Finance Magnates spoke with Jeff Ward, Global Head of EBS Direct for his exclusive perspective on both the group’s central liquidity system, as well as its risk management practices, namely in regards to its handling of the Swiss National Bank (SNB) event earlier this year.
1. Take me through the events of the CHF aftermath and how was this different for EBS?
The EUFCHF was one of the traditional core currency pairs that we have trading on EBS Market. When something happens to core EBS pairs, the USDJPY, EURUSD, etc., it happens here first and there is a subsequent ripple in the market. In a way we are heavily leaned upon, and many others in the market are reacting off of our platform.
Our opinion in that perspective is unique. What we saw after the Swiss National Bank (SNB) decision was extremely high volumes, record EURCHF volumes within an hour of the SNB. This was one of the busiest days in EBS Markets, generally speaking in the last few years. It was definitely the busiest EURCHF day in the last four years.
2. Were there any issues or problems with your system, and how did it perform in the face of massive volatility?
However, despite these large volumes, our system performed exactly as it should, and we spent lots of money insuring that we had sufficient capacity, etc. There were no issues of any kind and interestingly we saw pricing and two-way markets up and down the move and all the way back up until the market equalized. We had a two-way market and we did not see any extended period of time without a price on either side of the market.
Generally speaking, we are the market reference readers for the EURCHF, and we saw a lot of clients coming to us, banks and non-banks confirming markets highs and lows and asking for EBS Market data, which we were able to provide very quickly which was well appreciated by our clients.
EBS Market’s systems performed very well from our perspective and obviously an impact to customers and our customer’s customers. However in terms of the functionality of our system on the day, there were no issues whatsoever. Moreover, our central order book on EBS Direct we had no issues and pricing throughout the move.
3. Have you had any types of feedback surrounding the reception of your central liquidity or reference rates?
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What this also demonstrated very clearly was – based on responses from our customers – in times of stress in the market, the importance of having a central pool of liquidity was paramount. In times of low market volatility, the fragmentation of the market works fine, you have multiple choices of which to use.
However, when things get rough, the value of having a central place to trade with centralized liquidity that people know they can rely on has proven to be invaluable. If there were no EBS or central place for liquidity, then the impact of the Swiss volatility would have been much, much greater. This event has reminded people of having a central limit order book like EBS.
Given the massive moves seen in markets, there were a lot of banks and brokers, and professional trading participants that either had to fill client orders, had stops triggered, or had taken profits that needed to be executed. If there was no central reference rate, how could anyone do this on their own respective platforms? It is possible that certain types of customers will now want to seek access to a central pool of liquidity given if this happens again, direct access may be an additional source of liquidity is a tremendous asset.
4. Will your strategy or risk management change as a result?
We have a forty-year history of operating in this market environment. Having been with the company for over ten years I have personally seen a global financial crisis, and some the many issues with Lehman brothers, etc. We have busy days and others where we have done only 50% or in some cases 100% of volume on top of our January trading day following the CHF event.
We have the framework in place to accommodate nearly three times the volume we saw during the event in January. That being said, we need to continuously invest and look at making sure we have a resilient and robust system.
I think one thing we might do is looking at access to our marketplace. This is merely the carrying on our tradition of being there for other brokers or providers, which we will look to do into the future as we always have been.
5. Do you feel that the industry itself, whether it be regulation, etc. will be changed at all by the fallout surrounding this volatile episode?
Obviously the landscape is reviewing the regulatory environments already with Dodd-Frank, MiFID, etc. There are increased reviews taking place already in the industry even before this event. Though this will continue to support reviews or changes on the regulatory side.
However, on a global level, I do not see how this will change anything on a global perspective in spot FX – you won’t be seeing a globally regulated spot FX market. Certainly you will see regional regulatory suggestions, though I am not sure we will see massive and sweeping changes other than what has already been started in prior years.