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ACI BRIEFINGNEWS FROM THE FINANCIAL MARKETS ASSOCIATION

http://www.acifma.com

Germany Readies World Congress .................1

Message from the Chair .....................................1

ACI Expresses “Concern” Over FTT..................2

Regulatory Focus: ACIFXC Tackles Impact on the Industry........3

ACI’s CFP: A Busy Year For A Busy Market ....4

Kenya Sets the Pace for ACI Exams.................5

Ghana Joins ACI ....................................................5

FX Turnover Set at $5.3 Trillion ........................6

Interest Rate

Derivatives Trade Also Rising ...........................8

Moral Compass:

ACI’s Model Code Sheds Light

on Rate Manipulation .........................................8

Bitcoinmania:

Hype or Pioneer in the

field of virtual currencies ? ................................9

FX Exempted from

New Margin Framework ..................................12

Message from the Chair

Dear Members and Friends,As I look back on the last year, Iam grateful that it has passedwithout too much of a negativeimpact on ACI, given that it wasnot a good year, considering theturmoil, conflicts andcatastrophes around the world. On 31st January, the lunarcalendar ushered in a new year,the year of the Horse. Though nota believer of the Chinese Zodiac,I take some comfort and lookforward to a more fruitful yearahead. The Chinese peoplerecognise that the spirit of theHorse is one that makesunremitting efforts to improveoneself. So must we, ACI – theFinancial Markets Association.Financial Markets have beenplagued by many issues includingthe scandal of indexmanipulation, the introduction ofthe Financial Transaction Tax, theever increasing regulatoryoversight and the furtherrationalisation of the industry, justto name a few. These challengeswill not go away. We need to stayfocused and look forwardexpectantly that there is “a pot ofgold at the end of the rainbow”.ACI has also concludedfollowing its Autumn Meetingthat we must have a full time paidPresident to represent the interestsof members and move theindustry’s agenda along. On thatnote, much work has been donesince October and I am glad to

Q1 2014 VOL 19, ISSUE 112 ISSN 1469-2031

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continued on p.2

The 53rd World Congress of ACI – TheFinancial Markets Association takes placethis year in the historical and cultural cityof Berlin. It will offer delegates a blend ofhigh level discussion over the future ofmarkets with social events and perfectopportunities to network.

ACI Germany will host the Congress at theMaritim Hotel in Berlin from 27 to 30 March,has unveiled an extended list of confirmedspeakers from the asset management, bankingand regulatory segments of the industry aswell as details of the business programme,which has been structured over two days withkeynote addresses, a panel discussion andtargeted workshops. The business sessionswill comprise some of the leading minds inthe financial markets.The Congress gets underway officially onThursday 27 March with the OpeningCeremony and dinner exhibition. The firstday of the business programme on 28March will begin with opening remarksfrom the new President of ACI Internationalfollowed by the General Assembly. The

ensuing panel will feature a high level sellside/buy side discussion on developments inFX with a particular focus on regulation andhow to keep the ethos of a self-regulatedmarket alive.Moderated by David Woolcock, Chair of theACI Committee for Professionalism and ViceChair of the ACIFXC. panellists will includeSven Carlsson, Ericsson Treasury; PatrickFleur, PGGM Investments; Paul Chappell, C-View; Stephane Malrait, Societe Generale,Chris Knight, Standard Chartered and RobertEntenman, Unicredit.Contact sessions, which will be held inparallel to a guided tour of Berlin, will closeout the day’s proceedings before delegatesadjourn to the welcome event, “Germanymeets the World,” to be held at the U3-Subway tunnel. Opening remarks will begiven by Walter Momper, the formerGoverning Mayor of Berlin.The afternoon of 29 March will consist oftargeted workshops. The General Assemblyof ACI Germany, with the election of its newboard members, will kick start the day and

Germany Readies World Congress

Contents

Eddie TanChairmanACI – TheFinancialMarketsAssociation

continued on p.2

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ACI BRIEFING I NEWS FROM THE FINANCIAL MARKETS ASSOCIATION I Q1 2014 VOL.19, ISSUE 112 I http://www.aciforex.org

will be held in parallel to a keynotespeech for international delegates byHelmut Rittgen, Head of the Cash andCash Policy Department, DeutscheBundesbank Frankfurt, who will discussthe introduction of Deutsche mark in theformer German Democratic Republic.A speech by Jens Weidmann, President

of Deutsche Bundesbank, the topic ofwhich is to be announced, will befollowed by a keynote from PeterZoellner, Head of the BankingDepartment, Bank for InternationalSettlements, Basel, who will discuss FXand money markets in a changingregulation environment.Workshops in the afternoon will cover

Asset-/Liability Management; CoveredBonds; Credits; Foreign Exchange;Liquidity Management; Regulation; andRepos.The final networking event of theCongress, the Gala Dinner, takes placethat evening during which the traditionalhanding over of the ACI flag will takeplace from ACI Germany to ACI Italy.

Congress. Continued from p.1

report that we are closer to putting up acandidate for the role by March in Berlinduring the World Congress. Much workhas taken place and I trust that the councilmembers will put their full support behindthe successful candidate.ACI – The Financial MarketsAssociation, needs to continue to work

hard in engaging all the other professionalbodies, regulators and members of ourindustry. It has the responsibility to ensurethat it leads and wisely supports theindustry’s continuous effort to rebuild andremake itself as a credible profession. Wemust look forward with faith. I amreminded of a quote taken from thetheologian, Saint Augustine: “Faith is to

believe what you do not see; the reward ofthis Faith is to see what you believe.” Let’s believe that the best is yet to be forACI – the Financial Markets Association.

Yours Faithfully,Eddie TanChairmanACI – The Financial Markets Association

Message from the Chair. Continued from p.1

ACI – The Financial MarketsAssociation has expressed its “concern”over the proposed FinancialTransaction Tax (FTT) in Europe.

The Association says the tax willimpact all users of financial productsand not just banks and financialinstitutions. It will have significantlybroader and larger implications forgrowth, jobs and pensions, theAssociation says, adding it will hitcorporate users who today use thesefinancial products to hedge their risks. “It will also impact individuals’ savingsas pension funds use many of thefinancial instruments available tohedge, and as a direct result secure lessrisky but better returns for theirsavers,” it argues.In a statement, ACI says the level atwhich the tax will be charged appearsimmaterial to those who are not involvedin the financial markets, but when lookedat across products, costs increase sharplyespecially as the proposals can be “manymultiples” of the bid offer spread incertain cases. This could destroy somemarkets, its adds, taking away valuableborrowing opportunities for banks,financial institutions and corporations. Asbid-offer spreads in many of the productswiden, thus damaging price discovery,reducing willingness to make marketprices and giving disincentives to hedgingfinancial risks, the Association warns this

