4 | october 2013 e-FOREX.
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transforming global foreign exchange markets
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We have devoted much of this edition to the asset and investment manager community.
This is a client segment that everyone agrees can have extremely complex workflows when it comes to FX and as a result it’s not surprising that many fund managers continue to explore ways to outsource parts of their trade execution requirements to specialist agents. In the past they have typically used the services of custodians for many of their FX transactions, but providers to this space have now widened to include bespoke currency specialists, agency brokers and independent dealing desks.
To compete, these firms need to have the experience, technology infrastructure and technical expertise required to service this demanding sector as well as an ability to achieve wide access to market liquidity and a significant capacity to deal in currencies in both emerging and more mature markets.
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Risk Warning: FxPro Group Limited is a holding company that controls FxPro Financial Services Limited.
FxPro UK Limited is a direct operating subsidiary of FxPro Financial Services Limited. FxPro Financial Services Limited and FxPro UK Limited do not offer Contracts for Difference to residents of certain jurisdictions such as United States of America and the Islamic Republic of Iran.
The steady development of Transaction Cost Analysis (TCA) techniques in FX, which is the subject of our special report in this edition, is clearly an area of particular interest to the fund management sector as it promises to help keep costs down whilst improving performance and increasing transparency.
Nevertheless there are still many problems and issues associated with delivering TCA in FX not least that accurate source data is still not available for most buy-side institutions. A further complexity is the adjustments for TCA purposes that have to be made in FX with respect to forward market conventions, which is a major difference to the equities market where trades are for cash settlement.
However, the lack of trade flow information in the OTC FX markets is slowly being improved as growing numbers of FX transactions are being executed electronically whilst at the same time new visualisation toolsets for FX TCA are being developed.
It is also interesting to note that many users of TCA in FX are realising the positive impact pre-trade TCA can have on helping to optimise their trading activities and this is a topic we will be focusing on during the course of next year. Finally, we have introduced a new Currency Clips feature in each edition of the magazine which aims to provide brief snapshots of FX news, commentary and analysis from around the world.
These should add some context to the stories and reports we publish so we hope you will find them interesting. Charles Jago Editor
[email protected] Managing Editor
[email protected] Subscriptions Manager
[email protected] Editor (FX & Derivatives)
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Contributing writer Regulatory Roundup
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Design and Origination: Phill Zillwood Design Works [email protected] Printed by Stephens & George Print Group e-Forex (ISSN 1472-3875) is published quarterly in January, April, July and October www.e-forex.net
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Foreword FX never sleeps
Industry report Global FX market update
trading and use of e-channels by Institutional Investors and fund managers is now stronger than ever in terms of achieving best Manfred Wiebogen flags up some execution, reducing operational interesting developments that risks, improving performance and have taken place in FX during the reducing costs.
summer break which have been keeping the momentum and 52. Breaking track records with volatility in the markets going.
26. Foreign Exchange – the market which never sleeps
Leader Transaction Reporting
SDPs - the Formula One trading platforms of FX Nicholas Pratt looks at banks’
E forex magazine pdf
Global FX market update 2013: efforts to develop their SDP Increased market transparency, offerings and examines whether more competition it is still possible to break new Nicholas Pratt
Investment Managers The benefits of e-FX
BNP Paribas The e-Forex interview
Regional e-FX Perspective Australasia
By Sang Lee, Managing Partner at Aite Group.
ground in this well established corner of the FX market.
thE E-FOREX intERviEw
Transaction Reporting of OTC FX Derivatives - what are your options?
Pick and Mix Choosing FX algorithms
Binary Options Friend or foe?
Faster FX Squeezing out latency
With the EU’s European Market Infrastructure Regulation (EMIR) requiring institutions to report their OTC derivatives trades to appropriate trade repositories starting as early as September 2013, Frances Faulds assesses the options available to FX firms under both the Dodd-Frank Act (DFA) and EMIR.
pLatFORms and FX E-COmmERCE
Moving the benefits of e-FX for Investment Managers beyond the advantages of workflow automation. Andy Webb
Automated FX trading Overcoming complexity A AccelerEyes ACI ADS Securities Alpari UK
page 12 D
AxiCorp Financial Services
page 92 Deltix
page 155 Devexperts
Outside Back Cover
page 121 E
Solutions LLC FxPro FXTransparency
page 68 EBS
page 50 Edgesense Solutions
page 10 Greenwich Associates page 33
page 156 eSignal eToro
page 55 F
page 18 Fair Trading Technology
4 | october 2013
page 153 M page 165 MarketsPulse
Inside Front Cover page 99
page 83 Eastspring Investments
BNP Paribas BT
FXone - Seabury Financial
Bloomberg Tradebook BNY Mellon
page 112 L page 61 LMAX Exchange
B Blacktree Investment Partners
Inside Back Cover INTL FCStone page 45
page 175 FXCM FXDD
AvaTrade Azul Systems
page 49 IFS Company
page 166 Commerzbank
page 28 Currensee
Nicholas Pratt explores why the value proposition of electronic FX page 67 I
page 8 FinFx Trading
page 11 First Derivatives page 26 Commonwealth Bank of Australia page 81 FlexTrade page 2 and 3 Credit Suisse page 121 FXall page 12 Currenex page 15 FX Architects
COmpaniEs in this issuE
Copy trading Record Currency Management Tradertalk New investment possibilities
GAIN Capital Gold-i
page 175 H page 31 HotForex
page 16 page 143 page 105
REgiOnaL E-FX pERspECtivE
Australasia Richard Willsher investigates what factors are shaping the foreign exchange market within Australasia and what growth in e-FX we can expect to see taking place throughout the region. T
P page 141 Perseus Telecom page 17 Phillip Capital
page 152 360 Treasury Systems page 25 tradable Thomson Reuters TMS Brokers
R page 5 R5 FX
page 158 Tradepoint systems
Record Currency Management page 182 TraderTools Regis-TR page 146 Rochford Capital page 19 Royal Bank of Scotland
page 39 Traiana
page 74 page 16 page 43 page 8 page 122 page 109 page 85
page 88 page 129 U page 97 United Overseas Bank
N National Australia Bank
Page 91 S
page 59 SAP
page 57 Saxobank SmartTrade Technologies
page 178 OLFA Trade One Zero
State Street Global Exchange page 12 StreamBase Systems page 47 Squared Financial page 133 Sucden SX-SGS Team
Thomas Soede, Global Co-Head of Electronic Markets at BNP Paribas Corporate and Investment Banking talks to e-Forex about the major advances the bank is making in its institutional and corporate electronic platforms.
K page 139 KCG Hotspot
BNP Paribas – a first class digital strategy resulting from a topdown commitment to e-banking
V page 149 Valbury Capital
page 16 page 111 W page 84 WBR page 159 Westpac
page 18 page 79
page 41 page 13 X page 167 X Financial Solutions
contents SpEcial REpORt
Introducing benchmarks into the FX trade execution process The growing FX transaction cost analysis (TCA) market is bringing more tools to measure the performance of liquidity providers, execution quality and even latency. Frances Faulds looks at what is in store for the future.
thE e-FOREX ROundtablE
106. Provision, distribution and consumption: Is liquidity changing the operational dynamics of the FX Marketplace? e-Forex invites some leading players in FX to assess how the provision, distribution and consumption of liquidity may be altering the way the market has traditionally functioned and to try to determine the wider consequences of this.
algORithmic FX tRading
Pick and Mix - choosing the best algorithms to fit your FX execution strategy FX execution strategies Picking and mixing you algorithms
e-FX for investment managers Moving the benefits beyond automation
William Essex sets out to investigate in what ways factors that drive a firms execution requirements will influence the most appropriate FX algorithms for them to use and how buy-side clients are increasingly looking to pick and choose algorithms according to what they wish to achieve in any given point in time.
Hammering out the kinks in a trading workflow requires a comprehensive understanding of how latency can develop reports Dan Barnes.
autOmatEd FX tRading
Data, models and programming: overcoming complexity in automated FX trading As automated trading becomes increasingly accessible to retail traders, a fundamental shift is taking place among the available platforms. On the one hand, the sophistication of their tools and analytics is increasing.
On the other, the programming expertise required to take advantage of this enhanced functionality is decreasing. Andy Webb examines some of the key areas in which this apparent contradiction is taking place.
PrODuct BeNcHteSt – FxPro Quant Coding an automated model from scratch is not trivial - a point not lost on FxPro, which has launched FxPro Quant as a drag and drop solution. Andy Webb takes a look.
