banks will go this route for over the past year especially we have heard repeatedly that some banks are starting to refuse to handle client orders because, frankly, they are more trouble than they are worth. If the market runs away, the client gets an awful fill and the bank is criticised, if the market pops through a stop and rebounds, the bank gets criticised for executing the order. It is, and always has been, a lose-lose situation, but a segregated desk, like that built at NatWest Markets, solves that problem. If the client has an

issue with the execution they can complain all they like, but they will also know that the bank made no money out of the trade. On that point, what NatWest has effectively done is built a managed OMS for clients of the segregated desk, and that costs money. Order management is, when all is said and done, an agency offering, so why are clients not paying for the management of these stop-losses and takeprofits? Back in the day the bank could use such orders as protection for their own positions or as entries into new positions, but that is now frowned upon, therefore is it time for banks to look to recoup the not inconsiderable expense of building an OMS as NatWest has, by charging clients? It is not as if the independent TCA services don’t exist to validate the order execution.

managed certificates and more besides, and then overlay that with the best posttrade in the business and a quality research offering. Aside from that there is nothing else to do except take advantage of the coincidence of the alphabet which sees our top award winner placed last. UBS’ Neo remains the most comprehensive, intuitive and easily navigable platform out there – not just in FX, but in every

major asset class you can think of.

Award for e-FX Excellence Order Management

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UBS iven how UBS won our Best MultiAsset Class Platform Award (again) there is next to nothing we can add to the write up for that award. We will therefore, merely highlight the excellence of the FX options offering, the incredibly comprehensive structure products solutions, from options to actively

H1 2020 I profit-loss.com

Awards for e-FX Excellence Structured Products FX Options Post Trade Research

EYE ON THE CLIENT THE 2020 DIGITAL FX AWARDS

The 2020 Digital FX “Eye on the Client” Awards Digital FX Awards 2020 Best Multi-Asset Class Platform

UBS

Best FX Platform

JP Morgan

Best Execution

JP Morgan

Best Prime Brokerage

NatWest Markets

The 2020 P&L Innovation Award

Deutsche Bank

Best Mobile App

Citi

Special “Decade” Award – Best Corporate Platform

Citi Pulse

Editor’s Choice

Citi

Digital FX Awards for Excellence in e-FX BNP Paribas

Execution Services

Citi

FX Options, Research, Command Centre, Real Money Blotter

Credit Suisse

Edge FX, Agency Swaps

Deutsche Bank

Market Colour, AOS, Mobile

Goldman Sachs

Commodities, Algos

HSBC

Prime Services, Algos

JP Morgan

Commodities, Rates, Mobile

Morgan Stanley

QSI React, Fusion Edge

NatWest Markets

Orders

UBS

Structured Products, FX Options, Post-Trade, Research

H1 2020 I profit-loss.com

MARKET CONDITIONS

The Good, the Bad, and the Ugly: A Quarter End to Remember

FX Fixes and market conditions were in the spotlight at the end of the first quarter of 2020, and as Colin Lambert reports, while things could have gone worse, it wasn’t all good news.

s anyone who has seen western or war films of a certain era can tell you – the most dangerous time of all is when the world is at its quietest, and so it proved in foreign exchange markets where, just when people were actually starting to think volatility may never recover, it came back with a bang. It took conditions outside of the market to trigger this, of course, but when has volatility not been prompted by global or regional events? It’s how it works. To continue the film analogy, what the FX industry underwent in late March was the perfect storm, as desks thinned by dispersal (and indeed illness) were left to cope with an uncertain and skittish market as the pandemic really hit home – this was reinforced by probably one of the biggest trading days of this and many other years. The reason March 31 is so important is that not only is it a quarter end at which re-balancing flows from asset managers are typically at their highest, but it is also year-end in Japan, a time when local companies also balance their books. FX flows are traditionally higher, especially around the main Tokyo fix at 9.55am (which is actually just a time stamped reference rate), as well as the more widely known London 4pm WMR Fix. The result in 2020 was – and this is the last film analogy, promise – the good, the bad and the ugly. Liquidity conditions in FX had already worsened considerably as the quarter end approached with top-of-book spreads in the 2-3 pip range in that most liquid of pairs, EUR/USD, compared to what most have become accustomed to, 0.1 pip wide. The situation was even worse in less liquid pairs like Cable which regularly had top-ofbook spreads in the 5-10 pip range. “As March progressed, so conditions gradually worsened, but it was a creep – it wasn’t

obvious that things were getting so bad,” reflects the head of e-FX trading at a bank in London. “Even after the really busy days in the second week of the month, liquidity was thinner, but consistent. As we went further into the month, however, it become patchier and gaps started appearing.” Asked why this was, the e-FX head responds, “People got nervous. The lockdown started in the UK and that really got everyone’s attention and made it harder to have enough people in the right place. All of a sudden we were relying on people in the suburbs to manage technology and systems – or rather we were relying upon their Internet connection.” Several sources point to March 23, when the UK joined most of Europe in a lockdown, as the day things really turned, and the first signs were around the 4pm Fix. “We saw some really nasty moves in the minutes leading up to and during the fixes that week,” says a quant analyst at a bank in London. “It’s hard to know if it was prehedging or people trying to pre-empt the move, but whatever it was liquidity levels couldn’t cope and we started seeing sharp moves of 50-60 points or more.” The worsening conditions in the market prompted the Global Foreign Exchange Committee (GFXC) to issue a statement to remind market participants of their responsibilities in what it said was likely to be a challenging market environment. Looking ahead to the quarter end, the GFXC highlighted how “market participants may execute larger than usual FX volumes during end-of-month benchmark fixings”, while also noting that many were also facing operational constraints. In its statement, the GFXC stressed how participants should give appropriate consideration to market conditions and the potential

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MARKET CONDITIONS monthly rolls, trading desks have the luxury of planning ahead to manage their costs, making peer-to-peer a highly viable solution in the swaps space.”

March 31

impact of their trades; that these orders should be handled fairly and transparently; and that internal guidelines for handling of these orders should be observed and adhered to. Inevitably in some quarters this was seen as a warning that banks could attempt to manipulate the market ahead of and during the Fix, although the reality was very different with one senior GFXC source telling Profit & Loss the intent of the press release was “aimed much more at the buy side than sell side”. The GFXC action prompted praise from the industry, a senior e-FX salesperson at a bank in London observing, “That was a wake up call for the market and well-timed. You couldn’t say after that statement that you weren’t aware of the potential for things to go wrong and while we were having conversations with our clients before that about their quarter end flows there were a lot more after it was released.” Sources also say that it was more than conversations that were prompted, the e-FX trading head reveals the bank in London saw “significantly” higher flows around the fixes in the days leading up to quarter end as customers sought to establish their hedges early. “There was also the volatility in equity markets to consider,” adds the quant analyst. “We were seeing 5-10% moves per day and that triggered a lot of hedging on the part of asset managers as their hedging thresholds were crossed. So quite a few managers were hedging on a daily basis at that time, which helped reduce the flow going into month end.” This was also the case in the FX swaps market, as Jay Moore, CEO and founder of FX HedgePool – a peer-to-peer matching mechanism for passive hedgers in FX swaps – observed at the time to Profit & Loss, “Given the predictable and recurring nature of the