may lead to an increase in the level ofoverall systemic risk.“The FTT will also kill innovation andlimit a bank’s ability to offer risk reducingproducts to clients given the unnecessaryburden of incremental costs imposed by aFTT,” ACI states. “This will reduceliquidity in markets further and increaseinefficiency in the financial system.”The Association also notes that there is noappetite outside the Eurozone to apply anFTT and as such the tax will disadvantagebanks in the Eurozone. “Even within the Eurozone, there is a lackof understanding of how the FTT will beapplied and the tax rates may differbetween countries within the Eurozone,”ACI states. “This is a taxation scenariosetting itself up for harmful and disruptivegeographical arbitrage.“Much discussion has taken place andmuch resistance has been shown in theEurozone,” it continues. “The FTT isalready being watered down and is likelyto finish up being a local stamp duty tax insome EU countries. This parochialapproach in managing what has been anefficient industry will set Europe’s bankingindustry back against global competitors.”ACI also argues that because existingrobust frameworks already exist in themanagement of a bank’s capital and itstransactions, through regulations put inplace by bodies such as the BaselCommittee, International Organisationof Securities Committees (IOSCO) and

the Financial Standards Board,measures already exist to “effectivelyregulated the activities of banks”. Thedirect consequence of an FTT will be tofurther weaken bank capitalmanagement with the knock on effectsto the real economy through reducedlending,” it claims.In the statement, ACI stresses itwelcomes measures to strengthen theframework for the governance of the

banking industry and its operations,however, it is of the opinion that anFTT will only work against theEuropean banking sector. “FinancialTransaction Taxes have their roots inancient Stamp Duties, are inefficientand if broadly levied in the moderneconomies of today will lead to knockon effects with secondary direconsequences,” ACI warns. “We trustthat the EU’s governmental bodies willconsider this carefully.”

ACI Expresses “Concern” Over FTT

continued on p.3

The FTT will kill innovationand limit a bank’s ability tooffer risk reducing products toclients given the unnecessaryburden of incrementalcosts...This will reduceliquidity in markets furtherand increase inefficiency in thefinancial system

3


The implementation of new regulationon both sides of the Atlantic was asignificant milestone for financialmarkets in 2013, but the process willcontinue to be a primary focus in 2014as the industry embarks on thetechnical application of new rules.

In terms of the impact this will have onthe FX industry, it is perhaps unsurprisingthat the key topics on this year’s agendafor ACI’s FX Committee (ACIFXC)centre on how best to address thesignificant challenge these changesrepresent. “In the last year there has been a lot oftalk about regulation and the impact onthe FX industry,” says Stephane Malrait,ACIFXC Chair. “In particular, looking athow can we use the ACIFXC to discussthe implementation of the new regulationsin the US, with Dodd-Frank and SEFs, aswell as the regulation in Europe withEMIR and MiFID II and the upcomingregulation in Asia.”The mission statement of the Committeeis to represent the whole FX market,including different sectors representingthe global FX industry.As a result it has representatives from thesell-side, platform providers, pensionfunds, money managers and corporates ina bid to represent the industry as a whole,with representatives from the US, Asiaand Europe. Even so, the level of awareness about

regulation is quite low even within theCommittee explains Malrait. “So whenwe meet we update our members aboutwhat’s going on in regulation and wherewe see any potential conflict which helpsto start the debate and prompts theCommittee members to reach out todiscuss these issues with the rest ofindustry, to their local Association etcetera.”The ACIFXC also launched an initiativelast year to create a White Paper on theimpact of European regulation for the FXmarket, for which it has commissionedthe services of consultancy firm Adsatis.“We will conduct interviews with the buy-side and try to gauge their concerns aboutthe changes being brought in by EMIRand what potential impact this will haveon the FX industry,” says Malrait. “Oneexample is the definition of FX forwardsas being classified as derivatives underEMIR. This could potentially impact theindustry because it will then follow all thesame regulations as other derivativeproducts.” Another concern that has already beenraised by the project is that theinterpretation of those regulations inEMIR will be applied by each localregulator. According to Malrait, the definition of FXderivatives is different across the region.“As FX is a global market it is going to bevery difficult to have those kind of localdifferences,” he adds. “This is what the

White Paper will be trying to clarify.”The document is expected to be finalisedbefore the ACI World Congress at the endof March in Berlin with copies availableat the conference.After publication, it will be used by theACIFXC as a valuable communicationtool between the regulators and each ACIAssociation, in a bid to raise awarenessabout those concerns and the potentialimpact these points will have.“We believe that participants in the FX

Earlier this year SIFMA’s Global FXDivision published a research papersaying the FTT would typicallyincrease transaction costs for users ofthe foreign exchange market bybetween 300 and 700 percent in thecase of corporates and between 700 and1,500 percent for pension fundmanagers (and by as much as 4,700percent in some instances). ACI’s statement came in the same weekthat Italy rolled out a transaction tax onhigh frequency and equity derivativestrading.

EU Lawyers Cast Doubt on FTTValidity

Meanwhile, the legal group for theEuropean Union Council has cast doubt

upon the validity of the FTT that has beenbacked by 11 Member States.The legal service, which represents theEU's 28 member countries, says that theFTT is incompatible with EU law andlikely to distort competition within theEuropean Union. The group’s opinion,while non-binding, is expected to bolsteropposition to the proposed tax, which isbeing led by the UK.Plan for the tax were unveiled by theEuropean Commission in 2011 and at thetime the EC passed rules that allowed thetax to be implemented by as few as nineEU countries if they could prove commoninterest, however the legal group says theproposal “exceeds member states'jurisdiction for taxation under the normsof international customary law”.The group adds that the plan is notcompatible with the EU treaty “as it

infringes upon the taxing competences ofnon-participating member states” and was“discriminatory and likely to lead todistortion of competition to the detrimentof non-participating member states.”In spite of the standing of the legalgroup, the European Commissiondismissed the opinion, saying it hadconducted a “thorough” legal review andsaid it would not delay the roll out of thetax. In April 2013, the UK lodged aformal complaint on the FTT before theEuropean Court of Justice inLuxembourg, arguing that it was anattempt to stop trades moving out of theso-called FTT zone to London orelsewhere if a party to the transactionwas based in the FTT area, or acting onbehalf of a party based there, whichmeant the trade would be taxedregardless of where it takes place.

