Minutes of the London FXJSC Operations Sub-Committee Meeting - 15 September 2021

Minutes

Item 1 – Welcome and Apologies

John Blythe (Chair, Goldman Sachs) welcomed members to the FXJSC Operations Sub-committee meeting held via conference call. Mr Blythe welcomed guest presenters Sharon Wallis, James O’Connor, Bhavin Patel, and Nicholas Butt (Bank of England).

Item 2 - Minutes of the 9 June meeting

The minutes of the 9 June 2021 meeting were agreed. There were no matters arising.

Item 3 – Sector Response Framework

Sharon Wallis (Bank of England) presented to members on the Sector Response Framework (SRF), highlighting the importance of co-ordination in enabling the UK Financial Sector to respond to operational disruption to ensure continuity of operations and stable functioning of Retail and Wholesale markets. Ms Wallis explained that the SRF aims to facilitate this response in providing guidelines and capabilities that enable sector groups to respond concurrently or on a modular basis.

The benefits of SRF include: enhancing awareness of sector-wide capabilities; clarifying understanding between strategic and tactical co-ordination as well as decision-making authority; information sharing and operating principles; and providing a framework in which skilled teams across the sector can come together and respond as required. The framework also provides a lexicon to provide consistency and standardisation in relation to how firms describe their incidents externally to support in further harmonisation across industry.

An overview was provided of the different components which make up the SRF, including the core framework, group templates and integration guidelines, and a schematic of the SRF and its associated groups.

Members noted that the documentation is helpful and provides a useful avenue for further integrating firms response plans within the financial sector. Members discussed challenges with balancing co-ordination across several stakeholders and recovering from an incident at the same time.

Item 4 – FXJSC Turnover Survey

James O’Connor (Bank of England) presented the April 2021 FXJSC Turnover Survey results. Relative to October 2020, there had been a rise in FX activity, reaching record highs in April up 16% over the last 6 months and 24% year on year. This rise was driven largely by increases in FX Swaps, which rose by 18% since October 2020, although turnover increased across all other products. Similar increases were seen in the US, Canada, Singapore and Tokyo, although one exception was Australia which saw a decrease in turnover over the last year.

There was an increase in trading of all major currency pairs. Trading in EUR/USD rose 17% from October 2020, to a record high, and both USD/CAD and USD/AUD saw particularly large increases in turnover, with USD/CAD reaching an all-time high, rising 47% since October. Turnover in sterling pairs was also high, if a little lower than the peaks seen in 2019. Turnover also increased across Emerging Market currencies, which was similarly driven by FX Swaps.

Since the previous turnover survey there has been an increase in both the number of trades and the average trade size, rising by 4% and 11.5% respectively since October 2020.

Item 5 – Digital Assets

Nicholas Butt and Bhavin Patel (Bank of England) presented on the Bank of England’s work on Central Bank Digital Currencies (CBDCs). Mr Patel explained that globally there had been an increase in exploration around CBDCs, noting that 86% of central banks are now engaging in some form of CBDC work, and the pandemic had accelerated the move away from cash to more electronic forms of payments.

Mr Patel gave members an overview of opportunities presented by CBDCs including: resilient payments; avoiding the risks of new forms of private money creation; supporting competition and innovation in payments; improving ability and usability of central bank money; addressing concerns of a decline in cash; and as a building block for better cross-border payments. Members discussed the issues around CBDC that may impact the FX market including impacts on accessibility for use by foreign residents or investors, core financial markets and asset prices, cross-border capital flows and exchange rates, FX pricing and margin and implications for settlement and liquidity management.

Mr Butt described how a platform model of CBDC could work, noting in such a model the Bank of England could would offer the core CBDC ledger and payment interface providers (PIPs) would provide the customer interface which would link to the ledger via an Application Programming Interface (API). Feedback on the 2020 CBDC discussion paper^{footnote [1]} published by the Bank of England was discussed as well as the 2021 discussion paper on new forms of digital money.^{footnote [2]}

In terms of next steps, a Bank-HMT Taskforce is coordinating a cross-authority exploration of UK CBDC, including close contact with relevant industries and experts.

Item 6 – CLS Update

John Hagon (CLS) highlighted that in relation to CLS Convergence, the migration of CLS Settlement to the new platform occurred in June and the new platform has been stable since.  While service continues to be strong, there have been a few external impacts to settlement and pay out recently, for which the underlying root cause has been a preference by clients to wait for technical recovery rather than invoke contingency and then subsequent problems with their execution of contingency remotely.

