In response to what it says were concerns expressed by some respondents to a previous call for input on the issue, the UK’s Financial Conduct Authority (FCA) is to launch two market studies to gather more information and investigate access to data in wholesale markets.
The FCA says that limited competition in the markets for benchmarks and indices, credit ratings and trading data may increase costs for investors and affect investment choices. In response it plans to launch one study in the middle of 2022 which will will look into concerns that complex contracts for benchmarks and indices prevent switching to cheaper, better quality or more innovative alternative providers.
By the end of the year, the regulator says it will launch a second market study to assess whether high charges for access to credit ratings data is adding costs to investors and limiting new market entrants.
The FCA will also now begin gathering further information on competition in the market for wholesale trading data. Trading data include information on how many financial instruments are being traded, what people are prepared to pay for them and the price at which trades are executed. It says that concerns have been raised that limited competition may increase costs and have an impact on the types of assets that investment managers buy and sell. It adds that a lack of competition could affect the quality of wholesale data and mean increased costs for investors.
“Effective competition is central to ensuring markets work well and is at the heart of the FCA’s wholesale strategy,” the regulator says. “To identify potential issues in the markets it regulates, the FCA can use one of its deepest analytical tools – the market study – to look more closely into these markets.”
The Full FX View
While there is little doubt this initiative is going to mainly focus upon fixed income and equity markets, the foreign exchange industry is likely to feature in some shape or form. FX market participants have previously expressed concerns about the value of market data being delivered by the primary FX CLOBs, especially as volumes on those venues have declined.
Broadening the access to data for the FX industry will not be easy, however, because as has been shown with the failure of what originally the FastMatch Tape, and the lack of a genuine alternative since, this has to be a user-driven initiative – if alternatives are to be offered those wanting competition have to want to use them and see value in them.
If it is a difficult proposition in spot markets, it will probably be even harder in swaps and derivatives, where the information being shared is probably even more proprietary. Fragmentation of market data is probably not high on FX market participants’ wish lists for 2022.
The other area of interest could be benchmark fixes. While there are few complaints about the cost of the WM-managed fixes, that could be because those paying the fees don’t really bother themselves with such matters in a trade that is, to them, largely administrative. Throw in the willingness of come institutions (still) to offer benchmark fixes at “competitive” prices and there is a lack of momentum to study its use.
It will be interesting to see, however, if the FCA study raises the prospect of alternative mechanisms and methodologies, as currently exists with the advent of Raidne’s Siren Fix over a longer window. Sources say they latter is starting to garner increased attention from some funds, therefore it has to be considered a risk to WM that an FCA study into competition provides momentum for this growing interest.
“Access to wholesale data is really important for those who want to make investment decisions, without it, they lack the information they need to make properly informed choices.” says Sheldon Mills, executive director, consumers and competition at the FCA. “Our Call for Input and planned market studies are intended to ensure that competition is working well, that information is available to market participants that want it, and that innovation is keeping up with market developments.”
The European Commission has announced sanctions against five banks for their collusion in G10 spot FX markets.
The banks, Barclays, Credit Suisse, HSBC, RBS and UBS, have been fined a collective EUR 344 million for their actions, although UBS, which brought the activity to the attention of the EC, has been granted a 100% reduction under European Union leniency rules.
European commissioner Margrethe Vestager, who is in charge of competition policy for the region, says, “Today we complete oursixth cartel investigation in the financial sector since 2013 and conclude the third leg of our investigation into the foreign exchange spot trading market. Our cartel decisions to fine UBS, Barclays, RBS, HSBC and Credit Suisse send a clear message that the Commission remains committed to ensure a sound and competitive financial sector that is essential for investment and growth. Foreign exchange spot trading activities are one of the largest financial markets in the world. The collusive behaviour of the five banks undermined the integrity of the financial sector at the expense of the European economy and consumers.”
The Full FX View
Just in case anyone thought the chat room saga would go away, here it is again in the spotlight. For the FX industry the EC’s laboured investigation (it is more than eight years since authorities started investigating events) is inconvenient as it once more thrusts historical bad behaviour into the spotlight, but it needs to be remembered that these are historical acts that are now covered by the FX Global Code
Perhaps the interesting aspect of this is the stance of Credit Suisse which, almost alone amongst banks, has refused to admit guilt and co-operate (in the authorities’ sense of the word) with the investigations. Other banks that have co-operated have found themselves with little leeway when it comes to facing civil lawsuits and the fines have been topped up by compensation for clients.
In this case Credit Suisse may have missed a 50% reduction on a fine of EUR 83 million, but it is probably on much firmer ground when it comes to defending itself against civil actions – and the lack of an “easy win” may deter some plaintiffs from pursuing the bank when other institutions clearly offer a smoother path. It could be, by taking a bigger fine, the bank could end up better off in the long run – EUR 83 million could be a cheap cut?