STEPHANE MALRAIT

Regulatory Focus: ACIFXC Tackles Impact on the Industry

continued on p.4

We will be publishing a WhitePaper because there is a lot oftalk about European regulationand its potential impact onother asset classes such asequities and fixed income, butmuch less is said about itseffect on the foreign exchangeindustry

FTT. Continued from p.2

industry don’t realise the potential impacton the real economy,” Malrait says. “Wehave quite a few points of concern to lookat which have already been raised in thefirst few interviews that the consultancyfirm has conducted.”In addition to the difficulty in defining FXderivatives and whether FX forwardsshould be classed as derivatives, which isalready covered in the EMIR paper, theother point of concern for the Committeeis this difference between theinterpretations of each local regulatorwith regards to how they each define FXderivatives.For example, in the UK an FX forward isnot recognised as a derivative instrumentbut in some European jurisdictions it willbe classed as such.Malrait adds: “The next step for theCommittee will be to communicate andraise awareness of these issues, which iswhy it is important for us to publish this

paper in March.“It will then be presented to theregulators, published in the press andcirculated to the local ACI operations inEurope to try to raise awareness.“There is a lot of talk about Europeanregulation and its potential impact onother asset classes such as equities andfixed income, but much less is said aboutit effects on the FX industry.”The ACIFXC has also established aprocess to be able to communicate itsfindings and engage meaningfully withlocal regulators.By leveraging the existing reach of theACI network, the individual organisationswill be able to communicate theseconcerns to their respective regulatorswho they have already established arelationship with, with the ACIFXCoffering its expertise when needed.“For example, ACI UK has already hadcontact with the UK regulators and hasheld meetings to discuss these issues, and

we are also invited to be part of thesediscussions,” says Malrait.“The same situation applies for the othercountries.“That is one of the key strengths of theACI – its local presence and localconnections to each regulator make this isa very powerful way of working.”In the coming year, the FX Committeewill also look at the continuing FX fixingissue, with the implementation of andrequests for changes to the Model Code.In addition, the announcement of theinaugural President Delegate this yearwill be a significant change for ACI,according to Malrait, as it will be the firsttime there will be a full-time head of theorganisation.“I think it’s the right time to do it, becausethere is so much happening and so muchchange in the industry,” he adds. “The FXCommittee will be working with this newPresident to drive the agenda, as will theother committees. “

Since it was originally presented inMay 2000 in Paris, the financialindustry’s need for the ACI ModelCode has become more pronouncedyear-on-year and 2014 looks set tocontinue this trend.

Redrafted by the Committee forProfessionalism (CFP) in 2013, the firstpart of the Model Code covers ‘timelessvalues’, areas such as morals and ethics;personal conduct; dealing practices andsegregation of duties that do not changeover time. Areas that are likely to change over timeas the markets continue to evolve areincluded in the Model Code asappendices. The appendices cover areas such asgeneral risk management principles fordealing business, asset and liabilitymanagement best practices and marketsand instruments covered by the ModelCode.According to David Woolcock, Chair ofthe CFP, there are a number of sectionsthat are planned for amendment orinclusion in the Model Code this comingyear in response to market demand. The first of these areas relates to bankaggregation. In conjunction with the ACIForeign Exchange Committee (ACIFXC),Woolcock says the CFP has been

approached by market participants whoare trying to collaborate with the industryin an initiative to have some best practicearound the use of aggregation, particularlyin the foreign exchange market.“The CFP has gone through this issue andare minded that we will add a section onbest practices for FX aggregation, notonly at the wholesale level but potentiallyat the retail level as well,” says Woolcock. When the CFP wants additionalcomments from the foreign exchangemarket it will work in conjunction withthe ACIFXC, he adds.While he certainly envisages includingthis in 2014, Woolcock adds that usuallyan amendment to the Model Code willappear in Q3.A further area for review by the CFP thisyear is unsurprisingly related to alleged

rate fixing, with participants in three orfour different jurisdictions having askedthe committee to review the parts of theModel Code which concern ratemanipulation. “We feel that the content we currentlyhave is still relevant and correct,”Woolcock says. “But some people haveapproached us to see if we would expandthe advice on what we regard as bestpractice concerning rate settings and theCFP is going to review that to see whetherwe could be more detailed in the bestpractices we recommend.”The CFP has also been contacted by anumber of parties regarding the guidancefor trades that are done at technically off-market rates, which are often referred toas mis-hits or off-market trades.

ACIFXC. Continued from p.3

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ACI’s CFP: A Busy Year For A Busy Market

David Woolcock

We feel that the content we currently have inthe Model Code is relevant and correct, but

some people have approached us to see if wewould expand the advice on what we regardas best practice concerning rate settings and

the CFP is going to review that to seewhether we could be more detailed in the

best practices we recommend

continued on p.5

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As part of an ongoing commitment to the suite ofexaminations provided by ACI Education, ACI Kenyaarranged three workshops over the last 12 months to train 50candidates for the ACI Dealing Certificate. Of thosecandidates who have written the exam to-date, 20 haveachieved first-time Distinction Passes.

“A combination of the candidates’ talent and hard work, as wellas the expert facilitation of the training supervisors from PeterSkerritt & Associates, have all helped to make this a very proudachievement for our association and country,” says Grace Newa,Vice-Chairman of ACI Kenya. Pictured here at the Nairobi Hilton with Grace (leftmost lady)and Chairman Steve Lagat (back row, second from left) are manyof these high-achieving young men and women.

Kenya Sets the Pace for ACI Exams

Ghana Joins ACI

Successful candidates in Kenya

“Although we have a prolonged period oflower volatility in markets, andpotentially because of a reduction inliquidity, we are experiencing someextreme volatility in very shorttimeframes,” Woolcock explains.While the Model Code does haveguidance regarding these trades, the CFPhas received requests for more detailedand updated market guidelines explainingwhose responsibility it is to resolve theseissues.Woolcock adds that participants have alsoasked the Committee whether it couldcome up with a new recommendation ofbest practice to provide firm guidance on“when to amend or even cancel trades,rather than the language that we use at themoment”. “That is going to be investigated by theCFP and, where it has implications for theforeign exchange market, in conjunctionwith the ACIFCX,” he says.Bitcoin and other virtual currencies havealso made it onto the Committee’s agendathis year.“As the chair of the Committee I cannotbind the Committee, but we will have thediscussion in Berlin and at a preliminarymeeting beforehand,” explains Woolcock.

“It is my opinion that until we see serioustake-up of these currencies it could be abit early to consider best practices aroundthis. They risk being a fad and it may bemore about a passing phase of interestrather than people actually thinking it willbe used a medium of exchange any timesoon by corporates and financialinstitutions.”Pointing to recent hacking scandalsinvolving virtual currencies as anexample, he says that it is difficult toimagine a multinational company or bankgetting involved in something that is thatvulnerable. “However we continue tomonitor the World Currency Unit(WOCU), and more recently the Ven, forsigns of demonstrable demand for newvirtual currencies,” he says.The CFP also has a new Vice Chair for2014, with Keith Sedergreen, ManagingDirector, Tullett Prebon Australia, takingon the role.In addition, Robert Entenman, GlobalHead of e-Commerce, UniCredit BankingGroup, has also adopted the role ofobserver and liaison between the twocommittees – the ACIFXC and the CFP.And in a move which serves to highlightthe global reach of the Model Code it hasrecently been translated into Chinese,

with Woolcock adding that the Committeeis also anticipating further translations. “We are expecting to see an Italianversion of the Model Code and also aGerman translation in 2014,” he says.The CFP has also had banks formally

asking to use the Model Code as theirown internal code. According to Woolcock, the Committeecontinues to recommend that banks usingthe ACI Model Code should have itsigned by traders as read and understood.He adds, “They can then have a very cleardocument written by practitioners forpractitioners, in contrast to being writtenby lawyers, using language they canreadily understand both with regard to therules and the spirit of the code.”

ACI – The Financial MarketsAssociation recently held its CouncilMeeting in Paris. The meeting wassignificant for the acceptance ofGhana as the 64th NationalAssociation of ACI.