REtail FX tRading
copy trading – opening up a 130.
Six Steps can Make You Millionaire in India
Investing for the future - making the world of possibilities for retail FX right strategic choices about retail forex investors From being able to trade instantly technology e-Forex asks a selection of leading FX technology providers some questions relating to some of the key issues forex brokerages and margin FX providers are concerned about as the industry continues to go through a period of rapid growth.
Binary Options - Friend or Foe to Forex Brokers?
6 | october 2013
150. Hardware, Software, Middleware and Networks - squeezing out the latency for faster FX
Hardware, Software, Middleware and Networks Squeezing out latency for faster FX
nEtwORkS, hOSting & cOnnEctivity
There is currently rapid growth in the binary options market and high demand for them by traders.
Shay Hamama argues for their future as an easy and intuitive financial tool that will continue to attract traders and which can provide significant benefits to brokers as well.
without spending time as an apprentice retail trader learning the ropes for yourself, to improving trading and investment performance by watching what makes others successful, copy trading is popular and is becoming more so as Heather McLean discovers.
record currency Management – providing experience, continuity and consistency e-Forex talks with James Rockall, director of trading at Record Currency Management, one of the world’s leading independent currency managers.
Thomson Reuters expands community on Eikon Messenger
TraderTools adds its pricing engine to LightFX™
Thomson Reuters has expanded the Eikon Messenger community on the buy-side through the integration of its FXall clients.
All FXall customers will now be able to seamlessly connect, interact and collaborate with Eikon Messenger’s global community of 190,000 financial professionals directly from their FXall toolbar, via the latest release of FXall Trading. TraderTools has announced that it has added its pricing engine to the liquidity aggregation and order management capabilities already found in the company’s LightFX next-generation hosted FX trading service.“Now banks will be able to distribute their rates via our FIX API to the world’s leading ECNs, such as 360T, Bloomberg and FXall,” said
CMC Markets strengthens trading platform
“Financial professionals depend on instant messaging tools to interact with the wider financial community and want tools that allow them to interact, irrespective of their choice of provider,” said David Craig, president of Financial & Risk at Thomson Reuters.
“By opening up Eikon Messenger to the FXall community we are enabling the sell-side and buy-side to communicate more efficiently within networks they already trust.
This is about helping our customers find new counterparties and unearth new business opportunities whilst reducing complexity.”
8 | october 2013
Yaacov Heidingsfeld, Chief Executive Officer at TraderTools. “This enhancement enables the banks benefiting from relationship-based pricing in our FX trading platform to provide more competitive pricing to their clients, regardless of the trading venue.”TraderTools’ Pricing Pad allows for multiple windows with intuitive interfaces.
CMC Markets has completed further upgrades to its Next Generation platform.
The latest enhancement has been heavily driven by valuable client feedback plus new features developed by their international technology team.This upgrade is their second of 2013.Significant changes have been made to the way CMC Markets’ clients navigate the Next Generation platform. These include a new toolbar to make their advanced features more accessible, new short-cut functions, enhanced order ticket design and increased control over the platform tools so their clients can maximise their experience, even on a smaller
Clients can now also access social media via the Next Generation platform. With more than 31% of client trades now executed via mobile devices CMC Markets has also updated its mobile offering to satisfy the increasing demand for comprehensive on-the-go trading platforms.
FlexTrade selected by UOB FlexTrade Systems, Inc., has announced that Singapore-based United Overseas Bank Limited (UOB) has chosen MaxxTrader and FlexFX, its white label and enterprise FX trading solutions, to facilitate global FX trading.
In conjunction, UOB will also implement FlexTQM, FlexTrade’s comprehensive transaction quality management platform for realtime and historical transaction cost analysis.
Used as a complete FX solution, MaxxTrader, FlexFX and FlexTQM will allow UOB to cover the full trading life cycle, including price construction, distribution, trade execution, hedging, position management and post trade analysis. “As Asian investors grow more affluent and sophisticated, we are seeing an increase in demand for electronic trading in the region.
In partnering with FlexTrade, we will be able to offer our customers an enhanced FX trading platform to help them better manage their global FX trading and risk,” said Low Teck Ngee, UOB’s User Project Manager and Head of Demand Management, Global Treasury.
Abu Dhabi sets up financial free zone Commenting on recent news from the Government of Abu Dhabi who have announced the setting up of a financial free zone on Maryha Island, Jeff Grossman, Managing Director of Squared Financial
10 | october 2013
Edgesense Solutions launches project with MultiCharts
Edgesense Solutions, a consulting company and trading solutions provider, has announced the launch of a project that aims to bring MultiCharts to institutional forex clients.
MultiCharts is the award-winning technical analysis package that features microsecond resolution, proven performance and reliability as well as support for C# or EasyLanguage. Edgesense Solutions will provide integration of
MultiCharts with Knight Hotspot, that turns this software into a fullyfunctional trading platform suitable for both manual and automated trading at this major ECN.
In addition, Edgesense will support clients, helping them to switch to MultiCharts or start trading at the Hotspot ECN. More information about the range of services provided by Edgesense Solutions can be found at http://edgesense.net
services, a brokerage firm that is increasingly active in the region, says, “We see great potential in this launch.
We believe our clients will welcome and support the move especially those with operations centered on Asia and Eastern Europe. We expect the development will greatly enhance general service levels and liquidity during this “grey phase” between trading sessions.” Abu Dhabi Global Market (ADGM) is the latest free zone which will function as the financial services conduit, between Europe and Asia; bridging the closing and opening of those two markets by augmenting liquidity and general risk management facilities.
ADGM is set to become a market maker
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and price setter in the region, and will also specialise in the financial handling of physical commodities, which is heavily reliant on FX.
Alpari UK introduces would like to trade; then they binary options they select how long the trade will last Alpari UK has expanded its product range with the introduction of binary options.
The company is one of the few global brokers authorised and regulated by the Financial Conduct Authority (FCA) currently offering binary options. Alpari UK’s binary options platform is straightforward to use for accessing the markets.
Traders follow only three steps. Firstly, they choose the financial market (asset)
(from a variety of timeframes such as 30 seconds, 60 seconds, end of day, end of week and up to one year); and finally they select the amount they would like to trade. Daniel Skowronski, CEO of Alpari (UK) Limited, commented, “Our number one focus is to ensure that we continually evolve and enhance our consumer offering.
Binary options are the latest addition to our product portfolio and follow on
OANDA boosts features in fxTrade Mobile
from other recent product launches in 2013 such as our social trading product TraderConnect and VPS.”
AvaTrade partners with Gold-i AvaTrade has partnered with Gold-i, to offer Bitcoin CFD trading to its clients. This latest development at AvaTrade maps onto the online broker’s strategy of offering the widest range of financial instruments for its clients to trade.
AvaTrade clients can trade Bitcoin against the US Dollar on MetaTrader 4 alongside their Forex, commodities, stocks and indices trades. Tom Higgins, CEO of Gold-i
OANDA has made enhancements to the advanced technical analysis features built into the fxTrade Mobile applications for iPhone, iPad, and Android smartphones and tablets.
With these new features added to fxTrade Mobile 3.2, OANDA’s clients can now draw trend lines, mark chart patterns, and identify support and resistance levels on currencies and financial instruments anywhere they go, at any time.
12 | october 2013
fxTrade Mobile 3.2 provides traders with the ability to draw more advanced things such as Fibonacci Fans, Arcs, and Pivot Points. The latest version of the app also features Japanese language support. This update builds on recent enhancements to the app released in July that included the addition of several new chart types, indicators, and the Ichimoku overlay designed to help traders identify trends in the market.
adds, “New currencies rarely come into existence and Bitcoin is very different to other currencies which have launched.
It has global appeal and is likely to be very successful. Now that we have added Bitcoin to MT4/MT5, we plan to add it to the Gold-i portfolio to sell it to others. I believe there will be an increasing demand for brokers to follow AvaTrade and offer Bitcoin to their clients.”
X Financial Solutions launches xRisk Jakub Zablocki
X Financial Solutions have announced the release of their new risk management product, xRisk which automates the management of a broker’s risk exposure and allows for intelligent hedging based on parameters set by the user.
It comes with an ultra-low latency price feed and Smart Executor, controlling even the smallest trade, thus solving problems experienced with scalpers and high-frequency traders. “Our new xRisk system lets brokers manage risk the intelligent way,
without giving up extra profits from their B-Book,” said Jakub Zablocki, Managing Director of X Financial Solutions.
