Meeting a man with his eye on the ball >>>
changing regulatory environment. FX Spot is out of scope for clearing, trade reporting and can still be transacted by voice or on a SDP so work is continuing on developing our internal and external capabilities. On FX Options we are working with several potential SEF providers to ensure we have connectivity to both stream liquidity and transact on these platforms as they are launched.
Post trade services is one specific area where many FX market participants are currently focusing their efforts to improve STP and reduce risk. What are the most urgent and critical post trade FX issues facing leading FX providers like HSBC as you take steps to overcome the various work-flow and technology hurdles associated with connectivity to clearing houses and trade repositories?
Connectivity is the first hurdle banks need to overcome, there is no consistent common format message being used between different CCPs and trade repositories, so internal code needs to be transformed in to various formats, complicating the connectivity challenge. FX is a global business but different jurisdictions are implementing aregional trade repositories. Te work flow to ensure trades are reported in the correct format in the correct location will be a challenge. HSBC is supportive of the Global FX Trade Repository run by DTCC and would hope in time this will be used to populate other regional repositories. Tere will be an increase in collateral requirements as firms will lose the offset between their cash and derivatives trades, with collateral on cash still being bilateral and on derivatives being with CCPs, this increase will be compounded by the need to post Initial Margin and post capital into default funds at CCPs. Clients will also need assistance in having a consolidated view of their entire portfolio, reporting to repositories and managing collateral between cleared and uncleared transactions and will need to partner with banks to facilitate this. As we build out our OTC Client Clearing offering, we are taking these client challenges into consideration to ensure we create solutions for them.
Do you believe that regulatory pressures will see FX evolving into a hybrid model with clients clearing some products like FX Options on a CCP and other products being cleared OTC?
Tere are currently hurdles to overcome mainly around liquidity in order
“..we have been investing heavily in the
trading side of the eFX business; both in terms of quantitative development to improve our pricing and risk management algorithms and, in terms of our underlying technology that supports those algorithms.”
to facilitate the clearing of physically settled FX, these will need to be resolved before FX Options can be cleared. Initially the industry will work towards ensuring the regulation can be adhered to. Tis will result in FX Options and NDFs being cleared and FX Spot, FX Forwards and FX Swaps being traded OTC (if the US Treasury exemption is granted). As explained earlier this will increase both buy-side and sell-side collateral requirements, there will inevitably be a push from the CCPs to clear unmandated products to increase revenues and this is likely to be supported especially by the buy-side as this will reduce collateral requirements and simplify work flow. Clients will also be looking at this as a cost - benefit analysis. Regulations will be very costly and clients will need to determine the added benefit of these regulations and determine if it is worth the added cost to voluntarily incorporate their OTC products.
Do you think the role of e-FX is changing and moving beyond the basic transactional process, perhaps
october 2011 e-FOREX | 73
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