Transcript of Question & Answer Session Fireside chat at ACI Australia Conference

Guy is here in the capacity as Chair of the Global Foreign Exchange Committee. Guy, what I'd like to talk about really is, I guess, the results of the recent three-year review, which are getting further in the rear-view mirror, I have to say. And I guess there won't be any surprises for you to know that I want to talk about Last Look and the changes.

Yeah.

So, what do you think were the key changes, and were you surprised by the reception you got?

No, I wasn't surprised by the reception I got, and there was a reasonable amount of reception because we'd had a pretty robust debate in landing on what we landed on for the paper that we put out on Last Look. So no, I wasn't surprised by that. What we aimed to do was to provide more clarity around what we were intending with the principle on Last Look, and also what we were not intending, to some extent, and so really what Last Look is to be used for. As I said a few months ago, we didn't go down the route necessarily of saying what Last Look wasn't going to be used for, for a couple of reasons. One is it's actually hard to define, but secondly then, if anything we leave off then, people can see that as a safe harbour and decide if you didn't say that that's not one of the things you can use it for, then it must be okay. So we didn't go down that route.

But really, it was to emphasise the point that it's there for credit and price validity and nothing else, and you are to get on with it straight away having received the order, not get around to it when you feel like it.

It's interesting to me when you mention the fact that there are people there that may, should we say, get in the room immediately you say what it is to be used for and try and find a way to look for that safe harbour. Because it strikes me … I mean, people I'm talking to were still saying to me afterwards, ‘Oh, that's just in the guidance paper, that's not in the Code’. This guidance paper but is meant to be effectively …

It sits alongside the Code as does the one on Pre-Hedging. And we also said, when we put this out, that when we see how this goes over the next year or so, then if we need – this is purely on my successor and not on me, if we need to revisit it, because I've had enough of this – if we need to revisit this, then we will. But before I possibly steal your next question, the other thing, though, I think I would point to is what the FCA put out on Monday.

Yes.

If I've got the dates right. So the FCA re-endorsed, I suppose, the Code in its entirety, but particularly added in their press release some specific wording around Last Look, mostly – a little bit on Pre-Hedging, but specifically on Last Look. And they talked specifically about additional hold time and not being a thing.

It was interesting to me that they also … And I'd be interested in your take on it, because I looked at it and they mentioned the senior manager's certification ratio in the UK, which effectively means that somebody is responsible, and the company has to nominate that person. So somebody in each firm will now be responsible for what is termed non-adherence to the Code, including AHT. Did you read that or do you think it was a more generic statement about the SMC?

Well, I think if someone in each firm will be … I mean, not adhering to the Code will put you in the firing line of the senior manager's regime, generally.

Yeah.

But from the FCA's point of view, that I suppose is a focus area.

I mean, they've had, as probably most people in this room know, they've had concerns around Last Look for a while, but that was the most explicit articulation of it earlier this week.

Do you think it's a game changer, the FCA statement? Because there are people with their head in the sand, as we've seen.

I mean, it shouldn't be, but it is, in the sense that in my mind, I don't think they said anything different to what I said earlier, which I didn't think was anything different to what we wrote in the guidance paper. But apparently, I've heard by you and directly from others that they did, that those things were different, but I don't think they are. But to the extent you had any doubt, I would've thought such doubt should have been put to bed.

Do you expect to see more regulators look at the Code now? Now that you've had this first review, this three-year review, do you actually expect more regulators to start using it as a guide?

Well, I mean, for people in this room who are probably all pretty well aware, ASIC does. So from the Australian point of view, that's sort of … And we've talked …

Does ASIC need to renew its approach the way the FCA did?

I'm going to defer to my colleagues at ASIC about how … and definitely don't quote me on this … I'm not sure I'll get it exactly right the way they state it. But it's the guide they use in their surveillance of the FX market. And we, Matt and I, talked to ASIC. They had some comments on the draft version of the Code, so we had some input from them. So they're fully across what's there. We did talk about Last Look with them as well. So they're certainly on board of it.

But more generally, I mean, if I look around other jurisdictions, obviously the FCA takes care of one very large jurisdiction or one very large FX market, at least. The Chinese actually have the Code in legislation, so

that's a level even higher than anyone else.

Yes.

But then our counterparts in Malaysia and … Oh sorry, in Singapore and Hong Kong. Because in both those, the market regulation sits inside, certainly in Singapore at least, inside the MAS then, and the MAS is a very active member of the GFXC. So they use it in a way at least as stringently as ASIC does. So, there's a decent number of markets around the world where it's already utilised by the regulators. I mean one notable exception, but …

I think we're both in the same country at the moment.