“We designed this system using the open infrastructure of X Open Hub. xRisk will automatically hedge only the excess exposure set by client or instrument, while maintaining excellent client execution quality with smooth NonDealing Desk execution.” The new risk-management technology is available to all brokers using X Open Hub, as well as MetaTrader 4 (MT4).
Commerzbank chooses DealHub’s FX Distribution Hub DealHub’s price distribution service, FX Distribution Hub, has been selected by Commerzbank as the cornerstone of a new price distribution infrastructure, designed to enhance pricing and flexibility for clients in a fast evolving FX trading landscape.
The first venue to go live on the service will be FX Connect, followed by multiple venues in the months ahead. FX Distribution Hub allows Banks to price into any FX market destination from a single interface to their core pricing platform.
The service will provide Commerzbank with latency optimised connectivity to their chosen venues through co-located hosting facilities.
Chris Leaver, COO of DealHub, comments: “We are delighted
14 | october 2013
to add Commerzbank to our FX Distribution Hub – they join a growing list of banks, from Tier 1 price makers to regional specialists, using the service to cut the cost and time to market for multi-venue price distribution.”
can connect to one or multiple MetaTrader servers allowing brokers to consolidate their entire portfolio and manage risk through one intuitive interface.
smartTrade’s LiquidityFX ramps up Order Management System smartTrade Technology’s FX trading solution LiquidityFX™ is currently receiving several enhancements to its Order Management System for Spot FX, Forward Outrights, Swaps, NDFs and Precious Metals.
LiquidityFX OMS integrates the order book as an electronic venue in its own right for aggregation or internalization. The module gives a global visibility of all orders in using various templates such as hotness and midpoint. Traders can easily slice and dice their order book view by desk, client group and instrument group. Orders are automatically monitored and then filled manually or automatically depending upon various customizable criteria such as size, client, currency etc.
A followthe-sun routing schedule allows passing of order control between desks and traders.
Saxo Bank publishes trading volumes
Saxo Bank has launched a new transparency initiative publicising client deposits, daily average and monthly trading volumes. The figures will be published every fifth day of the month on: www. saxoworld.com/investorrelations/ transparency.
Sucden Financial sees rapid growth Sucden Financial’s e-FX division is experiencing rapid growth, so far this year it has almost doubled 2011’s total volumes and is well on course for a twofold increase on 2012’s volumes by the end of this year.
Didier Abbato, Global Product Manager at Saxo Bank commented: “We pride ourselves on being leaders and innovators when it comes to transparency within the financial services industry, which is vital due to the issues that the industry has faced in the past.
We continually strive to develop and put in place new ways to improve the amount of information available to our clients. By undertaking such initiatives we continue to gain legitimacy and improve our reputation in the market.”
For the third year in a row, the readers of P&L Magazine have named FCStone, LLC as the best non-bank FX Prime Broker.
FOREX.com partners with tradable FOREX.com, the retail division of GAIN Capital Holdings, Inc.
has announced that it is partnering with tradable in order to deliver the first open trading platform for forex traders to its clients. The tradable platform is now available in the United States exclusively to FOREX.com clients and will soon be extended to FOREX.com clients globally with a broader product offering including CFD’s.
“FOREX.com is an important partner for tradable,” said Jannick Malling, Co-founder & CEO of tradable. “With their strong brand and global reach, FOREX.com’s support for tradable will help push
16 | october 2013
the industry into a new era that is more open and collaborative, giving traders an unprecedented personalized trading experience.”
OUR SHELF is SAGGING.
Otherwise, we're all good.
Jonathan Brewer, Head of e-FX Business Development at Sucden Financial explains, “The bulk of our growth has come from existing clients, who have had a significant rise in business as a result of their relationship with us.
However, we have also had new clients on board and benefited from a recent award win, naming us as Best STP FX Liquidity Provider in Western Europe in the 2013 Global Banking & Finance Review Awards. Whilst FX remains our primary product, we have seen an increasing demand for Index and Commodity CFDs and in Emerging Market currencies.”
Sure, awards are good to get.
But now that you know what we’ve won, we’d like to remind you why we won: Superior service. Sophisticated technology. Deep market access. And a wide array of services through our subsidiaries, including Forex prime brokerage, cleared on-exchange foreign currencies, physical delivery of foreign currencies in more than 150 countries, and both electronic and voice execution 24 hours a day*. Plus the financial strength of INTL FCStone Inc., a Fortune 500 company.
That’s the solid foundation our reputation rests on, today and for the future. Chicago INTL FCStone Markets, LLC 312.780.6857 [email protected]
New York INTL FCStone Markets, LLC 212.485.3529 [email protected]
London INTL FCStone Ltd 44.20.3580.6232 [email protected]
Off-Exchange Currency transactions involve leverage and may not be suitable for all investors.
Such transactions are not executed on a regulated market or exchange. We may act as your agent or as principal.
In a principal transaction, we act as the buyer when you sell and the seller when you buy and, as a result, our interests may be in conflict with yours. Your deposits have no regulatory protection. Due to leverage losses greater than you deposit may be experienced. You should fully understand the risks prior to transacting. Futures trading may not be suitable for all investors. The trading of futures and options involves substantial risk of loss and you should fully understand those risks prior to trading.
*INTL FCStone Inc. offers these services through its affiliated companies. Off exchange foreign currency is offered though INTL FCStone Markets, LLC, a Swap Dealer registered with the National Futures Association and INTL FCStone Ltd., which is authorized and regulated by the Financial Conduct Authority. Foreign currency futures and options are cleared at FCStone, LLC; a registered FCM with the National Futures Association.
INTL Global Currencies is authorised and regulated by the Financial Conduct Authority the provision of payment services.
Invite Only Strategic Forum for Buy Side European Head of Equity To Best Access Liquidity 28 November, 2013 | Millennium Mayfair, London www.liquidityleaders.com
Your invitation to join the discussion with regulators, policy makers, brokers, exchanges and Buy-Side Heads of Trading
CitiFX Pro launches new MetaTrader 4 CitiFX Pro has launched a new MetaTrader 4, offering free virtual private servers (VPS) to both trial and live account holders.
Clients can access the MetaTrader 4 interface via desktop download,mobile app or free VPS. “The importance of a reliable, lowlatency MetaTrader 4 offering cannot Alex Knight be overstated,” said Alex Knight, Global Head of Margin FX Trading at Citi. “With a strong MetaTrader 4 product from a leading bank in FX, Citi can further expand its foothold with experienced active individuals and smaller institutional customers.”
Learn from our speakers: Lee Hodgkinson, Head of Sales and Client Coverage, EMEA & APAC, NYSE Euronext François Bonnin, CEO, John Locke Investments Mike Bellaro, Head of Trading, Deutsche Asset Management Per Lovén, Head of International Corporate Strategy, Liquidnet Jane Lowe, Director, Markets,, Investment Management Association (IMA) Martin Henning, Head of Trading, BNY Mellon Service KAG
Register now to secure your attendance Call: +44 (0) 207 368 9465 Email: [email protected] www.liquidityleaders.com
“In our live testing of the upgraded system, clients have enjoyed accessing the analysis tools within the VPS interface,” said Kevin Wilson, North American Head of Margin FX Trading at Citi.
“Both demo and live users can host indicators and strategies free of charge, which is a unique way to test our pricing and evolutionary algorithm compatibility.”
TMS Pro platform proving very popular TMS Brokers, which became the first Polish broker to offer a cTrader-based platform (see last edition of e-Forex) to its clients, has been delighted with the popularity the TMS Pro platform has been experiencing since its launch in February.
The platform was given another boost recently, when the c-Trader application received a ‘Best Retail Platform 2013’ award in New York. “It is our ambition to continue building the most competitive product portfolio for our clients and we are delighted to have both MetaTrader and c-Traderbased platforms on offer for our clients to use,” comments Marcin Kotowski, Head of Marketing and New Product Development at TMS Brokers.
Scandinavia Nordic-based volume at FinFX Oy decreased 15% from the previous quarter (Q1 2013).
Brief news and analysis from around the world of FX
This phenomenon closely resembles historic Q2 turnover figures as evidenced by our statistics in 2012 through 2010.
Despite the fall-off both Danish and Norwegian metrics experienced an uptick of 30% and 10% respectively. Our analysts are forecasting a net gain of 25% from the Nordic clients in Q3 of 2012 as compared to the previous quarter.