Eurex is currently not processing any live business through CLS. Mr Hagon highlighted that there had been a recent press release related to efforts on designing and rolling out an alternative PvP service for non-CLS currencies in collaboration with a number of global settlement members.

Item 7 – SWIFT Update

Joe Halberstadt (SWIFT) noted that two FX related change requests have been accepted for the country-vote as part of the SWIFT November 2022 standards release. This is a change to add the South Korean Financial Services Commission to field 22L as a reporting jurisdiction. The other is to add support to the MT 300, 304, 205 & 306 for non-deliverable trades in digital currencies. In view of the impact on the industry of migration of SWIFT payments to ISO20022 starting in November 2022, more substantial change requests were postponed.

Item 8 – FCA Regulatory update

Babatunde Carew (FCA) reminded members that the UK Wholesale Markets review consultation period is due to end of the 24 September. This review is led by HMT and was established to determine how the UK’s approach to regulating secondary markets needs to adapt following the UK withdrawal from the EU and ensure the framework caters for future change and opportunities. The FCA plans to release a statement later this year, and regulatory changes that will be informed by the consultation paper will be implemented as soon as parliamentary time allows and will happen alongside the Future Regulatory Framework Review.

Mr Carew noted that since 30 June additional rules have been implemented in relation to FX forwards and swaps. This was in the form of a joint policy statement by the PRA and FCA relating to margin requirements for non- centrally cleared derivatives.

Mr Carew drew member’s attention to the FCA restarting proactive supervision. With COVID uncertainty receding, and material progress being made to reduce risk from EU withdrawal and LIBOR transition, FCA supervisors have begun to restart high-priority pieces of work outside these areas and the FCA will shortly be restarting the suspended elements of the Delivering Effective Supervision framework.

Item 8 – Education & Outreach

i. Operational Manager’s Working Group (OMWG)

Juna Nashi (Citadel) provided an update on discussions at the recent Operational Manager’s Working Group (OMWG). The two main topics of interest included a return to office strategy and CLS. While many US banks and large financial institutions had been targeting September for return to office, some plans have been put on hold due to an acceleration of Covid cases in the US. In relation to CLS, the working group discussed that there could be more engagement and awareness for the buy side as the value proposition is attractive to firms. There was also discussion focused on payments, reducing settlement risk and an industry push to a more systematic way of managing FX settlement.

i. ECB OMG

Steve Forrest (UBS) provided members with an overview of the topics discussed by the European Central Bank (ECB) Operations Managers Group (OMG) meeting on 23 June. Mr Forrest noted the discussion included: an update from Northern Trust on custodial services; cryptocurrencies, distributed ledger technology and digital currencies; a discussion regarding Covid and back to work strategies; and the benefits of an increase in acceptance of digital signatures.

ii. GFXD Update

Mr Forrest provided an overview of topics discussed by the Global Financial Markets Association (GFMA) Global Foreign Exchange Division (GFXD) meeting in June. These included: a review of the Financial Stability Board (FSB) paper related to challenges with cross border payments^{footnote [3]}; how twenty-four hour settlement might evolve; topics of discussion for 2022; and a new working group looking to cover new technology, people, settlement risk reductions and standing settlement instructions.

Item 9 – Any Other Business

The FXJSC Secretariat thanked members for participating in the Committee’s annual contingency call test.

The FXJSC Secretariat conducted a survey to determine member appetite for a hybrid meeting in November.

Next FXJSC Meeting: 17 November 2021

Attendees

Adam Jukes – Deutsche Bank
Babatunde Carew – FCA
Boyd Winston – JP Morgan
Claire Forster-Lee – Morgan Stanley
Daniel Horgan – Citigroup
Gail Smith – RBC
Gavin Platman (Deputy Chair) – Insight Investment
James Kaye – HSBC
Joe Halberstadt – SWIFT
John Blythe (Chair) – Goldman Sachs
John Hagon – CLS
Kerry Peacock (Deputy Chair) – MUFG Bank
Sharon Chapman – Barclays
Steve Forrest – UBS
Terri Van Praagh – Northern Trust

FXJSC Secretariat

Alice Hobday – Bank of England
Devin Bennie – Bank of England
Lauren Rana – Bank of England
Jeremy Pitblado (Legal Secretariat) – Bank of England

Guest attendees

Bhavin Patel – Bank of England
James O’Connor – Bank of England
Nicholas Butt – Bank of England
Sharon Wallis – Bank of England

Apologies

Andrew Rogan – UK Finance
Matt Dukelow – Bank of England
Mike Irwin – XTX Markets