As I've said, we talked to ASIC, obviously the Bank of England had conversations with the FCA, but we also talked to ESMA about it. I suppose a number of people in this room know … I mean, ESMA, EU whatever are looking at whether … FX has got this carve out of their market abuse regime. And so that's an open question still before the, I think technically, the European parliament as to whether … But anyway, in the context of them thinking about that, we had quite a long discussion with them about mostly, actually, Last Look and Pre-Hedging, and particularly Pre-Hedging actually, in their case.

All things that people told me a year ago had gone away.

Yeah.

With the Pre-Hedging piece, I mean, obviously you put out a guidance paper on that as well. Has that generally been accepted? And just as we are talking about how the Last Look still has some deniers, does the Pre-Hedging paper now sit comfortably alongside the Code and everyone's accepted it?

Yeah, I think the challenge of Pre-Hedging I think is it's just hard to describe effectively. And I think, so Harri Vikstedt, who did a lot of the work on that, I think has done a pretty reasonable job. But I think the challenge is just describing it in a way which is effective. I think he did a reasonable job, and I think Harri would … Is there stuff that we potentially can be revisited there going forward? If there's feedback that there needs to be, then yeah, potentially, I think so.

All I'm hearing is a lot of clicks as the pin's pulled out of the hand grenade for your successor.

Well, I mean, yeah.

It could be quite busy.

Yeah, but I think you've got to leave a bit of time for this to settle. I mean, the one thing that we will do, or my successor will do with the rest of the GFXC is, and the Bank of England on two things. One on the disclosures, which are now out there. Then we'll follow up in a year or so, I suppose, on how many are actually up there, for starters, and then what the content is of them. I mean, we put them out there and there was … I'll just back up in terms of … we did a trial run. We road tested them with some large market participants on both sides, sell side and buy side, to make sure they made some sense before we put them out there, so that it wasn't just suck it and see. But that said, it doesn't mean we necessarily landed everything first time and they can evolve through time, depending on what the information that people actually feel is useful and how effective the sheets as they stand currently are in conveying that.

But we will certainly look at what's out there in a year or so time. I mean the Bank of England did a bunch of work leading into this, which Andrew Hauser picked up in a speech a little while back, where the Bank, they just looked at the disclosures that they got from their counterparts in terms of how useful they were, which was not very. And then said, well, what would be more useful for us as a market participant, and that's sort of where that came. So there will definitely be a follow up in terms of how widely they're used and how effectively they're used. But then on Last Look specifically, I think that will be something for my successor to have a look at in just where that sits in the market in a year or so time.

With the disclosures then, I mean, a couple of years ago you pointed out that too many disclosures were like a caveat emptor.

Yeah.

Which, brilliantly, I had to explain …

It certainly would've been much easier if they had just said caveat emptor.

It would've been much quicker to read rather than 100 or so pages of notes.

Yes, exactly, which basically said the same thing. Do you think, now that with the increased emphasis from the GFXC on disclosures, that that approach will be negated? Or do you still expect people to have to read them very closely, so they're not caveat emptors?

I think you still have to read them to see what you are actually … Because in the end they govern the client interaction.

Have you given people enough pause for thought, those that might be considering using them?

I mean, the point of the templates is at the higher level, you can do a complete, in principle, at least, you should be able to do a quick compare and contrast across different liquidity providers on some important parameters. So, I mean, they're cover sheets. They're not the full disclosure themselves, but they lift up some of the important information so that you can access that easily and do that quick comparison across different providers. That's the main point of them. The detailed documentation still sits behind them.

Yeah. So it's a question of making sure the detailed documentation doesn't say everything we say in that cover sheet can be changed at the moment's notice?

Well yeah, that's probably one thing to have a look for, but …

Yeah. More lawyers. Oh, deep joy.

But to pick up on one thing which is a point you emphasise a lot though, is there is also an obligation on the user to follow through on the information that's provided. I mean, it's all very well for us to put the information out there to the liquidity providers. But the information needs to be used once it's out there.

Yeah. And I guess that's quite an important thing, isn't it? Because I've always been quite big on the whole issue of responsibility across the spectrum. Do you believe that the new iteration of the Code will actually bring the buy side responsibility into line with sell side? Because the issue of proportionality still sometimes gets a few mystified looks, doesn't it?