Key fX news
The most significant FX news came from Finland; where on May 15, 2013, FIN-FSA announced its intention to regulate the rolling spot F/X contract.
Spotlight on Latam – God must be Brazilian When events are turning their way – Brazilians like to joke that “God must be Brazilian”. Well lately…. The ‘hand of God’ is more of a slap. For a good part of the last 5 years it has been China, which has been affecting the Latam currencies.
Brazil more than any other. A large exporter of almost every commodity has seen a surge in prices, growth and foreign investment of such great scale, that the host of the next World Cup, and Olympics was smiling like a carnival dancer. That is until one afternoon Bernanke spoke and everything in Latam ( and EM in general ) changed.
The most important factor in the EM boom went largely
20 | october 2013
overlooked – the worldwide supply of easy money. It is not longer a China story it’s now a Dollar story. And ever since the BRL has been one way in the opposite direction.
CurrenCy war enters new pHase
Off almost 15% in the last 3 months.
There’s a global correction as the Currency War enters its new phase. But, it is worth noting that the ‘war’ itself was all about EM currencies being too strong in the first place.
regulator has deemed that trading based on the rolling spot contract is by its nature an investment service; and as such should be considered an enactment of the Act on Investment Services.
Finnish domiciled entities looking to service investors in the FX market will be required to pursue the aforementioned licensing requirements. For Q3 we anticipate that the global environment for the Norwegian krone (NOK) should gradually improve over the fall. In early Q3 the market reacted violently to the weak Q2 Norwegian GDP figures and sent the NOK to its weakest levels in three years.
Mainland growth of a meager 0.2% was significantly weaker than anticipated and although yields have yet to react; it seems that the FX market is now pricing
To aid the embattled national currency, Brazil’s central bank said it will infuse $60 billion worth of cash and insurance to the foreignexchange market by the end of 2013.
With an auction of $1 billion of dollar loans every Friday and an offering of the equivalent of $500 million worth of foreign-exchange swaps Monday through Thursday. “Brazil for me is making a policy error in trying single handedly to fund the Current Account Deficit through intervention. Better to listen to markets and reform than to sit alone on the offer in futures....” says a London based Head of EMFX trading.
3 way problem
This brings Brazil back to the Trilemma of running the country.
That is the 3 way problem of stabilizing exchange rates, interest rates and the flow of foreign money
in an economic downturn in Norway. However, a closer look at the data reveals that both business investment and exports of traditional goods climbed again after a couple of slow quarters. Additional figures indicate near-term sustained growth in oil investment despite rumors of a slowdown in oil-related industries.
2013:http://www.talentumevents.se/ materials/nordic+fx+summit+2013/ a2194499 which will be held on November 25, 2013.
This event will feature FX specialists from leading Nordic asset managers, hedge funds and currency managers.
A few industry conferences of note are taking place in Stockholm during the month of November.
The Nordic Trading Room: http://www. wbresearch.com/tradetechnordic/ home.aspx will be held on November 12, 2013; the event will bring together more than 250 Nordic and international buy side, sell side, execution venues and technology providers from across a multitude of electronic markets.
The second key event organized in Stockholm is the Nordic FX Summit
in and mainly out of the country. Raise the already high interest rates to support the currency, at the risk of economic slow down, or lower them and risk inflation.
Something Brazilians know an awful lot about. “The reduction of inflation and the resumption of growth, all this is beginning to dissipate the grey clouds that had gathered over our country,” said Finance Minister Guido Mantega in September.
Stan Klebaner is Chief Business Development Officer at FinFx Trading Oy
With the Profit and Loss conference coming up in Rio in October 17th. I’m sure the decline in Real will be debated as a much needed correction rather than a fiscal crack in the economy, and God willingly 2014 will bring a brilliant World Cup victory In India they have several Gods….
But that’s a whole other EM story.
Brazil has set a target of four per cent growth in gross domestic product (GDP) next year, although that forecast depends heavily on conditions in the European Union and United States. While President Dilma Rousseff said Brazil can deal with the surging dollar due to its high forex reserves, currently amounting to $372 billion.
Jon Vollemaere, CEO of R5FX
A view from Asia
Storm clouds have been forming in Asia recently as macro liquidity tightens.
rate dropping more than 7% against the dollar this quarter.
Monetary easing by Western governments in response to the 2008 financial crisis has led to a significant flow of money into higher yield asset classes. Major benefactors of such policies have been emerging Asia currencies and equity markets, with funds pouring into the Asian markets since 2009 as one of the few regions with genuine growth prospects.
With Western economic activity showing tentative signs of resurgence and increasing speculation regarding tapering, Asian markets have been experiencing evident signs of economic slowdown as investment shifts back to the Western economies.
Other Asian markets have had similar woes, with India’s domestic currency depreciating by more than 15% since beginning 2013.
To provide a snapshot of the effect of western monetary easing, Indonesia stands out as a fascinating example.
The Indonesian Rupiah rallied some 30% off its lows versus the US dollar in late 2008 but we have seen a reversal of that performance with the rupiah spot
Update Middle East Q2 followed the pattern of previous years in the Middle East. Volumes through April, May and June exceeded all expectations with flow from GCC based institutions and inward flows from Asia and Europe setting new records.
Targets which may have seemed in doubt after a lack luster Q1 were brought right back into play. The strength of Q2 can be attributed to a number of factors, including the move of Ramadan to July/ August for 2013 with regional traders looking to complete business ahead of the start of the Holy month. The start of second half of 2013 coinciding with Ramadan with regional volumes reducing as expected but non-regional flows continued into the GCC with the
22 | october 2013
UAE becoming a focal point for trading.
Key fX news
The significant news in the region came from the
So have the Asian markets lost their power?
Government of Abu Dhabi who announced the setting up of a financial free zone on Maryha Island, part of the Abu Dhabi CBD.
Although the pressure on Asian investment looks set to continue, it would be wise to assess the individual country position before committing.
Governments are taking fiscal and monetary action and have solid fundamentals to facilitate growth in the medium term. As is evident in the West, high debt levels are detrimental to economic growth, whilst solid government accounts are rewarded and healthy consumer balance sheets allow credit growth to be a strong domestic growth driver.
On this basis Malaysia, Singapore, Philippines, Indonesia and Russia appear well positioned, although concerns over Russian corporate governance weigh heavily and in Indonesia attention will shortly turn to the general elections next year. Other countries have higher debt levels and are considered riskier. There remain significant risks to commodity currencies such as
The laws associated with the zone, named the Abu Dhabi Global Market (ADGM), have been developed to allow Abu Dhabi to market make and set prices for FX and a range of OTC products.
When the market launches this will be the first time that a financial centre in the Middle East has become a market maker. In Q4 traders are focusing on the international market factors: the gradual unwinding of Fed bond purchases and QE, together with the safe haven value of the USD are driving traders to buy USD, particularly against the Euro.
Draghi’s commitment to keep borrowing costs low, and the promise of action if money market rates climb too high has reinforce the Gulf regions view that there will be a lower EURUSD rate.
After eight months trading the Euro is little changed on the year but the
Australia whilst bullion, a traditional hedge against central bank profligacy and currency debasement, may respond and strengthen in the coming months. China’s new government doesn’t want to risk reflating the bubble, in contrast to the West, it prefers to deal with matters now rather than later. This risks a slowdown in growth but with structural reforms such as increased incentives for foreign investment, Xi Jinping is thinking about the next decade and may take shortterm pain to reap benefits later on.
monetary easing measures in the shorter term, the risk of tightening too early being considered detrimental to the recovery and politically difficult.
If this indeed proves to be the case or Asian economic growth crowds out such stimulus reductions, the recent falls in emerging Asia currencies and markets could provide opportunities for a bounce. Hang on to your hats.
Given Japan’s debt of 215% of GDP (14x government revenue), the traditional response of printing money to inflate the debt away could lead to significant yen depreciation.
It remains possible that, despite the recent economic pick-up, the central banks decide against a reduction in
pattern of trading in 2013 has been for selling interest to repeatedly cap any gains higher than 1.3400. This is expected to continue into Q4 as prices move back to the lows of 2013 at 1.2746.
There is still good buying interest in USDJPY in both options and spot and this should continue, but probably at a slower pace.
Investor’s enthusiasm for the currency at levels above 100.00 has stalled for the past three months, but statistical trend models show that bullish sentiment in USDJPY is still the strongest it has been since the late 1990’s. The model compares the percentage of higher highs and lower lows traded which are currently plus 31 per cent versus minus 14 per cent –a strong bull trend.