The latest fines relate to activity in yet another chat room, this time Sterling Lads, where traders inappropriately shared information about client activity, orders, and spreads. UBS received a full immunity, thus avoided a EUR 94 million fine, while, Barclays, RBS and HSBC received partial reductions under EU Leniency Notices, meaning they were fined just over EUR 54 million, EUR 32 million and EUR 174 million respectively. Credit Suisse, which did not cooperate under leniency or settlement procedures (which effectively means admitting guilt) was fined just over EUR 83 million after a 4% discount was allowed due the bank “not being liable for all aspects of the case”.
Good news for the industry is that the EC says in its latest notice that these decisions “complete the wider Commission’s investigation”. Previously it has fined six banks for traders’ activity in a number of chatrooms.
The 2021 NAB Superannuation FX Hedging Survey finds Australian funds signalling their intention to further increase offshore investing levels, raising the spectre of increased currency risk.
The biennial survey, the 10th by NAB, captured responses from funds with over AUD 1.8 trillion in assets under management, a significant proportion of one of the world’s largest superannuation pools, which Deloitte’s predicts will rise to $4.7 trillion by 2030.
The survey finds that the internationalisation of Australian superannuation funds’ investment portfolios has accelerated, they now have on average 46.8% of their assets offshore, up from 41% in 2019 as they search for further diversification and attractive returns.
The trend looks set to continue, NAB finds, with 61% of funds saying they will increase the share of international assets in their portfolios in the next two years. In terms of the specific asset classes funds will target offshore, listed equities figures most prominently followed by unlisted infrastructure and listed property. Alternatives, unlisted property, fixed income, and listed infrastructure also rated mentions.
Overall, funds are hedging more of their international equity exposures than in 2019. Even so, NAB says despite the sharp fall that occurred in the AUD in early 2020, overall hedge ratios remain relatively low, which it believes reflects the long-held view that running long foreign currency exposure will act as a diversifier during major ‘risk off’ events.
At the same time, the trend by funds to view currency through the prism of a desired foreign currency target has continued, with 72% of respondents now looking at currency risk in this way rather than via a traditional hedge ratio. The average desired target is 21.5%, the survey finds. More funds want to view currency risk using the same lens as they view other asset allocation decisions, NAB says. Interestingly, it adds that more funds took advantage of the collapse in the AUD at the start of the pandemic, to increase their hedging ratios, suggesting a more opportunistic and proactive approach to currency hedging.
Emerging markets in general and China in particular, are frequently mentioned by funds as important investment destinations, yet there remains no consistent approach to hedging emerging markets exposure. More than half of funds (57%) do not hedge any of their EM exposure, despite increasing allocations to these markets, while of the 43% of those who do hedge at least some of their underlying exposure, close to three-quarters hedge 50% or less of their equity risk. In contrast, most funds with investments in EM fixed income operate with a relatively high currency hedge ratio – typically, 75-100%. Some funds also report still using developed market currencies as a proxy for their EM hedges.
The trend to giving investment teams more responsibility in making and implementing currency decisions continues, while investment committees and boards focus on strategic decisions and monitoring the performance and effectiveness of the investment strategy. Some 64% of funds said the investment team is most influential in FX decision making, followed by investment committee and then their asset consultant. While funds continue to review their currency hedging policy annually, currency exposure is being reviewed much more frequently than was the case in the 2019 survey. “We conclude from this that currency decisions have assumed more importance, as highlighted during the period of extreme currency volatility in 2020, as well as the increased focus of funds on target currency exposure,” NAB says.
An emerging theme in this year’s survey is the impact of regulation. Funds expect the Australian government’s new Your Future Your Super (YFYS) framework to lead to much greater scrutiny and ongoing monitoring of the impact currency risk is having on their performance relative to APRA’s performance metrics.
Currency risk is often cited as the second largest portfolio risk, after equities, in a multi-asset portfolio and NAB says small funds indicated they were more likely to keep currency exposures close to their Strategic Asset Allocation (SAA) to mitigate tracking error versus the APRA (Australian Prudential Regulatory Authority) benchmarks. Not unexpectedly, funds with strong past relative performance felt they had more scope to continue with their current approach to managing currency exposure, notwithstanding the increased focus on the APRA performance matrix.
In terms of expectations for Australian dollar performance over the next year, NAB says that no strong consensus emerged, however there was a slight bias to the upside. Ray Attrill, head of FX strategy at NAB, pointed out in presenting the results, however, that the survey was taken during a period when the AUD was at the lower end of recent ranges and looking cheap on a valuation basis. While FX forwards, particularly in the three month tenor, remain the most popular hedging method, NAB says the survey also highlighted increased interest in using NDFs and FX options.
The Full FX View
The interesting aspect in this survey is how it does not correlate with the semi-annual FX turnover surveys, particularly that one from the Reserve Bank of Australia. Recent years have seen FX volume in Australia flatline and they remain well below levels of a decade ago – yet funds are investing more offshore. This suggests that either the Australian banks are losing market share – and the trades are being booked in offshore centres – or they are waiting for more liquid markets in Europe before hedging.