Yeah. I mean, I still think that this goes all the way back, as you know, to the work we did on benchmarks all those years ago. That you have a fiduciary duty to understand what you're actually doing in the market, and so I always find it odd that you can deflect that. So, in that sense, I don't think it's changed.

But I realise that it's fallen short for a long time. I think it's got a lot better.

I think people have an understanding, and I'd say including here actually, partly because of the role FX plays in a lot of asset managers' portfolios here that they recognise it's important. So I do think there's a lot more attention paid to it. And as people bring more expertise is in house and stuff as well, that makes a difference I think, so people know what they're looking for.

Well certainly if you look at that NAB Superannuation Survey with the amount of assets going offshore, investments going offshore, would suggest that maybe the buy side should be paying more attention to this. Do you feel as though there's an even rollout on the buy side, or is it still like three or four countries that are really sort of leading the way in terms of local buy side getting involved?

No, I don't think that's right. I look at it more in terms of size of institution. So Vanguard is on the New York FX Committee, so it's not on ours, but Vanguard operates in Australia and operates in every country. So if you look at it by the size of large asset managers around the world actually, the coverage is actually reasonable and has grown. So, that's probably the lens I'd look at it through, rather than number of buy side participants in each country. There are still some large ones who I think it would be good to have a little more engaged, but I think it's actually moved in a pretty positive direction.

It's quite an interesting one, isn't it, because obviously one of the recommendations from the three-year review is that for instance, trading platforms actually identify signatories to the Code. I guess this might be something going forward, it'd be quite interesting to work out exactly how much of the average daily volume is executed by signatories to the Code, to give us a broader picture.

Well, we know what it is on one side of the market because the coverage on the sell side and whatever Chris calls himself, non-bank liquidity providers.

A farmer.

Yeah. Yes, true. But the coverage in that part of the market is near enough, very, very large. So that's okay. And then, I mean, again, going back to something … Andrew Hauser went through the large buy side institutions a little while back and looked at who had signed up to the Code. And then if you look at that list today, a number of those have subsequently.

So if you use that as the metric, and then given what we're talking about, then that's covering pretty decent chunk of the market.

Another big theme on the three-year review and the latest iteration of the Code is settlement risk. Now this was raised by the BIS in the triennial survey in 2019, which I think actually caught a few people out who weren't quite expecting it to come. The GFC has picked up the mantle and you've put out a lot of recommendations around changing settlement risk. Do you feel as though that issue in particular has now been updated and put to bed?

I don't think it's been put to bed because there's still change happening in that space and the Basel community, the CPMI, which is the sort of market infrastructure one, is carrying on work on settlement risk and looking at what can be done to mitigate some of that, including looking at opportunities across time zones, more netting within time zones. I mean, CLS is obviously doing stuff in that space and we are seeing a few more new providers coming into that space. So I wouldn't say it's been put to bed, I think what it's done is highlighted … When we first put out the Code, it was sort of, I suspect not many people in the front office read that bit. Or didn't think about it that much. But actually I think it's raised that issue again. I mean, I think we've also seen with issues in Turkey in particular, that it's a … if you're in that market, it's a real thing with pretty material consequence. So you need to understand what sort of risk you're running.

The one thing, and a couple of things which came out of that is … So now in our six monthly FX turnover surveys, which all the various local FX committees are running – I think from this April actually, which aligns with the new BIS triennial – we're collecting data on a six monthly basis on settlement. Same way as you do it, so a number of people in the room here provide us with that data. So come next year, we'll have that on a higher frequency basis. Same way as it's done in the BIS triennial, so it's not duplicating what people need to provide, just doing it a little more regularly.

The other thing, which hasn't quite landed, but CLS has done a fair bit of work with two of the largest liquidity providers around and looked at their books and looked at the settlement issues around what was going on with their books. And because one of the issues is how much of it was internalisation, how much of it is intra-bank stuff. And the answer to which is, the second one, is actually for at least some of the large banks, a reasonable amount, in which case there's no risk, or, sorry …

Minimal.

Well, I'd say it's more operational risk. So I mean, Lehman's does show that actually it's not a … When Lehman's fell apart, I mean, FX settlement actually went pretty well, all things considered. But then some of the intra stuff, it was a question of – I think it was more from a bankruptcy point of view – which jurisdiction is this actually in, is still a thing. So if you're a global bank, then that intra bank business is still potentially a thing. As I said, I'm not sure you'd call that settlement risk, it's probably more a liquidation risk.