This reflects the underlying positive market sentiment created by unprecedented BOJ easing
Mark Hanney is CEO of Valbury Capital, the London based broker
and an improving US economy.
However, the market is very long and investors have been positioning themselves for a sustained move through 100.00 toward 110.00 since April, when the BOJ unveiled their aggressive monetary policy.
There is a risk that if we don’t get sustained buying above 100.00 in Q4 this year then investors enthusiasm and patience may fail.
Max Knudsen is Chief Market Strategist at ADS Securities
Get your Helmet On!!!
Highlights from the Currency War Correction Jon Vollemaere of R5 Reports In July 150 delegates came together in London to discuss the recent rise of EMFX trading and its future.
At the first dedicated - EMFX Conference - Everything from the health of the underlying economies to internationalisation of new currencies. From the emergence of some HFT in EM to the birth of new trading technology for the sector.
One message that came across loud and clear was the need to, “Get your helmet on and take cover”, as things were about to get more volatile. This was only July 27th and ever since the EMFX market has been front-page news. Since the conference, and at the time of writing, the Fragile 5 (INR, IDR, TRY, BRL, ZAR) are all significantly down with Indian Rupee at the front of the nosedive. Malaysia, Thailand, Philippines and Indonesia all suffering a range of -5% to well more than -10%.
The wise voice of reason – Paul Chappell of C-View – nailed the discussion with the quip of, “the thing to remember here is that Trading EMFX is NOT just trading long the underlying economy.
24 | october 2013
There are significant trading and portfolio opportunities both long and short and in relative value in the right circumstances”.
by 2020… Is a total pipedream – it will never happen.”
The discussion covered both the difficulties and the benefits shorting EM currencies.
Philippe Bonnefoy of Eleuthera Capital said, “when traders start looking for the exit… it gets very small and further away,” reminding us that while liquidity can be thin as well as crowded around the IMM dates. Some traders have made considerable returns from this most recent Currency War Correction.
“If it’s ‘e’ traded then its not EM anymore…it’s New World.”
In a refreshing change, professional journalists from Dow Jones, Wall Street Journal, and the Financial Times moderated panels.
Making for some more in-depth and revealing lines of questioning. Some of the more notable answers coming out of the day were: “When it comes to EMFX liquidity…the tide comes in…the tide goes out.
Only then do you see who’s swimming naked,” As well as: “The idea of CNY as an International Reserve Currency
And my personal favourite:
In many respects the idea of what is EM is already blurring.
“It’s impolite to call China and Brazil as emerging anymore. Rouble is effectively a G20 currency.” And as such is already a high frequency traded currency pair.
Moscow gets closer and closer to London every day… now at 38 milliseconds and the Moscow Exchange has seen fantastic growth over the last 12 months. One of their new contracts to watch is CNY/ RUB – while still young at this stage, its geo location alone could cause this pair to be very active over the next 5 years.
The conference continues with more dates and cities in 2014 with the overriding message of more participants means more liquidity… and more liquidity solves a number of the issues in this part of the market. Until then…. Keep your helmet on.
the market which never sleeps We have seen some interesting developments during the summer break, keeping the momentum and volatility in the markets: Emerging currencies are falling and there have been some concessions on clearing rules.
Whilst the industry was waiting for the BIS 2013 Triennial Survey, latest reports show a delay of FTT in Europe, however Italy has introduced a tax on high-speed trading and equity derivatives.
eMerging currencies under revieW
It looks like some Asian and Latin America officials are quiet frustrated about the recent flight from some emerging markets. Sell off in some countries started shifting money back to the western world.
Whilst the US and Europe were badly hit by the Global Financial crisis some emerging countries could take good profit from their resilience but also for providing good alternatives for investments in the past. Nevertheless, some of the emerging countries complained about the experimental monetary policy in the western hemisphere which they see as a source of potential financial instability for the entire global system.
Now, as the markets identified positive economic developments in the US but also a good stabilisation in Europe with positive outlook, investors have probably verified their risks and strategies again. Taking into consideration inflation and current account deficits of some of the EM countries we may identify that currencies have fallen the most in so called ‘risky’ countries – so it looks like investors have been starting to shy away from risk.
Fx daiLy turnover – the trienniaL centraL BanK survey By M.
Wiebogen Honorary President ACI The Financial Markets Association 26 | october 2013
Foreign Exchange market turnover increased by some 35% to $ 5.3 trillion per day in 2013, up from $ 4.0 trillion in 2010.
Wow – a strong sign from the industry which, honestly, I did not expect to become this size. The Bank for International Settlements coordinated the survey on turnover in foreign
Source: BIS Triennial Central Bank Survey 2013
Options and other
April 2013, in billions of US dollars
exchange and over-the-counter derivatives markets, which takes place every three years.
They collected the data in April this year from around 1,300 financial institutions reflecting a good market average. The recent result continues the trend of strong turnover growth seen from the previous surveys. A good part of the growth in foreign exchange trading was driven by other financial institutions (smaller commercial banks, investment banks and securities houses, and mutual funds, pension funds, hedge funds, currency funds, money market funds, building societies, leasing companies, insurance companies).
This segment had for the first time surpassed other reporting dealers (i.e trading in the inter-dealer market) in the 2010 survey. They dominated and grew again by 48% to $ 2.8 trillion in 2013, up from $ 1.9 trillion in 2010. The inter-dealer trading grew some 35% in 2013 to $ 2.1 trillion, up from $ 1.5 trillion in 2010! On the other hand, the US dollar remained the dominant currency; it was on one side of 87% of all trades in April 2013, up from nearly 85% in the year 2010.
The Euro was the second most traded currency, but its share fell to 33% in April 2013 from 39% in April 2010. [Because of double counting of the currencies, we do need to summarize the currencies to 200%] How may we interpret the fall in the Euro’s share?
Is it still a part of Europe’s economic struggling and/or is it an anticipation of some European countries demand for an FTT?
Anyway, the trend is further a concentration towards the largest financial centres. In April 2013, the United Kingdom was reported for a 41% market share (up from 37% in 2010), the United States counted for a 19% stake (up from 18%), and Singapore overtook Japan a the world’s third major FX trading centre (5.7% in 2013 versus 5.3% in 2010) whilst Japan fell from 6.2% to 5.6%. Interestingly the share of the top five financial centres (including Switzerland and Hong Kong) increased from roughly 71% in 2010 to 75% in 2013!
Of additional interest should be that emerging currencies (such as China and Mexico) are gaining further ground. The report also highlights foreign exchange trading has become more localised since 2010 and the share of cross-border FX transactions fell considerably (from 65% in 2010 to 58% in 2013).
Real-Time Market News
This trend indicates increasing concentration of FX trading in large financial centres and trading amongst counterparties located in these centres. And finally, the FX spot market grew by some 38% to a 40% market share in the entire Foreign Exchange segment but the FX swaps remained the most actively traded FX
instrument accounting for 42% of all FX-related transaction.
One trend in the FX-swaps is seen now towards slightly longer maturities (56% are counting for periods between seven days and one year).
First ever high Frequency trading transaction tax
Monday, 2nd September this year will stay a remarkable day. Italy has introduced a levy on both exchangebased and over-the-counter equity trading, as well as high frequency trading.
The levy against highspeed trading is the first in its kind ever noted taxation. Why Italy moved ahead seems to be unclear. It just came at a time, when the European Commission’s transaction tax has been at least delayed or even became more questioned.
The condition for Italy’s new tax is 22 basis points on exchange-based trades and 12 basis points for overthe-counter trades. High frequency trades will be charged 2 basis points when they occur within a timeframe shorter than half a second.
We now have to consider what this trend could mean to the Foreign Exchange markets in the future. Once more, ACI The Financial Markets Associations is heavily concerned with the ongoing discussions on an FTT in Europe and the impact it may have.
Besides geographical arbitrage, major problems may arise in price inefficiency, reduced innovation and also perhaps a drop in liquidity.
Increased market transparency, more competition By Sang Lee, Managing Partner at Aite Group
The global FX market, the world’s largest and most liquid asset class, continues to grow and evolve.
Fueled by market volatility, massive adoption of electronic trading, increasing adoption of high frequency trading (HFT), and retail market growth, the FX market has shown incredible resilience through the last decade, even through the aftermath of the global financial crisis of 2008 and 2009. As the FX market has gone more mainstream and FX has become accepted as a legitimate asset class, potential for increased regulatory supervision has emerged in recent years.