There was, therefore, no little optimism in the FX market as March 31 dawned, customers appeared to have heeded the warnings from their liquidity providers and the GFXC, and established as many of their hedges as they could. As has been noted many times previously, the FX market is very good at dealing with ‘known-unknowns”, provision can be made, resources allocated and, hopefully, trading goes off without a hitch. It didn’t take long, however, for it to go wrong. Price action ramped up at that morning’s 9:55am Tokyo Fix as a surge in orders ran into the thinner liquidity conditions. Expectations in the market were for dollar buying from Japanese companies, however, as the quant analyst says, “We thought most of them had already bought them.” Clearly they hadn’t as US dollar buying in the minute before the clock ticked over to 9:55, saw it jump sharply, with a gap even in the normally very liquid USD/JPY as it rose from below 108.00 to above 108.70, and in EUR/USD, which fell from 1.1025 to 1.0985. Things were even worse in Cable, which fell from 1.2400 to 1.2250, and AUD/USD, which fell to 0.6070 from 0.6180. Because the Tokyo fix is a point in time reference rate, there is no window for observations to create a TWAP (time weighted average price) fix, rather the Bank of Japan takes a one second snapshot. This led, as one source told Profit & Loss, to “a mad scramble for a timestamp”. One dealer spoken to told Profit & Loss that liquidity was about as normal as it gets in the current environment, and added that the market was “overwhelmed” with the demand for liquidity in a very short space of time. “Just look at how the market settled back afterwards,” the dealer observed. “This was a one-off event – the rest of the day was pretty quiet.” Another dealer noted, “We just had a rush of orders to buy dollars at the Fix, it was madness. We told our clients this would trigger a large move and they didn’t care, they just wanted their year-end dollars, so we filled them as best we could.” Inevitably and somewhat predictably, having hit the timestamp, the market reversed course and reversion moves were seen, leading, not for the first time, to people questioning the logic of having such a fix. “Why does the Bank of Japan support this? The ECB changed how it’s point of time reference rate was used by delaying publication, why can’t the BoJ?” asked the head of etrading for a firm in Asia-Pacific. “You can question why customers want to chase this timestamp, but as long as the central bank endorses it, they are going to continue.”

4PM, or Just Before

Given the upheaval at the Tokyo fix, markets were nervous going into the London 4pm WMR Fix on March 31, however the window passed off without incident. The dollar did indeed attract buying interest during the Fix, but it was subdued. The trouble, if that is indeed what it was, happened in the minutes leading up to the fixing window. At 3:45pm London there was a brief surge in the dollar, with Cable leading the way, gapping lower from 1.2430 to 1.2375. Also hit was EUR/USD, from 1.0986 to 1.0960 and AUD/USD, from 0.6130 to 0.6110, while USD/JPY rose from 107.98 to 108.18 and

H1 2020 I profit-loss.com

MARKET CONDITIONS USD/CAD went from 1.4230 to 1.4265. While accusations of prehedging were made, the fact that the market reverted before the fixing window started suggests that what actually triggered the rise in the dollar was speculative buying. “Everyone knew there would be dollar buyers – anyone with access to half-decent analysis and a new service would have known that,” says the quant analyst. “I think we saw what we often see in fixes, spec accounts wait to see which way the TWAPs go and jump on the move. On this occasion they may have been spooked by a move in Cable, which spilled over into other markets.” The move ahead of the window aside – and the dollar sell off continued afterwards which suggests a speculative market long of the currency – the quarter end fix was nowhere near as bad as some were fearing. That said, it wasn’t as good either. Profit & Loss was able to obtain comparative analysis by execution analysis firm BestX which looked at execution performance at quarter end compared to that on December 31 2019. It finds that overall spread costs (measured as spread to mid at benchmark time) were approximately five times compared to end Q4, thus it was clearly a much more expensive roll (the costs include both spot and forward components). The analysis also found that overall slippage to the 4pm London WMR Fix during the quarter end week was approximately three times worse on average compared to end Q4, although it was interesting to see that in terms of currency pairs it looks like liquid G10 in many cases had slightly better performance relative to WMR compared to Q4, but less liquid pairs suffered more. This is to be expected of course, because liquidity in these pairs is even worse than the “majors”, indeed as the analysis highlights, for example,

The USD/JPY fixing move

slippage for Scandi currencies approximately doubled, and many crosses experienced significant slippage increases. Using an analytical framework developed in a white paper earlier in 2020, BestX also found that the variation of the fixing price was approximately three times larger than that of a TWAP over a longer period. As the firm notes in the paper, “This suggests there is opportunity cost in waiting for the fixing window to execute.”

Algos and P2P

When top-of-book spreads on the primary markets widened out, and were accompanied by spreads on bilateral channels (although not to the same degree), buy side eyes inevitably turned to algo execution strategies and the experience seems to have been mixed. While some users say they have been able to capture “significant” spread by using passive, interest-posting strategies, others say they have chased the market away by using the same method. Equally, some users of more aggressive liquidity seeking strategies say they have managed to clear risk quickly and efficiently – with some market impact – others say these strategies have triggered some of the liquidity gaps we have seen. As far as providers are concerned, the story is equally mixed. Giuseppe Nuti, head of data science at UBS, told Profit & Loss at a press briefing in late March, that while the bank was seeing more interest on the faster moving execution strategies, this channel was not out- or under-performing other execution methods once the vol beta was taken out. Asif Razaq, global head of automated client execution at BNP Paribas, however, reported a ramp up in volumes using the bank’s algo strategies, specifically those that allowed them to capture spread. The type of algos used depends largely upon how the client’s decision making process is structured, Razaq also noted, explaining, “Where execution desks have little or no discretion they are using faster, more aggressive strategies – this includes risk transfer – whereas if the PM is part of the process and has a view we are seeing them deploy passive, alpha capturing strategies like Chameleon.” Every bank algo provider spoken to in reference to this article also reported increased interest in executing using internal liquidity pools or third-party operated mid-books or dark pools. “We have seen an increase of about 20% in business going through either private pools or mid-books,” reveals the head of algo product at a bank in London. The other concept that is attracting attention and could receive a boost in the post-pandemic market is peer-to-peer matching. In the FX swaps space, as noted, FX HedgePool has seen good early success with its concept, allowing clients to save significant spreads on their month-end hedges. Data from the firm indicates that while the average published spreads from WMR have narrowed from 1.79 pips in EUR/USD in the last two weeks of March to 0.41 in the first three weeks of April (Cable had moved from 1.03 to 0.76 and USD/JPY from 1.93 to 0.79), they have gone up four to six times compared to the average over the past few years. In spot markets things are a little trickier thanks to the signalling of orders – as noted, a good look at equity and fixed income market flows will indicate the direction of the flow – which attracts speculative interest. That said, there are those who see this as making the case for the peer-to-peer model. “If the model is to work properly then it needs to operate over longer windows,” suggests the head of the execution desk at a large asset manager. “There are netting opportunities, without doubt; what we need is the opportunity to actually achieve them.” When asked how a peer-to-peer solution would impact the asset manager’s relationship with their bank liquidity providers, the

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MARKET CONDITIONS execution desk head – who confesses to “not being sold on” the peer-to-peer model – doesn’t see a problem, suggesting, “The vast majority of netted flow will be that which normally goes to the Fix – and only one bank generally sees that anyway. I still think there will be strong relationships between managers and banks.” Another buy side source believes the peer-to-peer solution will work as long as it offers a “credible alternative” to the current fixing arrangements. “It needs a longer window for netting and a longer window for establishing the benchmark,” the source says. “The challenge will be getting the oversight function at many managers to accept the need for change – many don’t see a problem with the current arrangement – but you feel there is a change coming.”

What Next?