But anyway, it's trying to get a hand … Those BIS numbers just took … The analysis just took the numbers at face value and said, well, this is a big number, which it was.

And the question is, well, how much of this is actual risk, and how much of it is stuff that we are less worried about? And so CLS is I think coming out pretty shortly with the results of that to give a sense of what that might be. And that's one of the things I think when the next triennial stuff goes out very shortly, actually, that we'll get a bit of a better handle on.

Is there an underlying theme with this settlement risk, though, that maybe what we are looking at is post trade in spite of a few people's efforts is never going to be sexy, and when it comes to technology budgets, people are reluctant to spend there. I mean, are we effectively saying on the settlement risk, the industry can do better with its technology?

But that's why I think you mean there are a lot more offerings coming in that space. So responding to that need, I know there's at least two or three more around. I mean, some of the stuff is irreducible – well, at least given current technology – because of time zones, market conventions in different markets. So it's a risk you've just got to live with, but some of it can be addressed by technology.

But I mean, it's the same with TCA. What do you do? The trade doesn't stop the minute you say done.

Maybe from the front office it does, but from the institution point of view, it doesn't.

Back in the day, should be write the ticket out right, yeah.

So I think people are recognising that there's value there, and hence you're seeing more offerings coming in that space.

So what do you think will be the big issues for the next three-year review, if you can get your crystal ball out?

Well actually I just did a bunch of interviews for the Vice Chair position as my last act as Chair, and so we asked that question. And besides the ones we've already talked about, the big one seems to be crypto, which I don't quite … I'm still not sure. So crypto, if you want to call it, is an asset class. I don't know if it's just because all FX traders want to trade crypto as well, but it's not obvious to me it's necessarily … Commodities is part of the FICC landscape, you don't bundle that in with FX, and so it's not clear to me whether it needs to be. But that was the answer which kept on coming up.

And I mean, the other thing, and I don't know that it'll be over the timeframe of the next two or three years, but coming back to settlement. I mean, one of the issues there which we're looking at as an institution obviously, is around cross-border settlement and central bank digital currencies and the ability of them to settle across borders or across our payments platform to interact with the Singaporeans, and we are actually doing some work with them on that. I'm not sure if that's moving, whether … I wouldn't see resolution of that in that sort of timeframe, but that's coming in too.

It's an interesting one, isn't it? Because I think a lot of the stuff that's happening in crypto does kind of reflect the FX market structure

in those ways. And the FICC market Standards Board in London put out a paper on commodities to make market structure change, which looked remarkably like the FX market with a clob, just with the addition of clearing. So I guess the crypto piece, and this can be a great advert for our next panel, the crypto piece dominates. Do you think that you've actually put issues like Last Look to bed, and Pre-Hedging? If we could be optimistic.

I would think that what's out there on Last Look is pretty clear, and now reinforced by the FCA. So I think so. Whether that means that actually the text in the principle could do with some refinement in light of that, I don't know. But at least, I would hope the understanding of it has been put to bed. I mean, Pre-Hedging, I still think is difficult. I think it's fundamentally difficult, actually. So that's why I don't think I'd claim it's being put to bed, because I'm not sure it can be. How much more clarity can be provided is not obvious to me.

You feel at some stage it might need some legal reinforcement?

Well, yeah, but – without, preventing myself from entering the US anytime in the foreseeable future – some of the legal reinforcement I don't think has been overly constructive, just put it that way.

We can agree on that.

So yes, but as long as it's done in a sensible way.

Okay. So you have, I think one week left, or just over one week left as GFXC chair. Is that door slamming? The foreign exchange market can hear you saying, ‘thank you very much, done that bit, please leave me alone’. Or are you going to actually …

I would say I've done that twice, actually. Or possibly if they want to be generous, even three times

if you throw in the benchmark stuff.

So back to the day job.

Well, yeah. But having invested a reasonable amount of time and effort into it, I'm not going to stop paying attention to it. I'll still keep … I'll rely on the full FX to provide me with what I need to know.

With what might be termed a one eyed view of the [unclear 00:27:21].

That's right.

Well, all I can say is thank you very much for your efforts with the Global Code, because I think it has bought … The market was, from my perspective, the market was in danger of jamming up due to all the issues that were raised, and the Code has really helped that. So, thank you for that. And good luck as you don't have to talk to the FX industry every time someone wants to talk about conduct.

Please thank Guy.