Regardless of any regulatory threats, however, a genuine, industry-initiated effort seeks to
• Growth of electronic trading • Increasing adoption of FX algorithms and HFT • Push toward increased transparency and transaction analysis • Requirements for best execution and regulations Fueled by these industry-led initiatives is the next phase of competition in electronic FX trading market.
Over the last 12 to 18 months, new FX venues have emerged at a rapid pace, often touting increased transparency, low latency, and cost-effective trading as key characteristics of their competitive offerings.
Key marKet trends 1. Volume and electronic trading Global FX trading volume has seen tremendous growth over the last decade.
At the end of 2012,
Figure 1 : Global FX Volume Average Daily Trade Volume, 1998 to 2012 (In US$ billions)
28 | october 2013
day evolve into some form of highly regulated globalized exchange.
Source: Aite Group
Global FX market update 2013
introduce enhanced transparency into the market and provide a fair trading environment for both institutional and retail clients in the following ways:
Source: BIS, Foreign Exchange Committee/Federal Reserve Bank of New York, the Foreign Exchange Joint Standing Committee/Bank of England, Tokyo Foreign Exchange Market Committee, Singapore Foreign Exchange Market Committee, Canadian Foreign Exchange Committee, CLS, Aite Group
Figure 2: Estimated Adoption of Electronic Trading in FX Projected Electronic Trading in FX, 2001 to e2013
average daily trade volume in the FX market reached an estimated US$4.68 trillion despite a slight decline from the previous year (Figure 1), representing a vibrant market compared with other asset classes.
Continued adoption of electronic trading will play a key role in fueling the overall growth in FX market as well as the penetration of HFTs. Another factor that cannot be ignored is the overall contribution of the burgeoning global retail FX market. Electronic trading has become the main mode of trading in FX and now accounts for more than 60% of all trading done in the global FX market (Figure 2).
Moreover, Aite Group expects to see electronic trading adoption to continue in the FX market, reaching 70% by the end of 2013. This reality does not predict the end of voice trading, however. Typically, voice has a bigger role when large trades are being done. In addition, during times of severe market volatility, it is common for clients to rely on their relationships with banks to get much-needed color into where the market is headed and to get it via voice. This was certainly the case in 2009, when, following the record volume of 2008, the
dramatic dislocation of the general global economy created much uncertainty in the marketplace, leading to widened spreads and lower trading volume.
During this time, reliance on high-touch, voicedriven trading became crucial for clients seeking to navigate market uncertainty.
2. regulatory Changes On the regulatory front, the DoddFrank Act in the United States and EMIR and MiFID II in Europe have created an enormous opportunity for multidealer trading platform providers to register themselves or, later, their affiliates, as SEFs.
To be granted SEF status when that day comes will legitimize MDP FX electronic platform vendors’ status and forever transform the landscape of electronic trading of FX derivatives such as FX options and NDFs. While most of the changes forged by the Dodd-Frank Act focus on FX options and NDFs, Aite Group believes there is a growing sense of inevitability that the rest of the FX market will ultimately experience an increased level of regulatory change in coming years.
It is even fathomable that foreign exchange markets, the most dominant form of OTC market structure, may one
The Dodd-Frank Act, EMIR, MiFID II, and other similar regulatory reforms all paved the way for the transition to the changing market dynamics that usher in the next phase of OTC-to-exchange-style trading and centralized clearing. This transformative movement poses the next challenge—for all market participants and the execution venues that they have chosen to trade, that is—to demonstrate that “best execution” is indeed being achieved and the principle of achieving it is being followed.
Growing awareness of tCa Institutional asset managers have long employed TCA as a tool to measure execution quality in equities for at least 20 years. TCA is important to this audience because these money managers have a fiduciary obligation to achieve “best execution” for the assets that they manage on behalf of their clients. As FX is gradually recognized and treated as a separate asset class from stocks and bonds, the notion of fulfilling best-execution obligations in FX and subsequently using FX TCA services is a natural progression of this industry’s maturation process.
Furthermore, although using FX TCA to gauge execution quality is still in its early stages and is generally confined to the institutional investor community, the concept of best execution and how to measure it will soon become a requirement of many electronic FX trading platforms as the whole FX industry ramps up its electronic trading activities.
CompetitiVe landsCape in e-tradinG Venues
The first generation of FX electronic trading venues initially emerged in the interbank market in the early 1990s.
Both Reuters and EBS have remained traditional powerhouses in the electronic FX market since their
Global FX market update 2013
LMAX Professional: Retail brokers, hedge funds, proprietary trading firms, money managers, HNWIs, professional traders LMAX Interbank: Banks
Source: FX venues
Banks, asset managers, hedge funds, HFTs
Banks, asset managers, hedge funds, HFTs
Any participants with ability to settle via CLS (direct and third party)
A Sample of new market entrants
launches, supported by the dealing banks that relied on the two venues to manage their risk in a timely manner.
Over the last couple of years, we have witnessed the next wave
Source: FX venues, Aite Group US$850 billion calculated by aggregating ADV of electronic FX venues (excluding ADV from SDP) including all FX products traded on these venues Other includes LMAX Exchange, FXCM, 360T, Integral, and Bloomberg
The second wave of significant changes in the electronic FX market occurred during the late 1990s, when numerous electronic platforms surfaced to address trading issues in the client-to-dealer market.
most of those venues, such as Atriax, Lava, and FXMarketspace, ultimately ceased operations due to lack of market adoption, the few that survived, including Currenex, Hotspot FX, and FXall, form the backbone of today’s established FX ECN players.
Multi Dealer Platform Liquidity Sourcing
• Traditional electronic venues such as EBS and Reuters have been gradually losing market share to HFT-oriented market-making or proprietary trading firms, providing much-needed hope for new entrants to build attractive levels of liquidity unthinkable even three years ago.
• Dealing banks have become increasingly dissatisfied with the current group of FX venues due to (1) what they perceive as certain practices that favor automated trading firms and (2) the outdated trading infrastructures of existing platforms.
Make Forex Trading Simple
Both of these may lead to potential opportunities for new venues. • New participants from nonFX markets have entered the space looking for faster, more streamlined, transparent FX trading venues similar to what they are used to in equities and futures markets.
Figure 3: Market Share Analysis FX Venues Competitive Landscape, March 2013 (Average daily volume of all venues combined = US$850 bi
There are numerous reasons for the entrance of new FX venues into a competitive landscape that had been fairly stable until a few years ago:
Asset managers, hedge funds, HFTs, HNWIs
THE GAP MINDED
of new FX venues flooding the marketplace.
Table A shows a sample list of new FX venues that have launched recent years.
• Continuing regulatory changes in the OTC derivatives markets across different asset classes such as fixed income, commodities, and equities are leading to growing expectations from global FX market participants that similar obligations will be eventually applied to the FX market.
Single Dealer Platform
Credit Limit Checking
Aggregation Reporting & MIS
Auto - Hedging Auto - Deal & Cover
ESP RFQ [email protected] +44 (0)1245 496706 www.eurobase.com/banking
30 | october 2013
Global FX market update 2013
• FX clients are becoming more sophisticated and looking for more choices and efficiency in trading FX electronically.
• The existence of an FX ecosystem has drastically lowered the cost of entry for new market players. Most of the FX venues have to date experienced increases in volume over the previous year (as of March 2013 compared with 2012 levels). After a historic loss of market share leadership to Thomson Reuters, ICAP (EBS) aims to recapture its leadership position. The market share race between these two firms is intense, with only a single percentage point separating them.
CME has become a major player in the FX market, representing 15% of market share with its FX futures dominance in the exchange market. FXall is the third-largest FX venue; representing 13% of the market share, it continues to solidify its growing presence in the FX market.
FX Connect and Currenex round out the top five venues, representing a healthy market share of 12% and 9%, respectively (Figure 3). The FX venue landscape has never been this competitive, and the entrance of new FX venues seems to foretell a brutal market share battle over the next 12 to 18 months.
The global FX market, the world’s largest and most liquid asset class, continues to grow and evolve.
It has bucked the trend in volume declines over this past two years that were seen in other asset classes such as stocks and bonds, with a bottoming in its own trading activity in Q3 2012, and has staged a strong comeback ever since.
32 | october 2013
This pickup in FX volume is further fueled by the Japanese yen’s recent rapid depreciation, which has led to a boom in new trading interest. As a result, a surge in speculation by retail investors and hedge funds, as well as new hedging activities by institutional investors and multinational corporate treasuries, continues.
