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2015 has been a record year for the FX industry for both the right and wrong reasons.
Unprecedented volatility has been a welcome boon to currency traders looking to make money off currency moves, but record billion-dollar fines issued by financial regulators has shook the industry to its core and is changing the way the industry operates on multiple levels.
Industry participants shared their thoughts on what’s dominating the industry at this week’s TradeTech FX conference, held in London.
China and the renminbi
Volatility returned to currency markets in January when the Swiss National Bank ditched its EUR/CHF 1.20 floor, and hasn’t left since. China’s economic slowdown, and subsequent depreciation of its currency, cast a spotlight on the renminbi.
Christian Schoeppe, head of FX trading for EMEA at Deutsche Asset & Wealth Management, said: “Renminbi trading is almost as big as Australian dollar trading now.
“[It’s] a significant step forward, but we still face different versions of the renminbi, we so continue to remind the Chinese authorities to simplify trading of this currency as well. This is a big topic from a trading point of view.”
Liquidity illusion
The debate around the source of liquidity in FX is ongoing, with banks on one side of the argument and non-banks on the other. Dealers argue they are reliable market makers who execute trades in good and bad times, while non-banks are often derided as being “fair-weather” liquidity providers.
Richard Metcalfe, director of regulatory affairs at The Investment Association, said that potentially both sides could come together and collaborate, as seen in other asset classes.
“That could work because … the true liquidity is coming from the end-users,” he said. “A market maker is as good as their ability to offload their position onto someone else. It’s a very messy picture. [It’s] hard for me to see where it’ll end up.”
Price transparency
When customers are quoted a price, they now want to know how that price was calculated, and this theme of price transparency is set to continue this year and next.
Schoeppe said he had encountered members of the buy side – which includes pension funds and asset managers – who didn’t know the difference between the ‘mid-point’ and the ‘bid-offer’.
“In the past we just gave one execution price, and said to the client that’s it,” he said. “All clients need further guidance – how is this price created, where’s the fee component, what is the bid-offer, fixing, direct market execution, direct market access.”
However, both sell- and buy-side participants agreed the buy side is more pro-active about getting the best price on their FX, using transaction cost analysis tools.
Paul Aston, global head of quant solutions at TD Securities, said: “The biggest structural change I see is an increased awareness on part of the buy side … to really take control of foreign-exchange execution, and make sure they are, indeed, getting the best execution.”
Stay out of jail
Regulation is a concern in the industry, with a plethora of rules and regulation coming into force. The Senior Managers Regime – forcing greater accountability on bankers – is expected to have a substantial impact across the industry, and the word ‘prison’ came up more than a few times at the conference.
Lee Sanders, head of FX execution at Axa Investment Managers, said: “I think every firm wants to be perceived doing the right thing going forward. No one wants to go to prison, right? In our own firm, we’re looking at how we control and monitor the business that we do.”
What was considered normal behaviour 20 or even 10 years ago is not acceptable now, said Robin Poynder, director at FMR Advisory. Traders are nervous about taking positions on their book that might not be viewed as “normal” in five years’ time, he said.
Stéphane Malrait, head of the FX committee at trade body ACI, said: “A lot of traders who don’t know what they can and can’t do, [there is the] fear factor. Will I go to jail if I do that?”
Meanwhile, regulators are now turning their attention away from benchmarks to analyse how the FX market behaves, said Patrick Fleur, managing director at Dutch pension fund PGGM.
“Now [it is] about stop loss [orders], barrier options and last look,” he said.