The Association’s application wassubmitted by ACI Chairman Eddie Tanand accepted unanimously by Councilmembers. Othniel Kwainoe recently took over fromKobla Nyaletey as President of ACI

Ghana. He is keen to express his gratitudeto his predecessor for much of the workinvolved in the affiliation and says he isvery excited about the opportunity towork with ACI to move Ghana’s financialmarkets to the next level.

Until we see serious take up ofvirtual currencies it could be abit early to consider bestpractices. They risk being afad and it may be more abouta passing phase of interestrather than people actuallythinking it will be used anytime soon by corporates andfinancial institutions

CFP. Continued from p.4

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The foreign exchange market has a newbenchmark to measure average dailyturnover, after the Bank forInternational Settlements (BIS)released the results of its TriennialSurvey of Foreign Exchange Turnover.

According to the report, global FXturnover hit $5.345 trillion per day inApril 2013. This is the first time averagedaily volume (ADV) has broken the $5trillion threshold, the total represents a32.5% increase from the previous surveytaken in April 2010.Spot turnover rose 37.5% to just over $2trillion per day, while outright forwardactivity was 43% higher at $680 billionper day. Signalling the continued recoveryfrom the credit crunch, the effects ofwhich were still evident in 2010, FXswaps business rose by 26.7% from April2010 to $2.23 trillion per day. FX swapsremains the biggest FX market bycategory, but its influence is declining. Inthe latest survey swaps had a 41.6% shareof activity, down from 44.2% in 2010 and51.5% in 2007, before the credit crisis.By contrast, spot activity continues torise, with 38.3% of volume in thiscategory from 37.5% in 2010 and 30% in2007. There was also an increased sharefor outright forwards, which now accountfor 12.7% of ADV, up from 12% in 2010and 10.8% pre-GFC.FX options activity, in the last BIS surveyto be taken before the new regulatoryframework takes hold, registered averagedaily turnover of $337 billion, a huge62.8% rise on 2010.Activity in futures and options of foreignexchange was barely changed across thesurvey period, rising just $5 billion perday to $160 billion.

A Yen Story

The increase in activity was expectedafter the release of the global FXcommittees’ turnover surveys in late Julyfor the same month. The surveys taken bythe committees in the UK, US, Singapore,Japan, Australia and Canada indicated asurge in activity in yen, which hastranslated into the BIS data. In 2010, theBIS set average daily yen turnover at$567 billion, in the latest survey it was$978 billion, indeed the report notes thatactivity in yen was largely driven by anincrease in the six months to April 2013.

With a 23% share of all activity (up from19% in 2010) the yen has cemented itsplace as the third most actively tradedcurrency in global markets. While the USdollar also added to its market share, mostlikely as a result of the surge in USD/JPYactivity (responsible for 87% up from84.9%), the euro did not receive a similarboost – the ongoing crisis in the Eurozoneseeing the single currency’s share declineto 33.4% from 39.1%. As something of a blow to thosepromoting the euro as an alternate reservecurrency to the dollar, this is its lowestshare since the single currency wasadopted – indeed usage is only 1.4%higher than it was in 1998 as measured bythe legacy currencies.Reflecting a better economicperformance, a strong banking sector and,predominantly, its role as a “carry”currency, activity in the Australian dollarrose by one percentage point to 8.6%.AUD/JPY activity nearly doubled fromthe 2010 survey to $45 billion per day.The yen story is expected to be a shortterm phenomena, a BIS paper released inDecember estimated that activity haddropped by around 8% in global FXmarkets by September, almost entirelydue to a decline in yen activity.

EM on the Rise

A striking feature of the report isincreased activity in emerging marketcurrencies, although the BIS does notethat this could partly be due to bettercollation methods in some centres. Whilethe top seven currencies remain the samefrom the previous report, the Mexicanpeso has seen activity grow, giving it a2.5% share of ADV from 1.3% in 2010.This has seen the peso rise to eighth placein the currency table, USD/MXN turnoverregistering $128 billion per day.Even more interesting given theinternationalisation program underway inthe country is the success of the Chineseyuan, which has seen its share of themarket more than double from 0.9% in2010 to 2.2% in 2013. Given the pace ofthe increase – in 2004 CNY had a 0.1%market share, expectations are that in thenext survey in 2016 CNY could bechallenging the Canadian dollar andSwiss franc for sixth or seventh place.Currency the CAD has a 4.6% share andthe CHF 5.2% - both declined from 2010.

In notional terms, the CNY (the dataincludes offshore transactions denoted asCNH) sees average daily volume of inUSD/CNY of $113 billion per day, upfrom $31 billion in the 2010 survey – thefirst to include the currency. Another emerging market currencyexpected to continue its climb is theRussian rouble, which is now the 12thmost active currency, up from 16th in theprevious survey. Currently the RUB has a1.6% market share, up from 0.9% in 2010and it is likely to be pushing for a spot inthe top 10 at the expense of the NewZealand dollar (currently 2.0%, itself anincrease from 1.6% reflecting the NZD’srole in the carry trade). USD/RUB traderose to an average $79 billion per day,after not registering at all in previoussurveys.Overall, the Turkish lira, South Africanrand, Brazilian real, Chilean peso, theRomanian leu and the Peruvian new solsaw their share of activity rise, while theHong, Kong and Singapore dollars,Korean won, Indian rupee, Thai baht,Israeli shekel, Philippine peso andColombian peso saw their influencedecline.

Client Infleunce

New data collected in the TriennialSurvey show that 16% of dealers’ globalFX transactions were conducted via aprime brokerage relationship with theirclients. In another first, the survey showsthat 3.5% of global FX volumes in 2013was driven by trades of dealers with retailcustomers, either via electronic margintrading platforms or through retailaggregators.Although no comparative data is availablefrom previous surveys, the primebrokerage share of activity is expected tohave increased, especially in spot. Thisreflects the continuing trend that is thegrowing domination of the OtherFinancial Institutions segment. The 2013 survey provides a breakdown ofcounterparty categories. The data indicatethat non-reporting banks, smaller andregional banks that serve as clients of thelarge FX dealing banks but do not engagein market-making in major currency pairs,account for roughly 24% of global FXturnover. Other quantitatively significant financial