The big question facing the FX market is what happens to liquidity, market structure, indeed the fixes, when global conditions ease and some sort of normality returns to the world and markets? Clearly the length of the various national lockdowns will dictate the pace of recovery, as indeed will any flare ups of Covid-19 post the easing of restrictions. Already though, there is a sense that firms are heeding the lessons of this episode. “Banks in particular had already started looking at how they distributed liquidity before this pandemic, and that won’t change, in fact I think the pandemic may even accelerate the process,” says the head of FX distribution at a bank in London. “We have been pricing through a select few channels as part of our business continuity plan which calls for the cutting of unnecessary streams and we haven’t noticed an uptick in complaints from clients. There have been one or two counterparties who have questioned where our pricing has gone, but they weren’t core customers and as such we have told them they need to engage on our preferred channels if they want to see our liquidity.” The head of e-FX trading at a bank in London believes that liquidity levels will recover, with the commensurate drop in volatility, but neither will reach the highs, and lows, of recent times. “All LPs are going be more careful with their liquidity and I think customers are going to appreciate the liquidity they get a little more than they did,” the e-FX head says. “You will definitely see some channels start to struggle, especially those with poor execution performance. I don’t think customers will be willing to accept the sort of fill rates they were getting before the crisis hit, if nothing else this has taught them that a reject can be very costly.” This is not the view of everyone, however, for the head of e-FX sales at a bank in London believes, like the markets, the structure will revert back to what it was. “If volatility drops back to levels not at where they were but much lower than they are now, then I think customers will accept rejects, because naturally, in a lower vol environment they won’t cost that much.” That debate is likely to run and only be settled by experience, with the LPs’ use of last look at the centre of attention. Several sources have told Profit & Loss that last look hold times employed by LPs have gone up during the pandemic and that they are interested to see if and when they come down, and to what level. A source at one such firm says, “It’s common sense – we can’t manage our systems and risk as efficiently as we could so we need more protection,” however one buy side trader, while accepting the argument to a degree, points out, “We have the same issues and are being much more careful with our execution styles, so why hold us longer? That’s no reward for behaving better is it?” To many in the industry the answer to illiquid conditions is not longer last look windows, it is wider pricing, however as the

Cable at Tokyo and London fixes, March 31 source at a firm that has lengthened its window observes, “Customers have been very quick to criticise us if we widen out – you can’t win.” A cynic would, of course, suggest that widening out and lengthening the last look hold time is a double whammy, but the source points out that the wider spreads were accompanied by a dialling down of the hold time, “but not to the few milliseconds they were at before”. Overall, the sense is that while there will be a new “normal” for FX markets post-pandemic, it may not be the radical change many are predicting. Buy side firms talk of how difficult it is to change their hedging policies and liquidity providers about how they are ready to respond to changing conditions – suggesting the taps will be turned back on as and when the time is right. It may not be that simple, of course, lessons are being learned on a daily basis and in spite of the gaps we are seeing in the markets, most providers are experiencing impressive revenue growth, while at the same time limiting the liquidity they are releasing to the market. As far as the head of e-FX trading at a bank in London is concerned, the future is likely to be a slightly different version of the past. “I think we are already seeing how the market will behave for the foreseeable future. As long as there is doubt about coronavirus and the economic impact there will be nervous investors and that means long periods of calm with volumes below average, interspersed with short, sharp spikes as new information emerges. This looks familiar to most of us in the market, of course, but the big difference is likely to be how often we see these moves. “It will be different, but it will also be the same.”

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THE BASIS BLOW OUT

Understanding the Basis Swap Blow Out

With US dollar funding costs rising and the basis between money markets and FX markets blowing out in March, Colin Lambert takes a look at two Bank for International Settlements studies of the issue and concludes, this isn’t a problem that is going to go away quickly.

S dollar funding markets have often been subject to squeezes, there are times when demand for the world’s main reserve currency just gets too much. However, since the start of the Covid-19 pandemic matters have got a lot worse, and in spite of efforts from a group of central banks to ease the problem, which are having an effect, it is hard to escape the idea that the real problem may be yet another unintended consequence of regulation. In a recent Bank for International Settlements (BIS) study, it was found that the basis – the difference between funding costs in the money market and that obtained via the FX swaps market – vis-àvis the dollar – has widened since the start of the Covid-19 pandemic especially in short maturities. The three-month basis widened to as much as –144 bp for the Japanese yen, –85 bp for the euro, –107 bp for the Swiss franc and –62 bp for the pound sterling. The same has also happened for Asian currencies, most notably the Korean won (although levels remain below those during the GFC). In the study, the BIS notes that while the basis, which is usually close to zero thanks to arbitrageurs, has eased a little due to a group of central banks deploying swap lines, “it remains elevated for some currencies”. The calming effect was the result of a

group of central banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank) announcing a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements. They agreed to lower the pricing on the standing dollar liquidity swap arrangements by 25 basis points, so that the new rate would be the dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular dollar liquidity operations also agreed to begin offering US dollars weekly in each jurisdiction with an 84-day maturity, in addition to the one-week maturity operations currently offered. The measures have since been expanded further. The BIS report observes that the demand side of the equation when it comes to dollar funding is largely made up of institutional investors, while the supply most often comes from the banking industry. The latter has been squeezed since the global financial crisis thanks to regulation, but recent events have seen banks pull back further as they have experienced drawdowns of credit lines from corporate borrowers, which have crowded out other forms of lending. Prime money market funds that traditionally supply dollar

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THE BASIS BLOW OUT funding have also experienced redemptions, leading to thinner supply, the report notes, adding, “Together, the pullback in the supply of dollars from banks and market-based intermediaries (even as dollar demand has remained high) has resulted in the sharp increase in indicators of dollar funding costs.” Using data from the BIS OTC Derivatives Semi-Annual Survey as well as its International Statistics, the research works out banks’ demand for dollars using the gaps in their on-balance sheet dollar assets and liabilities. It finds that Canadian, Japanese and Swiss banks are net dollar borrowers in FX swap markets. Away from banks, the note argues that data show that the recent “outsized” moves in USD/JPY, for example, indicate that Japanese investor demand for dollars remains strong. The note observes that against the backdrop of strong demand for dollars, the supply of hedging services has fluctuated with the risk capacity of financial intermediaries. “After the GFC, banking sector assets have grown noticeably more slowly, reflecting the increase in the cost of bank balance sheet capacity,” the note states. “In the meantime, banking activity became more sensitive to the strength of the US dollar.” It adds that a “key mechanism” through which the dollar exchange rate can affect the risk-taking capacity of banks is the financial channel of exchange rates. For example, a bank holding a diversified portfolio of loans to borrowers, some of whom have currency mismatches, sees its portfolio credit risk increase as the dollar appreciates. “This drives up the tail risk in dealer banks’ global portfolios, which in turn reduces their risktaking capacity if the bank adjusts total lending so that total risk is managed down to match the bank’s economic capital,” the note explains. “The shift of money market investors away from prime money market funds into government money market funds has tightened bank funding conditions further, through two channels,” it continues. “First, banks receive less funding directly from them. Second, corporate borrowers who would normally issue commercial paper bought by money market funds have rushed to draw down their credit lines with banks, thereby crowding out other forms of bank lending. Credit line drawdowns are reported to have reached $124 billion since 1 March. Furthermore, a wider

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THE BASIS BLOW OUT

Preserving the flow of payments along global supply chains is essential if we are to avoid further economic meltdown Libor-OIS spread indicates greater funding costs for banks to undertake arbitrage activities.” The BIS warns that in spite of the central bank FX swap lines having a dampening effect, stressed conditions remain evident in the commercial paper market and with “significant” foreign participation in the CP market, “stress in this market might spill over to the FX swap markets if firms tap these markets to obtain dollars”. Away from the short term liquidity challenges, the note further observes that many central banks do not have swap lines with the Federal Reserve and as such will continue to face dollar shortages. This being the case, their options are limited to selling FX reserves – which could further disrupt markets – or tapping IMF finances, which “takes time”. The note further argues that the current crisis differs from the 2008 GFC, and as such it requires policies that reach beyond the banking sector to final users. “These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars,” it states. “Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown.” Allowing non-bank firms to transact with the central bank is one option to alleviate the issue, the note suggests, but it accepts there are attendant difficulties with this approach “both in principle and in practice”.

