Minutes were released from the most recent global meeting of the Foreign Exchange (FX) Committees. The group consists of representatives of eight major financial centers, the US, UK, Canada, Euro area, Japan, Singapore, Hong Kong, and Australia. The committees are known for their bi-annual volume survey which provided itemized statistics for each jurisdiction and are an important component of the Bank of International Settlements aggregation for its Triennial FX Survey.
Discussing the industry, the minutes revealed that the global committees were continuing to monitor trading action of FX fixes, overall industry liquidity, and the Swiss franc volatility following the events of January 15th when the Swiss National Bank (SNB) removed its price floor on the EUR/CHF exchange rate.
In relation to the FX fix rates, the 4PM London Fix period had become a point of investigation starting in 2013. Beginning as an investigation by global regulators into whether major banks colluded during the trading period before the 4PM fixing, the inquiries culminated in multi-billion dollar fines being brought down on culprit financial institutions during November 2014. This followed the initiation of stricter rules governing how firms need to monitor their traders and cross-bank correspondence.
In addition, the ‘fixing window’ for the London fix rate which is used to compute the WM Reuters rate was widened from five to fifteen minutes. In reviewing recent trading activity, the minutes revealed that the increased Fix window has had a limited impact on volatility.
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The committee also reviewed how firms were adopting recommendations from their FX Benchmark report. The report included recommendations to separate Fix and non-Fix orders while also including charges to Fix rate trades. In this regard, the minutes revealed that findings among committee members were mixed, with some larger banks having been more active in applying policies to separate Fix and non-Fix orders and price them differently, while smaller firms were having a harder time. The committees also noted that the share of algorithms based trades during the Fix period was increasing.
SNB and HFT
Algorithms and systematic trading was also brought up when the committees discussed the January 15th SNB triggered event. Discussing how high frequency trading (HFT) and algorithms are effecting FX liquidity, the meeting members noted that “the prevalence of algorithmic and HFT trading on electronic platforms could have contributed to the initial sharp price action in the Swiss franc”. However they also added that it “could have enabled the market to stabilize faster than otherwise expected”. The committee members also noted that monitoring transaction volumes and bid/ask spreads wasn’t always a good indicator of real liquidity. As a result of the dual impact of HFT, and the need for better standards to measure FX liquidity, the committee agreed that it will continue to monitor overall liquidity.
This decision could bode well for FX technology firms involved with providing market surveillance software such as Software AG, First Derivatives, and FluentTrade Technologies. Such market surveillance solutions have received demand from exchange operators, regulators, and banks to monitor trading activity and as well as to satisfy compliance requirements.
Also discussed was the retail FX industry. Committee members were reviewing how much of an impact the retail industry has on the liquidity of the wholesale FX market. Specifically, meeting members reviewed how trading developments in the retail market following the SNB’s policies which drove several firms out of business and caused others to sustain millions of dollars of losses, were impacting the rest of the FX industry. Although discussed, the meeting didn’t lead to any specific assessments from committee members about the retail market other than that it will be a topic to review in the future.