FX Turnover Set at $5.3 Trillion

continued on p.7

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players include institutional investors aswell as hedge funds and proprietarytrading firms, with a share in global FXturnover of about 11% for each group. Bycontrast, trading by official sectorfinancial institutions such as central banksand sovereign wealth funds accounted forless than 1% of global FX market activityin April 2013.Inter-dealer trading grew by 34% to $2.1trillion in 2013, up from $1.5 trillion in2010. The share of inter-dealer trading inglobal FX transactions stood at 39% in2013, and hence remained roughlyconstant over the past three years.Dealers’ FX transactions with non-financial customers decreasedsubstantially between 2010 and 2013,from $532 billion in 2010 to $465 billionin 2013. Non-financial customers – agroup that includes corporations andgovernments among others – accountedfor merely 9% of global FX turnover in2013. Since the 1998 Triennial Survey,the share of non-financial customers hasdecreased by 8 percentage points. Withthe exception of currency swaps, wherethe share of non-financial customersexpanded slightly, the declining role ofnon-financial customers in FX turnover isevident across all instrument categories,most notably spot and forwards.In notional terms, across all products,non-reporting banks are responsible for$674 billion of activity a day, by far thebiggest “client” segment, followed byinstitutional investors and hedge funds(including proprietary trading firms)which both execute around $308 billion. In spot terms, Other Financial Institutionsnow represent 57.8% of all activity, easilythe largest share the sector has ever held.As an indication, in 2007, this sector wasresponsible for 39.2% and in 2004 it was33.7%. In 15 years, since the 1998 survey,

Other Financial Institutions’ share ofactivity has nearly trebled. Partly this is areflection of wider banking industryconsolidation, and partly a result of thecoagulation of activity among a smallgroup of banks which has seen morebanking institutions move into the OtherFinancials sector. Another factor is,inevitably, the increased influence ofproprietary trading firms, which includeshigh frequency traders and non-bankmarket makers.In notional terms, Non-reporting Banksexecute $506 billion per day, for a 24.7%share of spot activity, while hedge fundsand PTFs have a 13.4% share, executing$282 billion per day and institutionalinvestors trade $267 billion. The share of hedge funds and proprietarytrading firms is a little surprising givenhow the high frequency sector is thoughtto have impacted the market. Just threeyears ago, there were estimates that HFTin its various forms, was responsible foralmost one-third of activity, this suggestsit is much lower than that and mayreflect a wider shift in the marketmicrostructure. The past three years hasseen a more democratic landscapeemerge in terms of the multi-participantplatforms, partly due to the rise ofaggregated, relationship liquidity. Thedecline in influence of HFT in particular,could be a manifestation of the rise ofaggregation venues and the reluctance ofmany players to interact with HFTliquidity on anything other than theirown grounds.Other Financials are also responsible forthe lion’s share of outright forwardbusiness, with 59.1% of activity, up from53.5% in 2010 and 43.9% in 2007,however Reporting Dealers still holdsway in the FX swap market, with a48.7% share of activity, compared toOther Financials’ 44.9%. The vast

majority of FX swap activity is focused atthe short end – 70.1% of activity has amaturity under seven days – and thedomination of the major dealers mayexplain why FX swaps have failed to bedriven to electronic markets.

Geographies

The UK remains the world’s largest centreby far, grabbing 40.9% of ADV (from36.8% in 2010), its biggest share of themarket since the BIS started reportingturnover in 1992. The UK is followed bythe US which has 18.9% (17.9%).Singapore has overtaken Japan as thethird largest FX centre, seeing its share ofactivity rise to 5.7%, (5.3%) just in frontof Tokyo at 5.6% (6.2%).As was the case with currency shares, the2013 Triennial Survey provides goodnews for emerging market centres. Of the19 centres to see a change in activity, 15emerging market centres saw it increase.Chile saw activity double and Chinaoutperformed even that, measuringonshore daily activity at $44 billion from$20 billion.In Asia Pacific, aside from the four majorcentres, regional centres saw $182 billionper day, up from $131 billion in 2010.The eight centres this represents, nowaccount for 2.9% of global activity.It was a similar picture in Latin America,where the six centres to report registered a$24 billion per day increase to $67 billion.Only Argentine saw a volume decline,while Mexico led the way with a $15billion per day increase.In a further sign that emerging marketsare gaining more influence – aside fromthe UK, the only four other centres toregister a new high in terms of their shareof the market were all emerging marketsbased – Chile, China, Thailand andTurkey.

Top 10 Centres (2010 position)

1: United Kingdom (1)2: United States (2)3: Singapor e (4)4: Japan (3)5: Hong Kong (6)6: Switzerland (5)7: France (8)8: Australia (7)9: Netherlands (=20)10: Germany (10)

Top 10 Currencies (2010 Positions)

1: US dollar (1)2: Eur o (2)3: Japanese yen (3)4: Sterling (4)5: Australian dollar (5)6: Swiss Franc (6)7: Canadian dollar (7)8: Mexican peso (14)9: Chinese yuan (17)10: New Zealand dollar (10)

Turnover. Continued from p.6

8


Alongside the headline FX survey, theBank for International Settlements alsomeasures activity in interest ratederivatives markets. The 2013 surveyfinds that trading in OTC interest ratederivatives markets averaged $2.3trillion per day in April 2013. This is upfrom $2.1 trillion in April 2010 and $1.7trillion in April 2007.

Interest rate swaps were the most activelytraded instruments in 2013, at $1.4 trillionper day, followed by forward rateagreements at $0.8 trillion.As was the case with FX, the growth ofinterest rate derivatives trading wasdriven by financial institutions other thanreporting dealers. Trading betweendealers and non-financial customerscontracted between the 2010 and 2013surveys. So too did inter-dealer activity,which at 35% in 2013 accounted for thelowest share of total turnover sinceinterest rate data were first collected in1995.In contrast to foreign exchange markets,where turnover increased in mostcurrencies between 2010 and 2013, the

trend in OTC interest rate derivativesmarkets varied across currencies. Theturnover of OTC contracts on eurointerest rates increased to $1.1 trillion,whereas that on US dollar rates wasunchanged at $0.7 trillion and that on yenrates declined to less than $0.1 trillion.The turnover of interest rate derivativesfor several emerging market currenciesincreased significantly between the 2010and 2013 surveys, including for theBrazilian real, South African rand andChinese renminbi.Changes in the geographical distributionof turnover tended to track the changesacross currency segments, increasing incentres where euro and emerging marketinterest rate contracts are traded anddeclining in some other centres. Theproportion of trading intermediated bysales desks in the United Kingdomincreased to 49% in April 2013 from 47%in April 2010.Turnover in single currency OTC interestrate derivatives went up slightly since the2010 survey, notwithstanding theenvironment of generally low and stableinterest rates and major regulatory

reforms affecting OTC derivativesmarkets. Daily average turnover measuredin notional amounts rose by 14% to $2.3trillion in April 2013, the lowest rate ofincrease since the inception of the interest

rate part of the survey in 1995. That said,it compares to a sharp fall in activity inexchange-traded interest rate contracts;turnover in futures and options on interestrates fell by 38% between April 2010 andApril 2013, to $5 trillion.

The foreign exchange industrycontinues to be rocked by allegationsthat dealers at some major banks“manipulated” or “colluded” to movemarkets away from clients ordersahead of the popular WMR 4PM Fix.The allegations have led to thesuspension of several dealers atmultiple banks and formalinvestigations have been started byseveral regional regulatory bodies.

