Transcript of Speech and Question & Answer Session Panel participation by Guy Debelle, Assistant Governor (Financial Markets), at the Forex Network
Mr Debelle
So what I might do is just give an assessment of where I see things that are at on the benchmark front prior to a bit of an assessment to the FSB a couple of months ago. So the recommendations of the report that Paul Fisher and I put together along with the rest of the group last year basically were in four categories; firstly around benchmark methodology, secondly around the execution infrastructure, thirdly around market conduct and then fourthly some stuff around central bank benchmark rates.
Let me talk a bit about where we are in terms of the benchmark methodology. So the main – well first main recommendation was the WM widen the window, and as you all know on the 16th of February they have widened the window for the major currency purse from one minute to five minutes. So we've now had basically two months under that new regime we've had one quarter end and I suppose my impression and that which is confirmed by talking to a number of participates is that so far that all seems to be going all right. The shift of the wider window you know I think has spread roughly the same flow over a longer period of time. I don't think we've seen too much flow either leave the fixing window or additional flow come into it, so I think it's still basically the same flow over a longer period of time.
At the same time we also suggested that WM or recommended that WM incorporates some more feeds into the fixed calculation, they have done that, they've started to utilise some more particularly using both Reuters and EBS, they're looking at broadening that out to other feeds in the fairly near future provided those feeds are of appropriate quality.
Third recommendation which a number of people are interested in was that they form a user group, they are in the process of doing that, they assure me they're reasonably well advanced in that and it will be from both the buy side and the sell side and I would hope that that is up and running fairly shortly particularly advising around things like incorporating more data feeds, so hopefully we'll see some movement on that from them fairly shortly.
On the execution infrastructure I suppose the ones which receive the most attention are that people actually charge for the fix, in a transparent manner and one which is consistent with the risk borne. Progress on that is I think now as of today from the main participants most of them if not all are actually charging in one form or another, there are I would say basically three different ways that people are charging, they're either using WM bearded offer, they're charging a fixed fee based on the risk transfer they assess they bear during the window with sort of numbers around $50 bucks a million or so being sort of standard fee which is out there, and the third method is basically what I would call rent and algo which is connects – keep your own business through the fix by using a bank's algo which they will rent out for you for that purpose. So all three of those offerings are out there a number of banks are offering all three.
I'd say most of the larger participants in the market are charging at least as of the beginning of April, there are a bit further down the scale the implementation of that has been a bit mixed, but I think we're getting a general move towards that and general industry acceptance of that I think. The other recommendation we made around that was that people should separate their fixed business from the rest of their business, not necessarily actually physically ie put people in a different room, but at least electronically. And there has been a reasonable amount of progress on this you know alongside as people have started charging for that, the main principle we want to get across there was the separation or segregation of information flows as I said, not that you can do that physically you can do that electronically.
The third area we make recommendations around was around market conduct, we had a decent amount of stuff on that as most of you should be aware at the meeting of the global FXCs in Tokyo last month, after that we published the share to global principles which articulated a lot more – lot more detail around appropriate conduct in the market. Also coming out of that so we've got that out there, also coming out of that we said there are two pieces of work which we are looking – which the global FXCs are going to be working on over the next 12 months, one is around getting greater harmonisation of the various codes that apply in each of the eight markets, the second which I'm responsible for is getting better adherence to the codes, so rather than you know the codes are all very nice and look good on paper but how are we going to actually get the market to demonstrate greater adherence to that you know in part to address the concerns which are out there around conduct and also to provide assurance to the counter parties. So that's work in progress which the FXCs are going to do a fair amount of work on, me in particular over the next – next 12 months.
So I suppose that's – finally let me just say the other thing that the FXCs are doing over the next couple of months is rather than us make an assessment based on me ringing a bunch of people in the market what we're actually going to do is get each of the foreign exchange committees to get their members to provide a more formal assessment of where they're at in terms of meeting those recommendations both around the charging, but particularly around the market conduct side of things. So that process has just got under, the idea is to make – have assessment of the state of play as of the end of – middle of the year as at the end of June, pull that together over sort of July/August and feed that back to the FSB sometime a bit later in the year.
Yeah so maybe let me finish there by way of introduction.
Question & Answer Session
Moderator
Sure okay, just one question on that are you a little bit concerned that without systematising the process there will be peripheral banks getting around these recommendations by not charging?