Regulatory Impact

Underpinning the latest problems is a phenomena familiar to many FX swap market participants, especially since the repo market blow out in September 2019, which saw the Federal Reserve pump tens of billions of dollars into the market on a daily basis – the impact of post financial crisis regulation. The latest BIS note observes that the dollar exchange rate takes on the attributes of a risk capacity indicator for the banking sector, observing, “This reflects the tendency for an appreciating US dollar to dampen dealer banks’ intermediation capacity. For this reason, the dollar exchange rate and dollar funding costs tend to move in lock-step, as they did during the recent bout of turbulence.” It adds that the negative relationship between the dollar index and the basis for a number of currencies means that banks’ willingness to provide FX hedging services fluctuates with the exchange rate, a relationship that has been “especially strong” during the recent market volatility. This speaks to a study conducted earlier this year by another BIS team, which found that direct links between liquidity conditions in FX spot and swaps markets are getting stronger – and that regulation is having an impact on the FX market’s functioning. In certain currency pairs there is an undeniable link and automated pricing engines in spot often have trouble quoting adequately in pairs such as the CAD crosses thanks to the USD/CAD leg being a one-day maturity while the other leg is most often a two-day maturity. Equally, in some emerging market pairs the same trader will manage both spot and forward books because 46

they are a country specialist. Away from those examples, however, it is hard to find solid links – just look at how the businesses are often managed, with the FX swaps being part of the interest rate franchise and the spot either sitting alone or being part of a global macro type set up. That said, the paper, authored by the BIS’s Ingomar Krohn and Vladyslav Sushko, finds that at month and quarter ends especially, a time when liquidity conditions undoubtedly change, the links are increasing. The paper sets out to assess liquidity conditions taking into account “the interrelation between liquidity provision in FX spot and FX swaps”. By assessing conditions in the FX swap market at the same time, the authors are breaking new ground – most previous efforts to assess liquidity have focused on spot markets only – and this allows them to examine the interaction between FX funding liquidity and more general market liquidity levels. They do this in the EUR/USD and USD/JPY pairs using quote data from Refinitiv Datascope, which raises the first potential variable – the data is not based upon actual trades, and therefore the bid-offer spread the authors use to assess liquidity conditions (the data is cleaned up and the analysis more complex than that basic measure of course) may not always reflect conditions in the market, for example some dealers could be quoting not to deal due to a variety of factors. Notwithstanding that, the authors state: “We find that bid-ask spreads in spot and FX swaps are very highly correlated, indicating that market liquidity in spot and swaps markets is intimately linked.” Specifically, the paper finds that a deterioration in FX funding liquidity, as measured by deviations in the covered interest parity (CIP) lead to a widening of spreads in both swaps and spot markets. This focus on month and quarter ends to study the impact of funding shocks on spot markets makes it is easy to see why there would be an impact given how a funding squeeze would impact the cost of carry to traders carrying open positions (especially Japanese retail engaged in the carry trade), which in turn leads to a clearing out of positions, volatility in spot markets and a widening of spreads. An interesting follow up to this paper would be to analyse the relationship at other times when there is not necessarily a funding squeeze, for example in this research the last price quote in each hour is used to build the database. This may be skewed slightly (although again the database is large enough to suggest it may not be) by what happens around the major fixes of the day, especially 4pm London, when major dealers typically reduce their principal activities while they, or an agency desk at the institution, executes the heavy Fix flow. This reduction in pricing to the market during major fixes is most likely unrelated to anything in the swaps market. There is also the question of how many of the price quotes used in the data are actually providing firm liquidity. Another factor suggesting that the authors have picked up on a specific phenomenon is how their model finds a stronger link between funding liquidity and market liquidity in USD/JPY than it does EUR/USD, as again this suggests that the carry trade may have had a significant influence on the findings. An interesting aside in the paper is how it finds that the positive net effect of dealer competition in FX swaps has “all but disappeared” in the second sub-period studied, from July 2014 to May 2017. This would suggest that spreads have compressed to a level through which the major dealers no longer see the value in pricing to the market, although it could also highlight

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THE BASIS BLOW OUT that the mix of interests in the market is suitably rich to ensure there is generally good two-way interest. This will be an interesting area of study as more multi-dealer platforms seek to roll out their FX swaps trading technology – generally these platforms’ selling point is how they can offer tighter spreads as part of a more efficient package overall, if the spread compression has already happened, one potential selling point is at the very best diluted.

Window Dressing

Perhaps the most notable finding of the report is how it highlights the impact of the capital and liquidity rules on FX swaps market liquidity, which the data suggest has become “several times larger” since 2014 thanks to G-SIBs (global systemically important banks) “window dressing” their balance sheets for quarter-end reporting. When looking at quarter-end US dollar liquidity droughts, CIP deviations since 2014 have become three times greater than they were during the 2011-12 European debt crisis as G-SIBs have significantly cut back on their quoting activity in FX swaps during these times. The “window dressing” referred to is the practice among G-SIBS to reduce the size of their balance sheets over reporting dates in order to cut the potential cost of capital and liquidity requirements. It can also help keep some banks in lower tiers when it comes to helping them avoid being pushed into a higher, and as such more costly, G-SIB bucket. When these conditions hit, part of the slack is taken up by non-GSIB banks, the authors find, however, these banks typically quote wider and in smaller amounts, hence the deterioration in market depth. This is limited to the FX swaps market though, which does suggest that the links between the two markets are not as strong as some of the headline comments would have people think. The report notes how G-SIBs generally maintain a healthy presence in spot markets throughout most conditions. Highlighting this impact of regulation, the research finds that prior to June 2014, liquidity barely changed during quarter ends, but FX funding conditions were usually worse. Post July 2014 (and it could be significant that the Liquidity Coverage Ratio aspect of Basel III came 100% into effect in 2015 but was announced in mid2014), FX funding liquidity measures are “considerably worse” and

Bid-ask spreads in spot and FX swaps are very highly correlated, indicating that market liquidity in the two markets is intimately linked the deterioration at quarter-ends much larger in relative terms, with spreads about two times wider. “Furthermore, unlike the earlier period, bid-ask spreads exhibit widening at quarter-ends for both spot and swap markets, indicating possible spillovers from FX funding to FX market liquidity at quarter-ends during the most recent period,” the paper states. There is one slightly puzzling dichotomy in the paper where the authors at one point state: “Overall, the empirical evidence suggests that a deterioration in funding liquidity at quarter-ends can spillover to market liquidity in spot and swap market[s]. Taken together with our previous results on dealer activity, these findings suggest that the pullback by G-SIBs from dealing in FX swaps at quarter- and year-ends can have particularly contagious implications for spot market liquidity.” Later on in the paper, however, they also write, “While large dealers still dominate market making in spot markets at all times, and their quoting intensity is associated with improved liquidity dynamics, they have exhibited a tendency to pull back from posting price quotes in FX swaps around balance sheet reporting periods.” While they add that “spot market liquidity appears to also suffer because liquidity conditions in spot and swap markets are tightly linked”, there is still the nagging feeling that the findings are being skewed by the use of month- and quarter-end data, which are associated with larger moves in spot markets because of the tendency of funds to rebalance their portfolios at these times – using the Fix or not. Thus, it could be argued that the real influence on spot market liquidity at quarter-end is less impacted by what happens in swaps than suggested here and that it is really more about the dynamics of an influential group of participants in the asset managers, whose activities around these periods are widely known. This is a very intriguing paper and leaves the reader wanting more, specifically, as noted, a study of the phenomena at different times as well as, if possible, a study using real trade data where possible, in order to better calculate liquidity in both markets. In day-to-day terms, the sense is that what is happening in swaps markets barely registers with spot traders who are more concerned with data from spot markets and their own order books to formulate a price – witness the meltdown in repo markets in September 2019 when FX swaps liquidity in dollar pairs disappeared, while the spot market continued to function normally. That there is an influence at certain times is undeniable, however, and this paper offers a real advance in the study of those links, what would be very valuable now is a follow up that can throw light on whether this study is looking at a phenomenon or a structural trend in FX markets. Overall, however, there seems little doubt that the regulatory changes of the past decade have fundamentally changed the inter-relation between spot and swaps markets and that means that whenever we see a brewing financial crisis, the chances are it will be accompanied by a blow out in the basis. Welcome to the new “normal”.