While the headlines have involved thewords “collusion” and “manipulation”there is a strong body of opinionthroughout the FX industry that if proved,the allegations are actually those of “frontrunning” customer orders rather than adeliberate attempt to move markets.ACI’s Committee for Professionalism(CFP), under the guidance of its Chair,David Woolcock, has maintained an

active stance on the allegations,commencing from the issuing of a pressrelease the day after the first revelationsthat drew the market’s attention to therelevant sections of the ACI Model Code,in which the guidelines explicitly coverthe responsibilities dealers have withregard to rate manipulation.“There seemed to be some confusion as towhat front-running actually meant and

what the duty and obligations were relatedto this,” says Woolcock, who is also Vice-Chair of ACI’s FX Committee (ACIFXC). ACI has reminded its members and allOTC market participants of the “firmguidelines regarding this topic” whichcalled for written procedures that “clearlystipulate the institution’s control policy inrelation to front running or parallel

Interest Rate Derivatives Trade Also Rising

Moral Compass: ACI’s Model Code Sheds Light on Rate Manipulation

David Woolcock

In contrast to foreignexchange markets, whereturnover increased in mostcurrencies between 2010 and2013, the trend in OTCinterest rate derivatives variedacross currencies...turnover ineuro contracts increased, itremained unchanged in the USdollar and declined in theJapanese yen

The allegations often seem to be describingfront running rather than collusion or

manipulation and as such are a clear breach ofexisting best practice as cited in the Model

Code. Unless collusion to manipulate or rigthe FX market is proven, then this is different

from recent events in other fixing mechanisms

continued on p.9

9


I was recently alerted to some of theissues surrounding virtual currencieswhen reading headlines like ‘…Chinesegovernment issues its most directstatement on the legitimacy ofBitcoins’, or learning that the USFederal Reserve Chairman, BenBernanke has released a letter onvirtual currencies to help guide the USSenate.

Is this not proof enough that Bitcoinsattract attention at the highest regulatorylevel? Acting as the Past President ofACI – The Financial Markets Association,with its focus on the foreign exchangebusiness (and others), I decided to deepenmy understanding.“Trade Bitcoins in 4,260 cities and 192countries”, including Austria (myhomeland), this is what I got first whenstarting my research on Bitcoins online.Buy (or sell) Bitcoins online in xyz, orBuy (or sell) Bitcoins with cash near xyz,or simply using a Single Euro Payments

Area (SEPA) bank transfer, OKPay,Paypal, PaySafeCard etc. The locationplatform provides potential buyers/sellersand further indicates the distance inkilometers to the next trader (and evenprovides a ‘show more function’ which ismap-based).

What is a Bitcoin?Launched in 2009 by a pseudonymousdeveloper, Satoshi Nakamoto, Bitcoin is aform of digital currency produced bypeople running computers all around theworld. The idea behind it was probably tocreate an alternative currency at low costfor transactions, independent from anyauthority and easily transferable byelectronic means.

Specifications of a Bitcoin:- Bitcoin - BTC (fractions of Bitcoin are

known as satoshis)- Virtual currency (bought/sold for tradi-

tional currency)- Divisable to the eighth decimal place

(one hundred millionth)- Traded on various online exchanges, or

can be directly transferred across the In-ternet from one user to another (usingappropriate software)

- Creation through mining (using com-

BITCOINOMANIA: Hype or Pioneer in the Field of Virtual Currencies ?

running; where traders knowingly executetrades in front of a customer order.”The guidance warns that dealers and salesstaff should not “profit or seek to profitfrom confidential information” and thatwhere a jurisdiction does not explicitlycover insider trading and market abuse inlegislation or regulations, managementshould instead provide clear guidelines tostaff on how to handle such information.As the story unfolded, several leadingbanks have said they are cooperating withthe various authorities and are providingthe information requested, including therecorded content of online chatroomconversations between traders, which iswhere the alleged activities took place.“If there has been wrong-doing in thebanks, let’s root it out,” says Woolcock.“It’s always possible that you can get afew bad apples in the barrel, and it is justa matter of getting rid of them.”But he warns against the dangers ofdrawing conclusions without knowing thefacts behind the claims, that he believesare often written as an accusation ofcollusion or market manipulation insteadof front running which seems a more

accurate description of the activitydescribed. “This means the allegations areof a clear breach of existing best practiceas cited in the Model Code. But unlesscollective collusion to manipulate or rigthe market is proven then this is differentfrom recent events in other fixingmechanisms,” he adds.Woolcock also warns that the suspensionof traders is not in itself a certainindication of any wrongdoing as definedin the Model Code, but may be due to thetrader having broken the rules of his ownemployment contract concerning matterssuch as external communications.“Since the beginning of time the foreignexchange market has exchangedinformation about positions one toanother,” he says. “This does not in itselfmean you have committed a malpractice.” He says he is also aware of variousalternatives that are being suggested to theFix, but believes that the fixingmethodology used by WMR is notnecessarily broken as it “seems to be awell-run Fix”. “To my mind, it’s the use to which thatFix has been put, by trying to do verylarge amounts in a 60 second window,” he

says. “Some suggestions have been madesuch as the length of time that youestablish the Fix should be longer, butthere are algorithms available that helpyou achieve this.”The entities’ placing orders at the Fix areregulated, adds Woolcock, and as such aresubject to having processes to prove bestexecution. “The TCA and EQA models [used bysome pension funds] appear to have usedthe Fix itself to benchmark and whetherthat’s appropriate is worthy of furtherinvestigation,” he adds.In the summer the Credit Suissechairman, Urs Rohner, said that is was notclear “what precisely the topic ofinvestigation is”. Woolcock echoes thissentiment, adding that although there havebeen observable actions from theregulatory bodies, until it is knownexactly what is under investigation it is“very hard to tell what the end game willbe”.He says: “I would hope the regulators willconclude their investigations as quickly aspossible because markets hate uncertainty,and it’s not good to have uncertainty fortoo long a period.”

Manfred Wiebogen

Bitcoin might be called theworld’s first decentraliseddigital currency

Model Code. Continued from p.8

continued on p.10

10


puting power/complex mathematic pro-cedure in a distributed network; mathe-matical formulae is freely available andthe software is open source)

- Purely created and held electronically- Maximum number of Bitcoins issued:

21 million- No intrinsic value (no commodity un-

derlying)- Not regulated (no central monetary au-

thority)

A survey by the Federal Bank of Chicagoacknowledges that the Bitcoin protocol‘…provides an elegant solution to theproblem of creating a digital currency(i.e., how to regulate its issue, defeatcounterfeiting and double-spending, andensure that it can be conveyed safely)…’– all without relying on a single authority. Since its creation in 2009, Bitcoin hasbecome a popular way to pay for goodsand services online. Over 12 millionBitcoins are circulating according tovarious websites. The volatility is high –sometimes extremely high – and theprices react very sensitively andimmediately on any news about thevirtual currency. Messages like “Bitcoinhits xxx, up 107% in a week” or theopposite were not a rarity during 2013.Bitcoin traded below US$ 20 in January2013, reached US$ 900 with some upsand downs beginning of November andthen went on to surpass US$ 1,200. OnDecember 5th the Bitcoin plunged atsome exchanges more than 20% after thePeople’s Bank of China (PBOC) bannedfinancial institutions from carrying outtransactions in this currency. The PBOCstated it is not a currency with a ‘realmeaning’ and doesn’t have the same legalstatus. While financial institutions arebarred from handling it, however, thepublic is free to participate in Internettransactions at their own risk. The currency received an additional boostwhen several entrepreneurs declared theywill accept Bitcoin as payment. There isthe example of the University of Nicosiaannouncing it will accept Bitcoin for feesand tuition starting from the Springsemester. Another example is the BitcoinATM operating now in Vancouver as ofNovember. In addition, you will findtravel agencies, book stores, sandwichshop etc., accepting the BTC. Should yoube interested in what you are able to buyor where to spend the virtual currency,just look up online (spendbitcoins.com) –you will be overwhelmed at the number

of BTC participants you will find.Needless to say, there are moreopportunities.