Mr Debelle
Yeah there is some concern around that. There are also a couple of practicalities which have come to life which we probably need to provide a bit more guidance around, so one is what happens on some of the second smaller currency pairs where particularly around the separation if you're the only person in the market and there's only one of you it's somewhat difficult to separate yourself into two in terms of – and then also so and then getting it across to people that actually particularly around the charging we expect that to be an industry that's not just for the big guys, it's not just for the 4pm it's actually around benchmark rates generally across all markets. We are seeing that being applied across all markets but not universally and it's to get a better assessment of the state of play there.
Moderator
Guy are you concerned or are you observing with the wider window opportunities for gaming? Because obviously there's a lot of people with technology out there trying to sort of get a feel for this new regime, do you think it's still early days or do you think we've sort of solved the problem?
Mr Debelle
Oh I wouldn't claim we've necessarily solved the problem but it may take – I think it might take a while for people to adapt to the new regime and to exploit it, but I mean my assessment which is confirmed again by talking to some people in the market is that actually you know five minutes is a longer time than one minute and actually trying to hold the market away or you know it's just a longer risk period and if you've got a strategy which is trying to exploit its just harder to do over five than it is over one minute, now that doesn't mean that we have a more experienced - - -
Moderator
I'd say - - -
Mr Debelle
- - - but I don't see it yet.
Moderator
One of the sort of issues out there and I don't think, correct me if I'm wrong Guy, but I don't think the recommendations dealt with it, but it's actually prefix netting. Now I know the FCA referred to it saying prefix netting in the appropriate environment is okay, do you sort of see that as being one of the next evolutions of how we fix getting that utility together?
Male
No the netting of all the participants in the market into a central exchange would clearly, clearly alleviate much of the pressure if they're all in opposite directions but everyone is – since everyone is doing the same index and everyone is in the same direction that's going to be very, very difficult to do. I think even – even with the best intentions with a centralised market we have large flows in the same direction.
Moderator
Guy from your perspective, I mean is this something that you feel is just going to take time?
Mr Debelle
I mean Mark mentioned it earlier and actually like Darryl Hooker. I've just come from Australian FX meeting a couple of hours ago and we were talking about this. I mean I think there is still capacity for a market wide meeting utility out there and yes there are issues around how you handle the net, but I still think there are potential gains to be had from that and it's certainly, you know there are problems but I think people can eventually get work through them. I think there are some potential gains which are still there to be had, then I think it's certainly worthy of further exploration I'm not sure it will necessarily get there but I think it's still worth further consideration.
Moderator
Guy from your perspective I mean this is clearly an ongoing work, do you sort of see last year's recommendations as a starting point on the journey? I mean might prefer there's no silver bullets, was it Mark or was it Jim, Mark referred to it as no silver bullets. I mean so do you see this as being very much a sort of work in progress?
Mr Debelle
I mean as I said on the utility I think there is more – potentially more progress. I mean coming back to a couple of points you made Colin I mean there is already that imbalance going through the market currently, actually if you try and net that down actually you're going to be reducing what is there currently. So it's not likely going to, you know, it's there it's a problem actually the market has to deal with even in its current configuration and if there's scope to net that down then arguably you're reducing it, I think as someone just said a minute ago it's a question of what risk someone's willing to absorb that and then how do you appropriately price that back to those who are generating that blow? But yeah so I think on that one at least it's a starting point and just as and I mean on the other one which I think is a work in progress very much around the conduct stuff, I mean on the charging side of things and I mean and it's also you know five is not necessarily the right answer for the window. I mean we said wider than one, five is wider than one so that's fine, but you know five is not necessarily the magic number. I mean I think you know you Colin came up with 10 was the magic number, so you know that potentially is still a work in progress but at least I think we've moved to a better spot it doesn't mean we've necessarily moved to the best spot.
Moderator
Yeah and to pick up one of your points earlier the likelihood is are we saying that certain currency pairs may get a shorter or longer window going forward?
Mr Debelle
Ah yeah I'm not sure about the shorter longer yeah I think potentially for some of the less liquid ones. I mean you know on some, you know if there's one trade every fortnight you know that may be the length of the window right.
Moderator
With these changes then to the fix, are we – do we think, I, maybe I'll start with you Guy do you think that these changes are likely to drive more volume. I was interested when you said you've seen little change observable change, in terms of the number of people using the fix and the flow going through, do you think it will continue that way?