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BITCOIN HALVING

Halving in the Time of Coronavirus The halving of the number of bitcoins that come into circulation will soon be upon us. This is a known event, unknown is the state of the global economy post the global pandemic. P&L’s Julie Ros caught up with a wide range of digital asset market participants to gauge their views on the role the digital currency may play in the future.

s the number of bitcoin that can be mined (aka, block reward) is cut in half when the highly anticipated halving occurs at some point in May, will the now 11-year-old digital currency see a price surge, and if so, how sustainable will it be? Will the continuing pandemic-related shutdown and resulting economic distress provide an opportunity for bitcoin and other digital assets to prove their long-term viability? Looking first at the halving – when the number of bitcoins (BTC) entering circulation every 10 minutes drops from the current 12.5 to 6.25, industry experts are mixed on whether the event has been priced in or whether scarcity will play a factor. New York-based Christine Sandler, head of sales and marketing for Fidelity Digital Assets, the virtual currency custody and trade execution platform, notes there are two schools of thought. “From an efficient market perspective, the halving does not represent new information,” she says. “Market participants have known about the algorithmically scheduled decline in issuance that occurs approximately every four years. Assuming bitcoin markets are efficient, the argument goes that this information is priced in. To the extent discourse about the halving, which reinforces bitcoin’s value proposition as a scarce asset, attracts new investors to bitcoin, it could have an impact.” Michael Moro, CEO of institutional digital currency trading firm Genesis Trading in New York, takes a lesson from history. “Based on how bitcoin has performed historically after previous halvings, a 48

price surge has been the expectation,” he says. “Ultimately though, I believe that the sustainability of the surge is more dependent on factors that would drive the demand side, rather than a constriction of supply, although I would concede that scarcity can often affect demand as well.” In defense of scarcity, Ryan Rabaglia, head of trading at Hong Kongbased digital asset platform, OSL, believes the halving will have a positive and sustainable impact on the market for the foreseeable future. “As we've been moving closer to the halving, of course global markets are in a state of flux, but overall BTC's resilience has persisted,” he says. “There are a few key drivers to this, but the halving is still one of the most economically sound drivers remaining.” But Chicago-based George Michalopolous, head portfolio manager of Typhon Capital’s Leonidas Cryptocurrency Fund, questions the relationship between the halving and price. “While there is a rationale, the mechanical causality is more ambiguous in our opinion than many market participants would have you believe,” he says. “This will be the third time bitcoin has halved, so there is some precedent for this.” In this vein, London-based Maxime Boonen, founder of cryptocurrency market making firm B2C2, notes that in the past, the market may have reacted with a sustainable halving rally, but doesn’t anticipate a repeat this time around. Drawing a parallel with oil markets, Boonen says: “First, mining costs do not operate as a floor on bitcoin's price. If the costs of

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BITCOIN HALVING

miners increase, some will have to cease operating, but that does not represent an unexpected change in bitcoin's supply. “Secondly, a price already represents the intersection of supply and demand: the price of oil dropped because there was an unexpected crash in the demand for oil,” he continues. “For a bitcoin rally to take the market by surprise, there would need to be a surprise change in supply, yet bitcoin mining rewards follow a predetermined schedule. Whilst it can be argued that the subsequent reduction in supply contributed to bitcoin's rally four years ago when it was in its infancy, this halving has been top of mind since 2018. Just like the oil market cratered in anticipation of a drop in demand, chances are that bitcoin's price already incorporates the halving.” Kevin Beardsley, head of business development at Londonbased Kraken Futures, a trading platform for derivatives on digital assets, suggests that If the Bitcoin block reward halving has an impact on the price of bitcoin, it will likely be due to market perception (aka herd mentality), rather than a direct impact from the halving itself. “If we assume a bitcoin price of $7,000, then the current daily block reward is $12.6 million (12.5 BTC per block *6 blocks per hour *24hours). So when the block reward is halved, it means $6.3 million in BTC is no longer entering the market each day,” he says. “A quick look shows ±$180 million in 24-hour volume on BTC/USD pairs only at Kraken, Bitstamp and Coinbase. That

doesn't even include the $500m+ BTC/USDT markets on offshore exchanges. “So for the price to go up purely due to the halving, you have to assume two things. First, that miners are selling all of their mined BTC more or less in real time – I have reason to believe this is not the case – and second, that a $6.3m reduction in selling demand (3.4% of daily fiat volume, 0.9% of Fiat+USDT volume) will have a noticeable impact on the market. Bearing in mind there are individual traders every day who buy or sell that amount as a normal course of business,” Beardsley continues. “So, if the reward halving does impact the price, it is more likely to be from market perception (everybody thinks the price will go up, so people start buying), rather than a direct impact from the reduced supply itself.” Meanwhile, Arthur Hayes, co-founder and CEO of cryptocurrency exchange BitMEX in Hong Kong, believes market dynamics are what they are, unpredictable. “All else being equal, a lower block reward should result in lower new supply entering the market, which should boost the price,” says Hayes. “But all else is not equal; there are all kinds of other factors at play. Therefore the price could do anything,” he says. “There is a lot of trading volume in crypto markets, driven by a high degree of retail speculation and volatility, with billions of dollars’ worth of coins flowing back and forth and round in circles,” Hayes explains. “It is therefore unlikely the halving causes a shortterm price surge as the $6 million or so which is being deducted

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BITCOIN HALVING

David Mercer

Joel Kruger

from the daily supply won't have much of an impact relative to the large trading volume. If the halving goes well, maybe the bitcoin price rallies 2% on the day, due to the news and excitement of the halving, but that won't be meaningful or sustainable. However, over six months it represents over $1 billion of supply being taken out of the system compared to the previous block reward. This may be a large enough quantity to impact the price.” Echoing these sentiments, Peter Johnson, a principal at Chicagobased Jump Capital, points out that it’s very hard to accurately anticipate near-term price movements in any market, so the price of bitcoin could go either way after the halving. Long term, Johnson says he looks at the supply and demand dynamics of bitcoin. “From a supply perspective, the halving obviously reduces new supply coming into the system. On the demand side, the most important source of demand is long-term investors,” he says. “Traders and speculators contribute to both short-term supply and demand – and drive much of the volatility. Over the long term, I believe that price will be driven by the available supply coming into the market and the demand by longterm investors.” Also looking longer term, Joel Kruger, currency strategist at LMAX Group, which operates multiple institutional exchanges for FX and crypto currency trading, including LMAX Digital, based in the UK, takes a different stance. “We’re not convinced the market will surge for any meaningful period of time as a result of the halving event. For one thing, we believe the event has been well telegraphed and markets do a good job pricing in what they can anticipate,” he says. “We would also highlight the fact that 85% of bitcoin is already in circulation, and as a consequence, we believe the notion that there will be a surge in demand because there are less new bitcoin coming into circulation, is an exaggerated one. “Overall, we expect a continued upward trend over the medium to longer term, but believe this to be less a function of one single mechanism and more as a result of the totality of bitcoin’s compelling economics,” Kruger says. Overshadowing the halving though, is the coronavirus pandemic, notes Mexico City-based Daniel Vogel, CEO of Bitso, Mexico’s first cryptocurrency exchange, who has a different take on what will move bitcoin prices. “The higher unknown here is how the market will react to the massive amounts of money being printed around the world to fight off the economic effects of COVID-19. I believe 50

Christine Sandler

there's a big possibility that scarce goods (stocks, gold, bitcoin) will come off as the big winners in this massive QE experiment we're seeing play out minute by minute,” he says.