What makes BTC popular?An oft-heard argument about why onewould use or invest in Bitcoins is theindependence from any government.During the recent Cyprus crisis, bankdepositors were charged for helping thecountry recover and consequently lost alarge sum of money. Since then rumourshave been circulating that there couldeasily be a repeat. An unfortunate public statement by theIMF claimed that 10% depositorparticipation on European governmentdebts could massively help the weak andheavily indebted countries, but it alsonurtured the fear of another financialcrisis, as well as fed a growing sense ofdistrust.Because of the BTC being unregulatedand decentralised, no central authority orgovernment will have control of thevirtual currency or have access to yourinvestments in Bitcoin. Neither theFederal Reserve Bank, nor the EuropeanCentral Bank (ECB), nor any otherauthority is able to supervise virtualcurrencies (yet). Ben Bernanke furtherremarked in his recent letter to the Senate:“… The Fed would only have theauthority to regulate a virtual currencyproduct if it is issued by, or cleared orsettled through, a banking organisationthat we supervise. Given the FederalReserve’s authority and the manner inwhich virtual currencies have developed,the Federal Reserve has focused primarilyon a supervised banking organisation’srole in the products’ sale and distribution,as well as the applicable regulations, suchas Bank Secrecy Act/anti-moneylaundering requirements…” This, in large part, is in line with theDecember statement of the PBOC, ChinaBank Regulatory Commission (CBRC),China Securities Regulatory Commission(CSRC), China Insurance RegulatoryCommission (CIRC) and Ministry ofIndustry (MOI) but also leaves enoughspace for BTC to become a mainstream

option for public investors andparticipants.

How Bitcoins workBitcoin might be called the world’s firstdecentralised digital currency. It isreferred to as a new kind of currency(alternative private currency) – but in theform of a virtual token rather than being aphysical coin or banknote. While thevalue of a country’s currency is mainlylinked to a country’s GDP (and the networth of its issuing currency and someother assets) the value of the Bitcoin isdetermined by how much people arewilling to exchange for it (how much trustis given to it – as there is no country’seconomic power backing it). I am going to try and explain the totalformula of the Bitcoin, but only in verysimple terms. ‘Mining’ is the procedureinvolved in processing Bitcointransactions based on sophisticatedmathematical calculations with a 64-digitsolution. Each problem solved processesone block of Bitcoins and the minerbecomes rewarded with new Bitcoins. So,people receive an incentive to providecomputer processing power to solve theproblems. In compensation the difficultyof the mystery is adjusted to ensure that atthe end a steady stream of about 3,600new Bitcoins are issued per day. At theend, this implies that the total number ofBitcoins in existence will approach butnever exceed 21 million. At time ofwriting, there are some 12 millionBitcoins in existence.To receive a Bitcoin a participant musthave a Bitcoin address (a string of 27-34letters and numbers) which is a kind ofvirtual postbox. Bitcoins are received orsent from this account. Transactions arefully anonymous as there is no registry ofthese addresses. On the other hand theaddresses are stored in so-called Bitcoinwallets, which serve to manage thesavings – like anonymous bank accounts.

Seize of the marketsFollowing a website statistic(coindesk.com) the Bitcoin market looks

Because of the Bitcoin being unregulated and decentralised, nocentral authority or government will have control of it or accessto your investments...During the recent Cyprus crisis, bankdepositors were charged for helping the country recover andsubsequently lost a large sum of money

Bitcoin. Continued from p.9

continued on p.11

11


surprisingly active. By the end ofNovember (26th more specifically), Icould identify the following figures:

• Total bitcoins (BTC)12,039,475 BTC

• Market value on actual prices USD 9,258,476,670EUR 7,464,474,500

• Daily transactions75,853

• Transactions per hour 3160

• Bitcoins sent during a daysome 1,801.210,56 BTC

• Bitcoins sent average per hoursome 75,050,44 BTC

Some market viewsSpeaking end of November at aneconomic forum, Yi Gang, the DeputyGovernor of the PBOC and Director ofthe SAFE (State Administration ofForeign Exchange) clarified, that it wouldbe impossible for China’s central bank torecognise the Bitcoin as a legal financialinstrument in the near future. A furtherstatement from Chinese officials in earlyDecember confirmed this view. However,Bernanke did also praise the financialinnovation which “..may hold long-termpromise, particularly if the innovationspromote a faster, more secure and moreefficient payment system ….”.However, the given volatility of theBitcoin market not only reflects essentialuncertainty on how regulators may decidein the future, but also the doubt on how toassess the virtual currency by the dividedopinions of the public. Trawling theInternet and following some forums, Isense there are various opinions on thematter including:

Pros- Enthusiasm for Bitcoin is driven by a

distrust of state-issued currency- It is an alternative private currency- A new corporate currency- It is a remarkable concept and may very

well have a future role in stabilising ei-ther governments or allowing corpo-rates to stabilise their own positions inrough waters

- One of the key drivers of adoption hasbeen the general publics’ diminishedfaith in the basic soundness and credi-bility of key pillars of the financial sys-tem

- The Bitcoin’s string of digits are an im-portant foundation and its introduction

of a new form into the payment channelcan serve to bring more transparency

- Important to be mindful that currencyserves beyond that medium of ex-change, which extends to store of valueand unit of account

- Currently traded on approximately 80exchanges in over 20 countries

- Wider use of Bitcoins could theoreti-cally lead towards creation of the firstglobal currency

- Probably it costs a lot more effort andtime to produce a Bitcoin than it does toproduce an additional USD

Cons- Looks like a speculation and possiblescam- Typical pyramid scheme that everyone iswilling to buy into- It is a speculative derivate with nounderlying asset - Risk that governments will want to shutit down- A currency is only worth what it can beredeemed for- A value of a currency is derived fromgold/silver (in the old days) and/or from acountry’s GDP and other asset- The BTC spot price appears to be puresupply and demand- If a Bitcoin is not pegged to something itwill stay an instrument of auction- The introduction of a new currency intothis global system without properoversight and regulation can increase riskwhich might end in global implications- Without regulation, fluctuations in valuecould run wild- One fundamental problem is that thealgorithm limits the number of BTCs toabout 21 million (fortunately a BTC canbe subdivided to eight decimals)- Different types of currency end with fiatcurrencies- Bitcoins are absolutely a Ponzi scheme- Tulip bubble or tulip mania of1637/Amsterdam- Value generated by a computer is nottrue value

After putting across both sides of thedebate, I would encourage you to makeyour own mind up at this stage of thedevelopment.