Mr Debelle
Um, not sure I mean there's two competing forces here, there's one – I mean you're now getting charged for executing at the fix, so if you don't have to do it then the fact that you are paying for that may mean you want to go to another time of day, but working against that the fix is still the most – well if you define liquidity in terms of volume, which may not be the right way to do it, but if you do then it's still by far and away the largest volume window through the day. So I think those forces are working in both directions and it's not entirely clear to me which way they go.
Moderator
Okay we've actually got a question from the floor so fire away.
Question
Guy it's David Clark here from ACR and WMBA. That last topic I think really pushes the discussion forward, but could I ask you a question on benchmark regulation and one the potential impacts, because you've been looking at this very closely across a number of asset classes, we've now got designated critical benchmarks in the UK, this means that the benchmarks will be regulated in a much more formal sense and you're also aware from the other FSB work done through the IBORS that this is certainly posing huge risks – regulatory risks to the participants, many of whom frankly just don't want to take part if they're exposed to that regulatory risk. And I think there are two questions I'd like to ask if you've considered in the work that you've been doing for the FSB on this. One is in FX in particular, but across the piece with the asset classes is there a danger to liquidity because of let us say very enthusiastic formal benchmark regulation? And aligned with that something which was touched on in your report but perhaps we're seeing much more closely when we look at benchmark regulation and that is what's the benchmark for? Who are the beneficiaries? Who uses them? And who does it cost? Is that something that may be best left to the private sector or is it something which as a central banker an FSB members concerns you?
Moderator
Guy do you think these sort of these end users of the fixes as Simon has just referred to there, need time? Do you think they could do with a gentle poke with the end of one's boot to keep the momentum going? Because it strikes me, and Simon you can answer this as well, but it strikes me that if they can take five, 10 years to say they need to adapt to this they will take it.
Male
I didn't say five, 10 years.
Moderator
No, no no.
Male
No I think 12 months, or six to 12 months I think would be helpful for the buyers and this is sort of in my conversation on the buyer side it sounds like this is sort of the time frame they need and what they're looking for.
Moderator
Guy?
Mr Debelle
Well I mean I think, so having to pay for something tends to focus the mind a little I think rather than getting it for free. And so they are paying for it now, but then it takes, a number – someone mentioned this earlier, there are a lot of mandates which just say you have to execute at the fix and it takes a hell of a long time to change mandates, that is actually a five to 10 year process to go back upstream to do that. But in the meantime I mean you know they are actually paying for it and so I think that does at least set that – that thought process in train doesn't necessarily mean they're going to change their mind. So you know so I do think the period of adaption potentially is quite long but I think what our job was basically trying to do was at least put in place a market structure that was more robust. It will continue to evolve over time but at least move it to a place as quickly as possible where it at least makes a bit more robust.
Moderator
Yeah what needs to be done then do you think to maintain the momentum of change? What can we do as an industry?
Mr Debelle
Well I mean as I said right at the beginning we need the FXCs which is both central banks and market – and the market participates are working on a number of things particularly – I mean around the conduct stuff but also you know there's not a sort of once off process will do this and then it's done we'll be sort of seeing how it goes and if it's not working we'll have to think about doing something else or making further changes. But there are some stuff, particularly on the conduct stuff which is one aspect of this there is you know there is more plenty more to be done and there is say some momentum of change there. We were talking about the utility earlier I think that's something where there is still there is momentum there are a number of people Mark and his outfit are certainly one of them who are very – quite keen on that proposition but they're not the only ones. So you know I think in a number of these aspects there are – there is change. The other thing which I mentioned earlier after some of the points around transparency and the like is that if WM starts having more interaction with market participants you know there is more potential to drive appropriate market driven change there as well.
Moderator
Just to close out Guy how happy are you with the progress you think the industry's made?
Mr Debelle
Um, I mean I think it's pretty reasonable now. I mean you know we put out the report in September and so we're only just six months down the track and I think there's been reasonable change and so you know the window's changed, the charging has started, is it universal? No it's not. Is it reasonably wide spread? I would say yeah it's reasonably so. So you know I think as these things go it's reasonable I would say it's you know there's more to be done but so far I think it's off to an okay start.
Moderator
Okay well I'm not going to draw any conclusions between Sydney having such wild weather and poor connectivity and Darryl Hooker being there. I'll leave you to do that. Guy thank you very much for sort of breaking into your evening for us. Jim, Mark, Simon, equally thank you, please join me in thanking our panel.