Decoupling?

Regardless of whether the halving gives bitcoin prices a boost or not, digital assets have tended to move in lock step for much of their existence. Will this trend continue? Fidelity’s Sandler suggests that it will. “Digital assets are still highly correlated. Given bitcoin is the largest, most established digital asset, price action in bitcoin could drive the tail of digital assets,” she says. BitMEX’s Hayes agrees: “Yes, it seems these cryptocurrencies are all highly correlated. We do not see a fundamental reason for this; however, we can't ignore the correlation. Eventually this correlation could break down, but we could not say when.” Bitso’s Vogel says that although he prefers less correlation, digital currencies do tend to move together. “I wish it didn't, but it usually does,” he says. “Historically, as people make money on the appreciation of BTC, they tend to see other crypto-protocols as diversification – often without any real technological or logical reasons.” “If you see a surge, it will mechanically carry over because most are still priced in BTC terms by default. Beyond that, a rising tide tends to raise all ships. So, yes, we think it would,” adds Typhon’s Michalopolous. Genesis’ Moro largely agrees, pointing to the special status bitcoin enjoys. “I don’t think there’s any question that bitcoin is the flagbearer for the entire asset class,” he says. “While I can see a scenario in which other digital currencies see a price increase if bitcoin has one, I think it says far more about the critical importance of bitcoin and its influence than about any attribute of other coins. However, I do believe that we will see price increases in other coins that will be greater than what you might see in bitcoin, due to the relative illiquidity of other digital currencies.” Jump’s Johnson suggests that the high correlation in price movements between bitcoin and other digital currencies may hold in the near term, but believes it will likely break down over time. “Bitcoin is still the king; the other digital assets generally get their marching orders from it – relying on BTC performance and benefiting as a result,” adds OSL’s Rabaglia. “Its market

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BITCOIN HALVING

dominance is well known and most trading pairs are priced in BTC across most exchanges.” David Mercer, CEO of LMAX Group, sees the cryptocurrency space as still in a maturing phase. “Because of this, the market will generally look at what the price of bitcoin is doing and expect similar results in other cryptocurrencies. Broadly speaking, bitcoin’s success serves as a proof of concept and signal of the potential of this emerging asset class that is cryptocurrency, which should therefore carry over to the success of other cryptocurrencies.” Concurring with this, Nigel Green, CEO and founder of Dubaibased financial advisory firm DeVere Group, suggests that the move from traditional currencies to digital is a process that will continue to grow. “A rising number of tech and institutional investors are opting for digital currencies, and with the expansion of the native digital generation, global demographics are also on the side of cryptocurrencies,” he says.

Wider Adoption

Looking over the longer term then, which factors are most likely to impact on the price of bitcoin and other digital currencies? Acknowledging that bitcoin and other digital assets are still relatively young, driven largely by speculative activity, and essentially detached from macro events, Fidelity’s Sandler says that this is changing as the asset class becomes more “financialised and integrated”. “This could cause interest in bitcoin to be increasingly driven by the search for a scarce, alternative asset depending on market conditions,” she says. Many of these coins have very different investment propositions, which should in theory imply their prices are driven by different factors, adds Hayes. “For example, a coin representing a world computer or high capacity/low fee payment network should trade like a risk-on asset. In contrast, bitcoin, which is often pitched as a highly robust system, capable of unblockable electronic payments, should trade more like a risk-off asset. This is clearly not currently the case, with the coins highly correlated and in some periods all trading like risk-on assets. “As for bitcoin, in the long term, we think the price can be driven by the degree of inflationary expectations, and any government action to impose burdensome regulation on traditional payment systems as a tool to achieve economic or political objectives,” Hayes says. Boonen turns to the ‘real world’ as providing underlying support for bitcoin. “I believe that low interest rates have been a

Ryan Rabaglia

major contributor to bitcoin's popularity. Bitcoin's big 2017 rally occurred at a time when inflation expectations were at their highest since 2013.” He adds that public concern about financial privacy in a postpandemic world could also support crypto prices, but that we are not yet at that stage. Vogel highlights three factors likely to have long-term effects on bitcoin's price. “Improvements to the technology and its providers (easier access and use), which leads to real use cases that will drive value (eg, network effects, mass adoption, etc), or trust in monetary/financial institutions collapses, making bitcoin one of the few alternatives,” he says, noting that any of these factors could have an impact. Along these lines, Genesis’ Moro adds that factors driving longerterm price impacts for bitcoin would be what the world is currently experiencing as central banks globally come up with ways to battle the economic shock of the current pandemic. “The pace at which money is currently being printed, the debt levels that are being accumulated and the acute consequences that may follow from all of these are some of the drivers for the ‘case for bitcoin’.” Bitcoin's birth was in a time of economic uncertainty and its success has been a mix of global socioeconomic factors combined with a lack of trust in our current system, notes Rabaglia. “With world governments once again proving that their most prominent tool in their toolboxes is quantitative easing, we're again faced with an amazing opportunity to decouple ourselves from this broken system and establish a purely decentralised asset class,” he says. Concurring with the bitcoin origin story, LMAX’s Kruger says: “Bitcoin was born out of a rejection of centralised governance and monetary policy that allows for the debasement of currency. We live in a time where ongoing, unprecedented monetary policy

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Kevin Beardsley

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accommodation has perpetuated risk associated with currency debasement. This makes the idea of decentralised, limited supply cryptocurrencies highly attractive and should result in increased adoption. We believe bitcoin’s first-to-market appeal, mystery around the identity of its creator, and superb design, make it the most compelling in the decentralised, limited supply cryptocurrency basket.” Beardsley, whose firm has been vocal about regulatory impacts on crypto exchanges, notes that regulation, specifically in the US, China, Japan, UK and Europe, has been and will continue to be the primary driver of accessibility to crypto markets, but inflation will also have a hand. “This will have the largest impact on prices in the long run, he says. “If there is a period of unusually high inflation, it could also drive increased interest in fixed-supply assets like bitcoin.” Echoing the inflation aspect, Michalopolous sees increased utility through new functionality such as smart contracts, as well as an inflation hedge, which will be the “hardest money” should we actually see sustained, increasing inflation in dollar terms. Additionally, Jump’s Johnson says, “Since the overall supply of bitcoin is fixed, I think price is largely a function of demand. So the main factor will be how demand for bitcoin and other digital currencies changes over time. In particular for bitcoin, the demand for it as an asset that is expected to have a low correlation with other assets and do well in high inflation rate environments (ie, “digital gold”), will likely be a key driver. Looking even further afield, Green notes that such factors as the coronavirus pandemic, the trade dispute between the US and China, and Brexit have all had far-reaching impacts on the adoption of bitcoin “due to the mounting consensus that it is a safe haven asset”. “As such, a rising number of institutional and retail investors are reviewing and revising their portfolios to hedge against such risks by investing in crypto,” Green says. “This will inevitably drive the price of bitcoin and other cryptocurrencies higher.”