New emerging trends that will impact the health and dynamics of the global FX market in 2013 and beyond include the following: • As the FX market has gone more mainstream and FX has become accepted as a legitimate asset class, a genuine, industry-initiated effort seeks to introduce enhanced transparency into the market and provide a fair trading environment for both institutional and retail clients alike.
• Fueled by these industry-led initiatives, the next phase of competition in electronic FX trading market has begun. Over the last 12 to 18 months, new FX venues have emerged at a rapid pace often touting increased transparency, low latency, and cost-effective trading as key characteristics of their competitive offerings.
• Banks are increasingly relying on internalization of client order flow to manage their market risk, but they are also leveraging their connectivity to various client-to-dealer platforms to manage their overall P&L and relying less on the traditional interbank venues such as EBS and Reuters.
• Partially caused by new technological innovations as well as by market structural changes as a result of new demandsupply dynamics and new regulations, more choices than ever in electronic trading venues now confront the end customers of FX.
Customers can choose to trade electronically via RFQ/RFS in single or multibank platforms, ECNs with streaming quotes and central limit order books, or exchange style trading that supports pre-trade anonymity and full posttrade transparency.
• Key findings by governmentsponsored FX regulatory bodies indicate that the average trade size of spot FX transactions has already dropped two- to threefold over the last three years, while the number of trades has gone up more than 50% during the same period. With expected continued growth in HFT volume and increasing market participation by retail traders, the average trade size of spot FX is expected to decrease even more in coming years.
• Although using FX TCA to gauge execution quality is still in its early stages and is generally confined to the institutional investor community, the concept of defining and measuring execution quality will soon become a requirement of most electronic FX trading platforms, the whole FX industry ramps up its electronic trading activities.
Transaction Reporting of OTC FX Derivatives what are your options?
With the EU’s European Market Infrastructure Regulation (EMIR) requiring institutions to report their OTC derivatives trades to appropriate trade repositories starting as early as September 2013, Frances Faulds talks to REGIS-TR and Traiana to assess the options available to FX firms under both the Dodd-Frank Act (DFA) and EMIR.
In practice this means that, more often than not, the reporting participant under DFA will be a financial institution and/ or major swap dealer or major swap participant. Under EMIR both counterparts to a derivative transaction have an obligation to report, with the exception of private individuals.
By Frances Faulds
With the new trade reporting obligations finalised, the countdown to this major new regulatory requirement for the FX market has begun bringing on the one hand certainty to FX firms, but on the other, a limited number of options due to the time constraints for those firms just starting preparations.
Forex Trading Tutorial for Beginners
The good news is that solutions are available and that much of this work can be outsourced or help is at hand for those firms making a strategic decision to report trades directly.
The reporting obligation can however, be outsourced to financial counterparties, third-party middleware or other vendors, clearing platforms or simply undertaken directly by the trading counterparty.
However, Nicolas Boatwright, Deputy Managing Director of REGIS-TR says that there may be limitations to a given market participant’s ability to delegate the reporting obligation under EMIR. He says: “Key considerations include confidentiality but also ease of access to the relevant data. In that respect intra-group transactions
or cross-border transactions are often reported by the trading counterparts themselves.” Under both jurisdictions legal entities domiciled in respectively the US and Europe will have, in principle, an obligation to report to their local regulator or respectively, CFTC, SEC or ESMA.
Boatwright says there are currently discussions underway between regulators across the world and, in particular the CFTC and ESMA, on the application of the principles of extraterritoriality when market participants trade on a cross-
border basis including intra-group transactions between a European ‘parent’ and an American branch and conversely.
“The question remains unresolved and should not be clarified before year-end when US and European regulators hope to agree a common approach based, the market hopes, on the principle of ‘equivalent regulation’.
Such an approach should limit the instances of duplicate reporting under both jurisdictions,” he adds.
As well as the differing reporting obligations the timelines that will operate in the US and Europe are also different with intraday reporting shortly after execution being the norm under DFA as compared to a T+1 reporting schedule under EMIR. According to Boatwright, a further critical distinction is the scope of reportable transactions, notably as regards FX trades.
“Under DFA non-deliverable forwards are not reportable whereas under EMIR forex forwards and swaps are to be systematically reported,” he says. Under EMIR, both counterparties to a derivative transaction have an obligation to report: with the exception of private individuals.
The reporting obligation can, however, be outsourced to financial counterparts, third-party middleware
or other vendors, clearing platforms or simply undertaken directly by the trading counterparts themselves.
Delegation can be undertaken either entirely or partially. Says Boatwright: “Trade repositories like REGIS-TR have adapted their account structures, reporting flows and technical accesses to facilitate the most diverse forms of delegation allowed by the regulation.”
David Retana, Managing Director of REGIS-TR, says that under EMIR, FX trading firms have a variety of options open to them including delegating to counterparties, appointing a third-party or reporting themselves.
However, the choice will depend on a number of factors, not least of which will be the availability, ability and/or willingness of a trading counterparty, broker or trading platform to report on a trading firm’s behalf.
He says: “Indeed, the main issue will be whether this counterparty or platform disposes of all the information required to report ‘on behalf’. Trading platforms, for instance, have only an incomplete set of data and would require that set to be completed by the client. Complementary information may include end beneficiary data or exposure valuation details. Completing the data set requires additional information flows possibly negating the operational streamlining that delegation should deliver.
It may mean sharing potentially sensitive commercial information.”
To ouTsource or noT
A further aspect for consideration, Retana adds, is the ability of a firm to delegate fully reporting of all their activity, including, notably,
The major distinction between reporting under Dodd-Frank and EMIR is that under Dodd-Frank the reporting obligation is ‘one-sided’ while under EMIR it is ‘two-sided’.
34 | october 2013
Transaction Reporting of OTC FX Derivatives
“Under DFA non-deliverable forwards are not reportable whereas under EMIR forex forwards and swaps are to be systematically reported,”
web-based GUI or upload of CSV and XML files through to automated file transfer via SwiftNet FileAct, SOAP API or SFTP, not to mention SWIFT Fininform whereby suitably enriched copies of confirmation messages can be used for reporting purposes.
intra-group and cross-border trades.
According to Retana, these are not typically automatically captured by a single counterparty or trading platform, which gives rise to the question of bifurcation. “So while delegation may appear attractive prime facia, a detailed analysis should be undertaken to ensure that full value is extracted,” he adds. While reporting is often viewed as a necessary evil and therefore best delegated, Retana says reporting directly to a trade repository such as REGIS-TR can be a relatively straight forward exercise.
Indeed, many firms will have the required data in their treasury management systems from which they can extract and send to the trade repository. For example, he says, a firm whose FX activity is limited to hedging purposes will report 30 data fields describing the primary economic terms of the deal and counterparty details with further data until maturity. REGISTR makes available a full gamut of connectivity channels to interface with the trade repository; starting with manual input via a secured
36 | october 2013
Further to this, REGIS-TR supports firms in this process with the provision of exhaustive technical documentation, availability of a helpdesk and free access to a full test environment.
REGIS-TR has also developed partnerships with software and treasury management system providers who have developed the necessary links and offer adapted modules to satisfy the needs of FX firms when the IT development expertise required is not readily available. EMIR states clearly that while reporting firms can delegate the act of reporting they nonetheless retain full responsibility for what has been reported. Hence the importance of maintaining a complete view of what has been reported at all times.
Retana says that this is facilitated by REGIS-TR, with individual trade reporting status reports available when reporting as well as regular end-of period reports recapturing aggregate positions and transaction reports at the end of the day, week or month. This is complemented by an archiving system which maintains full reporting details for a period of 10 years.
These reports allow for the reconciliation of firms´ internal
books to the positions held with the repository.
REGIS-TR also provides a reconciliation service for trades lodged by both counterparties, whether with REGIS-TR or any other authorised trade repository and links will be provided to providers such as Trioptima to facilitate portfolio reconciliation exercises that are also mandated under EMIR.
Says Boatwright: “If connecting directly to a trade repository, there is some effort needed in terms of adjusting the internal infrastructure to the reporting requirements. This often means gathering information from diverse systems and different departments at dissimilar stages of the trade. However, the benefit lies in the direct control of the reporting.
Participants will get messages of their outgoing reports right away and can make necessary adjustments rather easily.”