Conclusion

The true nature of money is that peoplewill accept it in exchange and it can beused to store value. The financial crisisstarting in 2008 nurtured the publicdemand for a depositor’s save haven. Aresult of the crisis was that commoditiestook on an important role and turned intoa desired and eligible asset. The creation of the Bitcoin emerged at atime of utmost financial instability anduncertainty. Driven by distrust, thecurrency was well received and withenthusiasm. Outside of traditional andregulated channels it has been used totransfer funds and to enter intospeculative investment opportunities.Some might speculate to see a fullyadopted and fully fledged currency.However, the public opinion is very muchdivided. The innovator of Bitcoin probably had inmind to create a fully independent andunregulated tool. I suppose, as soon as theBitcoin becomes widely recognised, wemight see governmental intervention.Anyhow, we have to admit the conceptualset-up of the virtual money, its complexmathematical mining and its tradingthrough exchanges is nothing short ofremarkable. It has all the makings of abrilliant idea for specific activities butmay still need further and more in-depthobservation. Could it be that Bitcoin will be a pioneeras virtual currency? Before we are able toanswer this hypothesis, every investorshould follow clear rules: Check yourpersonal risk/return profile.

Some links

bitcoincharts.combitcoin.debitcoin.sipa.belocalbitcoins.comcoindesk.combitcoinwatch.comspendbitcoins.com

Manfred WiebogenPast President ACI The Financial MarketsAssociation

The financial crisis nurtured public demand for a depositor’ssafe haven, due to distrust driven by uncertainty and the crisis,Bitcoin was enthusiastically received

Bitcoin. Continued from p.10

12


Physically delivered FX forwards andswaps have been exempted in the finalframework establishing the marginrequirements for non-centrally clearedderivatives, published by regulators.

The Basel Committee on BankingSupervision (BCBS) and the InternationalOrganisation of Securities Commissions(IOSCO) published a set of “globallyagreed standards” under which allfinancial firms and systemically importantnon-financial entities that engage in non-centrally cleared derivatives will have toexchange initial and variation margincommensurate with the counterparty risksarising from such transactions. The bodies say the framework has beendesigned to reduce systemic risks related toOTC derivatives markets, as well as toprovide firms with appropriate incentivesfor central clearing while managing theoverall liquidity impact of the requirements. The final requirements were developedtaking into account feedback from tworounds of consultation, as well as aquantitative impact study that helpedinform the policy deliberations. Chiefamong the modifications is an exemptionfor physically settled FX forwards andswaps, although the paper says thatvariation margin on these derivativesshould be exchanged in accordance withstandards developed after considering theBasel Committee supervisory guidancefor managing settlement risk in FXtransactions.The final framework also exempts frominitial margin requirements the fixed,physically settled FX transactions that areassociated with the exchange of principalof cross-currency swaps. However, thevariation margin requirements that aredescribed in the framework apply to allcomponents of cross-currency swaps.“One-time” re-hypothecation of initialmargin collateral is also now to bepermitted subject to a number of strictconditions. “This should help to mitigatethe liquidity impact associated with therequirements”, the bodies state.A number of other features of theframework are also intended to managethe liquidity impact of the marginrequirements on financial marketparticipants. In particular, therequirements allow for the introduction ofa universal initial margin threshold of€50 million below which a firm wouldhave the option of not collecting initial

margin. The framework also allows for abroad array of eligible collateral to satisfyinitial margin requirements, thus furtherreducing the liquidity impact.The paper also envisages a gradual phase-in period to provide market participantswith sufficient time to adjust to therequirements. The requirement to collectand post initial margin on non-centrallycleared trades will be phased in over afour-year period, beginning in December2015 with the largest, most active andmost systemically important derivativesmarket participants.

…As FSB Signal Satisfaction withReform Progress

The Financial Stability Board, whichoperates under the auspices of the Bankfor International Settlements, has issuedits sixth progress report on the reform ofOTC derivative markets.The latest report finds that substantialprogress has been made by standard-settingbodies, national and regional authoritiesand market participants toward meeting theG20 commitments, through internationalpolicy development, adoption of legislationand regulation, and expansion ofinfrastructure. The commitments wereestablished by G20 in 2009 and seek toensure that all OTC derivatives contractsare reported to trade repositories (TRs); allstandardised contracts are traded onexchanges or electronic trading platforms,where appropriate, and cleared throughcentral counterparties (CCPs); non-centrally cleared contracts should besubject to higher capital requirements andminimum margining requirements shouldbe developed.The report says that by the start of 2014three-quarters of FSB memberjurisdictions intended to have legislationand regulation adopted to requiretransactions to be reported to traderepositories. Frameworks for centralclearing requirements are in place in mostof the largest derivatives markets, withconcrete rules now starting to go intoeffect.It further finds that minimum standardsare in place for sound risk management ofFinancial Market Infrastructures (FMIs),including CCPs, supporting OTCderivatives markets. Guidance on FMIrecovery and resolution has beenproposed, to avoid a situation in whichthese institutions would otherwise be ‘too

big to fail’. Standards for marginrequirements and capital requirementsrelated to non-centrally clearedtransactions have been agreed orproposed, which once implemented willpromote sound risk management andencourage use of central clearing.The report also hails the recentannouncement that regulators from anumber of large OTC derivatives marketshave reached understandings to improvethe cross-border implementation of OTCderivatives reforms and highlights therecent report from the MacroeconomicAssessment Group on Derivatives thatsuggested there were long term economicbenefits from the reform process.The semi-annual report also focuses onthe readiness of market participants forthe reform process. It says that “ingeneral” participants appear to be makinggood progress in their preparations forimplementation of reforms. The actual useof centralised infrastructure by marketparticipants is most advanced in tradereporting and central clearing of OTCinterest rate and credit derivatives.It adds that the large share of cross-borderactivity in many OTC derivatives marketsmeans that clarity in how jurisdictions’regulatory regimes interact is crucial forall stakeholders.The reports also discuss areas wherefurther work is needed to complete thereforms and achieve the G20 objectives. Itcites the increased use of central clearing,and a renewed focus on the commitmentto increase the use of exchanges andelectronic trading platforms as a key area,as well as the establishment of resolutionregimes for FMIs, including CCPs. The report also stresses the need forcontinued work by regulators to cooperatein the application of regulations in cross-border contexts, to enable them to defer toeach other’s rules where these achievesimilar outcomes and greater clarity fromregulators regarding the detailed rules onthe treatment of cross-border transactionsand the timetables for implementation. Itadds that ensuring that authorities canmake full use of the data collected bytrade repositories in fulfilling theirfinancial stability mandates, including viathe aggregation of TR data, is also apriority.In a separate report, the FSB’s SeniorSupervisors Group has said that whileprogress was being made, more needed tobe done on counterparty risk.

FX Exempted from New Margin Framework

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