The Interest Rate Impact

As major global economies move towards zero percent interest rates, most see this as having a positive impact on adoption of digital currencies. Interest rates are pretty much at zero (or negative) around the world, and it’s likely to remain in this neighborhood for quite some time, says Moro. “If that’s true, inflation becomes much harder to 52

Arthur Hayes

control, particularly in countries outside of the US. Frankly, even for the US, the unprecedented level of Fed stimulus we’re seeing right now will have an eventual impact on inflation. As digital gold, one of bitcoin’s positive attributes is a hedge against inflation, and I believe it will perform well in an inflationary environment,” he says. Boonen takes the low interest rate argument a step further. “All cryptocurrencies will do better in an environment of permanent zero interest rates and high asset prices, irrespective of their underlying merits,” he says. “In a low/zero interest rate environment, the opportunity cost of holding a non-income generating asset is reduced,” Sandler adds. “To the extent countries must implement additional accommodative policy decisions, interest in fixed supply assets such as gold or bitcoin could grow.” “To some extent,” adds Michalopolous, “It makes the opportunity cost lower of speculating in [digital currencies], but if the state of the world is highly deflationary (as we currently view it), in such a scenario the net effect is negative for price. BTC should benefit most in an inflationary world. Smart contract platforms like ADA should perform best in an increased functionality world.” “Zero interest rates lower the appeal of holding traditional, fiat currency,” notes Green. “Furthermore, interest rate reductions usually result in higher inflation, lowering fiat currencies’ buying power. As a result, the attraction of bitcoin, and other cryptocurrencies is enhanced, and the price will move upwards.” On the other hand, Beardsley points out that Japan has had interest rates at or below zero for most of the last five years, and interest rates have not been the driving factor of crypto adoption there. “As I understand it, changes in regulation have played a much greater role in Japanese crypto trading adoption,” he says. “It would be surprising if zero per cent interest rates drive crypto adoption in western markets when it wasn't the key driver in Japan over the past five years. One thing to keep an eye on over the coming months is the effect a zero interest rate environment has on the fast-growing crypto lending sector.”

Comparisons with Gold

During the coronavirus pandemic, there has been a flight to traditional assets – the US dollar in particular. What are the chances of bitcoin becoming safe haven asset? “Turning to bitcoin as a safe haven was never a rational stance to begin with, aside from its somewhat defensible analogue to gold as

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Nigel Green

Daniel Vogel

a supply-constrained commodity, which often rallies in the short term as a flight to safety…though in deflationary shocks we do not believe gold can maintain this flight to safety quality for long,” suggests Michalopolous. “Bitcoin initially sold off along with most asset classes as there was a flight to cash (even assets traditionally seen as safe havens),” adds Sandler. “The move down was exacerbated by leverage in bitcoin markets, which has since come down. However, since mid-March, bitcoin has recovered by almost 50%.” “I think the conversation around bitcoin has changed,” Johnson puts forward. “In the past, when people asked me about bitcoin, they mainly seemed interested in the speculative potential to 10x or 100x their investment. Now, when people ask me about bitcoin, it is much more often in the context of having an allocation to an asset that might perform well as a hedge against the potential effects of the mass worldwide money printing that is occurring in response to the current crisis.” The common expression that “in times of crisis, all correlations go to one” has proven true again, at least in the early days of this coronavirus crisis, suggests Moro. “The OPEC/Russia oil situation in early March combined with the government-forced quarantines for economies around the world created extreme volatility in all markets (commodities, equities, fixed income), and it certainly spilled over into digital currencies with bitcoin experiencing its second largest intraday drawdown on March 12,” says Moro. “Bitcoin certainly didn’t act as a safe haven that week, but frankly, it’s hard to argue that anything did other than the US dollar. I think that today, bitcoin is more effective as a safe haven in a currency crisis situation, rather than in an economic crisis situation.” “Bitcoin’s growing consensus of being a safe haven asset is due to the fact it is a store of value, scarce, perceived as being resistant to inflation, and a hedge against turmoil in traditional markets,” adds Green. “The cryptocurrency’s ‘digital gold’ status is reinforced – it is known as digital gold as both gold and bitcoin share key traits, including being a store of value and scarcity. Moreover,

Michael Moro

bitcoin came about during the financial crisis of 2008-09 as people became increasingly angry and disheartened with traditional financial institutions. It is highly likely the current pandemic and subsequent financial downturn will spur on people to buy into crypto and start-up crypto-related businesses.” If bitcoin were a flight-to-safety asset, a ‘canary in the coal mine’ would be the AUM of the Grayscale Bitcoin Investment Trust, notes Beardsley. “It is a listed fund, so they report their daily AUM publicly. If bitcoin was a flight-to-safety asset over the past few weeks, I would expect the GBTC Trust to have seen an appreciable increase in inflows as investors seek bitcoin exposure,” he says. In fact, weekly inflows have dropped off in the past 3-4 weeks:

Beardsley adds, “The bitcoin price and the S&P500 have been highly correlated over the past weeks, further indicating it is not a flight-to-safety investment.” Taking the other side of this argument, Kruger believes there has actually been evidence of bitcoin’s flight to safety appeal during the global coronavirus crisis. “When stocks continued to extend declines to multi-month lows in mid-March, bitcoin managed to find

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demand. The resilience of such a fledgling asset is remarkable given the performance of some more traditional instruments,” he says. “At the same time, it’s important to recognise bitcoin is still a maturing asset in its infancy, yet to fully realise its longer term potential as a flight to safety, store of value option. This means bitcoin is also identified by many market participants as a risk correlated, emerging technology, and therefore potentially exposed to periods of global risk liquidation while it continues to work towards proving its longer-term potential.

Making a Case for Fiat

Do the levels of economic devastation resulting from the global pandemic demonstrate the need for governments’ and central banks’ use of fiat to smooth the economic effects the virus is having on individual countries’ economies? Making a distinction between the roles of policymakers and central banks, Kruger notes that, “Governments are meant to promote the general welfare of the public, while central banks have a responsibility to ensure the health of the economy through price stability and maximum employment. To that end, we would expect necessary reserves would be built up to contend with shocks to the system.The absence of such reserves would not be ideal and would force governments and central banks into money printing exercises that could lead to the debasement of currency. “At this early stage, most major governments have introduced already significant stimuli, but more will be required if the IMF prediction of a 3% contraction in annual GDP holds true. Specifically in the UK, where the OBR predicted a 35% Q2 drop in output, we should expect more government and central bank intervention,” he adds. “The economic cushion that is being provided by current monetary and fiscal policies does demonstrate the value of a flexible fiat currency in smoothing economic cycles,” notes Johnson, while Michalopolous concurs that, “Governments will need to use fiscal and monetary methods to help smooth this depression-level global shock.” BitMEX’s Hayes takes a different tack, however, “The virus is first and foremost a health crisis. The trouble is that going into this health crisis the financial system was extremely fragile. There is a huge amount of debt in the economy, both in the corporate sector but also on the buy side of the investment management industry. Now of course one person's debt is another person's asset, so the system reconciles. However, large amounts of debt still cause instability, between the two different groups, savers and borrowers. At the same time, there is a large amount of both inflationary and deflationary forces in the economy; two large tectonic plates locked into place, producing a seemingly benign environment. However, this is an unstable system, at any moment there could be a shock to the system and

large inflationary or deflationary forces could spin out of control, an economic earthquake if you will. “How did we get here?,” Hayes asks, “It was 30 years or so of an economic regime of lower and lower interest rates, responding to every little bump in the road with a looser monetary policy. A central bank put. Suppressing volatility, causing asset prices to go up and up and ensuring the level of debt in the system continued to increase. Papering over the cracks each time a problem occurred, but also sowing the seeds for the next crisis and ensuring the next crisis would be even worse. This virus was the catalyst for a financial crisis, but it was not the cause. If it was not the virus, something else would have come along. The cause of this financial crisis was the economic regime we had in place. “We think the old economic regime has reached the end of the road,” he continues. “With respect to the old set of tools: quantitative easing, lowering interest rates, opening up credit lines to foreign central banks, direct involvement in the repo market and direct loans to banks, this is as far as we can go – any further action won't have much more effect, even in the short term. “We will now shift to more direct fiscal action – "QE 4 Da People" – marking an economic regime change. This could consist of policies like direct payments to individuals (via UBI type systems) and grants to small businesses. In our view, there will be one longterm winner under this new regime, inflation,” Hayes concludes.