Moreover, REGIS-TR offers valueadded services, such as sorting
“…while delegation may appear attractive prime facia, a detailed analysis should be undertaken to ensure that full value is extracted,”
trades by counterparty, gathering many reports and tracking the reconciliation process through its web-based member area.
These services are available to traders that report through a third party as well, but – depending on the vendor they choose – information is sometimes only available in parts or not as fast and direct. On the other side of the coin, Boatwright says the gain from appointing a third party is the substantial shortening of the connectivity process.
“Within REGIS-TR, there is also the possibility to register as a Non-Reporting Entity.
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This read-only user can view all trades that are reported on its behalf, but cannot report on its own. If reporting is delegated to the counterparty, one counterparty needs to ensure the other side has all the necessary data at hand,” he adds.
He says that the cost of setting up a reporting capability includes the one-off cost of building the ‘internal repository’ that collects and collates the data required for reporting from the accounting, static data warehouses and trading systems, the on-going system and connectivity channel running and maintenance costs as well as trade repository reporting fees. The REGIS-TR reporting fees are comprised of a membership fee, individual transaction fees per deal and maintenance fees per contract position held with an annual cap defined for the total reporting activity.
While there is also the oneoff cost of back loading all derivative transactions that were pending on the 16th of August 2012 and/or initiated since then, REGIS-TR does
When choosing a particular reporting route, trading parties need to decide on the most appropriate solution, based upon the services offered by their counterparties and their own internal systems. october 2013
Transaction Reporting of OTC FX Derivatives
not charge for any back loading prior to the reporting start date for the respective derivative classes.
For those firms wanting to report directly, Boatwright says the choice of the most appropriate connectivity pathway will depend on a number of factors, including, but not limited to, the amount of activity, in-house systems, and the availability (or absence) of in-house IT capabilities, as well as the level of integration of in-house trading, accounting and middle-office systems. “In short firms will need to map the information that needs to be reported against the relevant sources of information dynamic and static data,” he adds.
REGIS-TR offers a suite of connectivity solutions to suit all customer profiles. Smaller customers can opt for manual input via secured internet access, or even manual upload of CSV files, while larger players may opt for XMLbased messaging and automated exchanges of information by a
choice of connectivity solutions ranging from SWIFT NET FileAct, to SOAP API or SFTP protocols.
A recent development includes the reuse of copies (Fininform) of suitably enriched SWIFT forex confirmation messages for reporting purposes. In addition, and critically for firms just starting to prepare for implementation, Boatwright says that REGIS-TR offers a dedicated test environment that is the first of its kind and tailored exclusively to European reporting requirements as well as extensive technical documentation including instruction templates, and a technical helpdesk to fully support market participants in preparing themselves for undertaking the new reporting obligations.
connecTing wiTh harmony
Traiana, provider of post-trade solutions, has also been working with the FX industry to develop workable solutions for the new reporting requirements.
As a result, Harmony TR Connect provides all market participants with the ability to comply with the trade reporting requirements under both the DoddFrank framework and EMIR, offering a single point of connection for post-trade reporting of FX, interestrate and credit default swap trades.
Steve French, Director, Product Marketing at Traiana, agrees that the reporting requirements on either side of the Atlantic differ slightly. Under Dodd-Frank, financial institutions, either under the definition of Swap Dealer or Major Swap Participant, or regular financial institution, must report eligible trades.
In the case of cleared trades then the Swap Execution Facility
“In order to be absolutely certain of being able to connect to all required TRs, then a middleware solution is the most flexible approach.”
38 | october 2013
reports the initial trade details.
Under EMIR, all financial institutions are required to report, irrespective of their status with respect to swaps trading.
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French says: “Under Dodd-Frank a hierarchical approach is taken to decide on the reporting party, but it is possible for one party to report irrespective of the counterparty’s status as long as everyone is in agreement.
Under EMIR both sides of the trade have an obligation to report, although one side can delegate the actual reporting of trades to the counterparty or a third-party, but they still have a responsibility to reconcile and confirm that the appropriate trades have been reported.”
spliTTing The Difference
This hierarchical approach is taken to decide the ultimate reporting party and middleware platforms and CCPs decide who the reporting party is.
Under EMIR counterparties can delegate the act of reporting, but they cannot delegate the responsibility to report. Under EMIR FX firms can report the trades themselves, delegate reporting to a counterpart (as long as the counterparty is in agreement) or delegate to a third-party vendor. However, because when reporting directly it is the counterparty’s responsibility to report and reconcile eligible trades, it is their decision as to which TR trades are reported. According to French, this means that the two counterparties to a trade can either report to two different TRs or the same TR.
He says: “With counterparty delegated reporting, the counterparty to a trade has to fulfill their reporting requirement plus that of the counterparty, but the nonreporting counterparty must ensure that they perform the appropriate reconciliation of what should have been reported versus what actually
At REGIS-TR, we’re ready to ensure you can comply with EMIR reporting requirements for your derivative trades.
Join us and take advantage of a one-stop-shop trade repository that covers all regulated derivatives types and which will soon be offering value-added services including collateral management. It’s time to choose REGIS-TR. Powered by
In the case of vendor delegated reporting, it is the vendor who selects the TR to report to.”
Choosing a reporting route
“Unless all of a firm’s counterparties can provide a delegated reporting service then a trading party may decide to report themselves -- i.e.
if they have to do it when trading with one counterpart they may decide to do it for all,” he says. “Alternatively, they could decide to use a third-party delegated reporting model. A third-party model is likely to provide the greatest level of support and TR connectivity as long as the chosen vendor can provide the appropriate reconciliation services and transparency into transaction reporting activity.”
Source: Deloitte Analysis © 2013 Deloitte Tax & Consulting
French adds that when choosing a particular reporting route, trading parties need to decide on the most appropriate solution, based upon the services offered by their counterparties and their own internal systems.
* BCBS & IOSCO Paper - definition of «covered entities»
EMIR – Key Cornerstones of the EU Regulation Different scenarios to consider
requirement - e.g.
Dodd-Frank reporting is near real-time so FpML message construction is employed, whereas under EMIR it is a T+1 requirement, therefore batch reporting using CSV or some other separator can be employed.
He says: “Firms can connect directly or, to an extent, rely on the interoperability offered by some TRs to regional TRs, but in order to be absolutely certain of being able to connect to all required TRs, then a middleware solution is the most flexible approach.”
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French believes a cost comparison should be made on their ability to comply with all regional and regulatory jurisdictions in the designated timelines.
He also says that the various TRs operate different reporting connectivity services and messaging formats based on the regulatory
40 | october 2013
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The result is a stable and professional service which is optimised for you, the client. Source: REgIS-TR
Transaction Reporting of OTC FX Derivatives
EMIR – Timeline (July 2013)
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FX E-COMMERCE and PLaTFORMS
FX E-COMMERCE and PLaTFORMS
Moving the benefits of e-FX for Investment Managers beyond the advantages of workflow automation Nicholas Pratt explores why the value proposition of electronic FX trading and use of e-channels by Institutional Investors and fund managers is now stronger than ever in terms of achieving best execution, reducing operational risks, improving performance and reducing costs.
commercial environment that strengthen the case for using electronic trading.
On the regulatory front, the various regulations of the G20, from Dodd Frank to MiFID II to EMIR, are all aiming to reduce systemic risk in the capital markets by mandating that more trades take place on electronic platforms.
By Nik Pratt
The value proposition of e-FX for asset managers and institutional investors may well be stronger than ever due to changes in both regulatory reform and the
42 | october 2013
At the same time there has been a greater awareness from investors, plan sponsors and other asset owners as regards the risk of trading and they want to see processes and safeguards put in place to mitigate this risk.
Clearly electronic platforms are the best way to ensure that these wishes are adhered to and that there are clear audit trails to verify the fact.
And there has been much greater investment from all participants in their electronic trading that have had a cumulatively positive effect.
The market infrastructure firms have spent time and money to make more instruments available for e-trading and the liquidity providers have spent heavily to increase the productive capabilities of their platforms thereby creating a much bigger pool of liquidity for the buyside to tap into via the much more accessible trade execution tools now available on the market. But despite the combination of these three drivers – regulatory reform, investor concern about systemic risk and providers’ greater investment in their offerings – the provision of electronic FX trading platforms and services to the asset management community is far from straight forward.
And just as there are clearly identifiable catalysts for greater adoption, there are still operational obstacles that must be overcome.
WorkfloW complexity The most obvious of these is workflow and the particularly onerous demands that asset