Enter CBDCs?

What role, if any, should a Central Bank Digital Currency (CBDC) play? CBDCs may emerge when commercial banks fail to do their jobs, says Hayes. “If they fail to provide loans to small businesses and the public (perhaps due to the burdensome regulatory regime), the government may step in and allow the public and small businesses to have accounts directly at the central bank,” he says. “Democratic congresswoman Rashida Tlaib has already made such a proposal. If CBDCs are adopted, it is likely to be out of political pressure, driven by a failure of traditional financial systems. If the traditional transmission mechanism between the central banks to the economy, via commercial banks, is broken (which it is), then they may need to try something new and more aggressive. CBDCs could be part of that.” But, Hayes adds, CBDCs could have a detrimental impact on deposit taking institutions, as they provide an outlet for depositors to flee the banks to a credit risk free and secure electronic alternative. “Commercial banks will therefore find it even harder to play their traditional roles as finance providers,” says Hayes. “CBDCs will therefore mark a sharp political shift to the economic left, where governments are more heavily involved in providing finance to the economy and have increased control over which projects receive financing.” Michalopolous adds: “The role they seek to carve out – which could be for something as simple as delivering fiscal relief more directly – realistically is not likely to happen in the next couple of years in our view. Eventually, we think that governments may try to implement fiat currencies on a private blockchain with interest rates, creation and destruction of coins, and automated taxation built-in to that private blockchain. This would ironically result in the exact opposite implementation from Satoshi’s design thesis of bitcoin as decentralised, free from government control, and supplyconstrained.” Moro adds: “The world has generally been moving in a digital direction in all facets for decades, and I do think that a natural

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extension will be the creation of central bank digital currencies (CBDC). Take the current situation where the US is providing $1,200 stimulus checks, and think about how much easier and faster it would be if individuals already had digital wallets and the Fed could deliver the money directly into them?” he says, although adding that a concern regarding CBDCs would naturally be around government surveillance and privacy rights of citizens, which no doubt will be a very delicate balance to strike. Sandler believes CBDCs could be a boon to digital assets generally. “To the extent central banks roll out digital currencies based on distributed ledger technology, managing and transacting with blockchain-based fiat currencies could increase the familiarity people have with digital wallet technology and drive people to learn about other digitally native assets based on similar underlying technology that offer differing properties,” she says. “The technology is obviously incredibly interesting and powerful. Digitising cash could have enormous long-term effects on financial inclusion – we have no better technological solution to digitising cash than through the principles of blockchain and crypto. The question is whether central banks (apart from PBOC) are ready to invest in a technology that could potentially be a fad and which still has significant limitations and technical hurdles,” adds Vogel. When people talk about CBDCs, they are typically referring to central banks keeping the records of the money held by all individuals and businesses, points out Johnson, a role that is currently held by commercial banks. “I think it is unlikely that central banks will disintermediate the role of commercial banks in most countries, with potential exceptions in places that have extremely strong centralised government control such as China,” he says, adding that stablecoins issued by commercial entities are more likely than CBDCs to have a significant impact on the industry, as the former will provide an open network for anyone to access dollars (and other currencies). “Central Bank Digital Currencies are a certainty,” claims Green. “China has been at the forefront of the cryptocurrency and blockchain space up to now. With the development of the digital yuan, defined as an ‘all-powerful cryptocurrency’, which could be ready this year and become the first sovereign digital currency in the world, the US – China’s economic rival – and other countries are following suit.” Indeed, a recent survey carried out by the Bank for International Settlements of 66 central banks said that from January this year, 80% of those surveyed are now involved in some form of CBDC work, a 10% increase over the 2018 survey (which had 63 respondents). “As well as bitcoin and other cryptocurrencies being digital and global, and the world becoming ever more digitalised and globalised, the fact that demographics are on the side of crypto, and that central banks, major organisations and institutional investors are all standing up and taking notice of digital 56

currencies, prices will undoubtedly move upwards over the longer term,” Green adds. On the flipside, LMAX’s Mercer says he doesn’t see any likelihood of CBDCs in terms of what we currently understand as digital currencies. “Banks with bigger balance sheets extending crypto credit into the real money segments is a distinct possibility, but a central bank will only be for state launched digital assets,” he says. Mercer’s colleague Kruger adds: “Though a central bank digital currency is inconsistent with the vision of bitcoin, there would still be many valuable applications with such an implementation. These advantages include direct money transfers without the need of third parties, greater financial inclusion through low cost bank accounts, an easier way to track the location of every unit of currency, and the ability for central banks and governments to swiftly and directly deliver stimulus to the public.”

Looking Ahead

So what will drive prices through the rest of this year and beyond? Beardsley says he will be watching to see if the bitcoin price can decouple from its correlation with traditional markets. “Looking ahead, there are so many crypto-specific and macro variables that can impact crypto prices that it’s hard to predict what will drive the change,” he says. Digital assets like bitcoin are largely driven by sentiment and perception, adds Sandler. “Longer term, as the asset class matures, it could increasingly be driven by fundamentals (eg, network usage metrics such as transaction volume and growth in addresses or development activity), as well as external macroeconomic factors and events,” she says. Michalopolous adds that liquidity and inflation dynamics in macro markets, as with every other asset class, will be the main drivers. “Inflation and utility are the only long-term drivers we care about in assessing sustainable upside,” he says. Although next month’s halving will likely positively impact the price of bitcoin, it is increasing crypto adoption and real-world issues that will drive prices upwards, adds Green. Succinctly summing up what will bring sustainability and wider adoption to digital assets, LMAX’s Mercer says: “Increased institutional Adoption, better Banking solutions and effective Credit. The ABC of Cryptoland.” Kruger adds, “We continue to see the price of bitcoin exposed to periods of intense risk-off in the global economy, resulting from coronavirus fallout and exhausted central bank policy accommodation and government stimulus efforts. We think the price will be exposed to this risk given its correlation with risk sentiment as an emerging technology. At the same time, we also expect the price of bitcoin will find plenty of demand into dips from risk-off flow, as medium- and longer-term players look to take advantage of a discounted asset, on its way to realising its potential as an attractive flight to safety, store of value alternative. The crypto ABC will be the long-term drivers for the asset class.” “As we step back and look at how bizarre this year began, for us all, it will indeed be the shocking level of uncertainty and fragility of the world that will continue to lend credence to the digital asset space,” concludes Rabaglia. “As the world tries to regain its footing after this first quarter of volatility, it will surely stumble and have after effects for the remainder of the year – and likely much further into the future. These new realisations that will occur will carry the weight of a changing world, one where this digital asset class of ours will prove to be a viable and transformational component to the new future.”

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