The in-phrases at the AFME conference appeared to be ‘regulatory tsunami’ and ‘unforeseen consequences’; the meaning of former which was, perhaps inadvertently, illustrated by short presentations in the first session from representatives of the European Commission, HM Treasury and SIFMA (Securities Industry and Financial Markets Association). Comprehensive though the presentations were they did not of course offer any further information than already possessed by the majority of the audience - the actual legislation is of course still under discussion on both sides of the Atlantic – and ultimately merely reiterated the regulators intentions of increasing transparency, increasing investor protection and confidence and minimising the possibility of such a crisis re-occurring. Even the exhortation to market participants to enter into constructive dialogue with the regulators to help mould the legislation rang a little hollow: the eight-week public consultation period for the MiFID review had concluded the previous day.
The current lack of regulatory specificity appeared to dog most of the sessions. There was a general gloomy consensus that, however the legislation ends up, it will mean increases in the cost of capital and thereby the costs of trading – not least perhaps as a result of the renewed support in Brussels for a financial transactions tax. The day sombrely wound on to the final session which featured representatives from the buy-side and sell-side and FX and fixed income. It was Mike Bagguley, Barclays Capital’s global head of FX trading who made a comment which summed up the day for me: “...on the revenue side [the FX industry] faces a tough time that will extend for a longer period than most people will acknowledge. The cost base against that faces...an oncoming regulatory wave which I think will be very expensive. What we will spend at BarCap FX in the next three or four years to meet the criteria we have to in order to fully service our clients and to stay in the top-tier of FX is a staggering number which will be a bar to all but the top three or four participants in the market. For a gathering like this it’s a pretty interesting time for the business model...and I don’t think the room will need to be as big as this when we meet again.”
So the AFME conference came to its unhappy conclusion; quite how I found the fortitude to then attend the ACI function at the Guildhall is a mystery but I certainly wasn’t the only glutton for further punishment. But fortunately the ACI bash ended up being the highlight of the day.
The panel consisted of Alan Bozian CEO of CLS, Sharon Bowles MEP chairman of the European parliament’s Economic and Monetary Affairs committee, Thomas Soede global head of Fixed Income electronic markets at BNP Paribas and Gavin Wells, formerly global head of FX e-commerce at Citibank and now a financial markets consultant at LCH Clearnet.
Even though the panel included Bowles, at the centre of European regulatory development, the discussion was unsparing in forthrightness of its coverage. This tone was set by the introductory remarks of Stuart Fraser, chairman of the City of London Corporation’s policy and resources committee. Fraser stressed to need for policy responses to the crisis but questioned whether the FX market presented systemic risk saying that it neither caused nor participated in the financial crisis. Fraser warned that “anyone who believes we can have a ‘level playing-field’ on a global basis is living in cloud-cuckoo-land” but that it was his responsibility to ensure regulatory arbitrage is kept to a minimum and that London remains competitive. He also pointed out that “there are liquid, well-regulated, low-tax centres”, notably Singapore, that would be the recipients of London’s business should the European regulatory regime prove too onerous.
In the panel, “To what extent will the EU follow the US Treasury’s approach to any possible FX exemption to Dodd/Frank?”, Bowles stressed the regular dialogue between EU and US regulators and said that it wasn’t a question of either following the other but of regulatory co-ordination. To illustrate this Bowles declared that she had lately “spent far more time with [SEC chairman] Shapiro and [CFTC chairman] Gensler than with European regulators.” However, Bowles did not speculate on whether any exemption would be forthcoming. Wells and Soede responded to the question by wondering whether timetable for the decision in the US conferred it ‘first-mover disadvantage’, with the result that the EU had the free option of witnessing the early consequences of whatever decision is made by the US authorities.
In response to a question regarding the precise systemic risks posed by FX, Bozian had the opportunity to state that by far the greatest risk was settlement risk (credit risk being covered by CSAs – credit support annexes). Bozian did admit, however, that CLS was not yet the complete answer to FX settlement risk and that more could be done: the further expansion of the currencies covered, from the current 17, the coverage of same-day markets, and encouraging participation by those banks that do not yet have CLS access. In this regard Bowles mentioned that she had recently cautioned against the possibility that a focus by regulators on forcing FX to central clearing could deflect from efforts to increase CLS participation.
An interesting question, suggesting that the Asian-Pacific region was not fully engaged in the regulatory effort, produced mixed responses. Bowles admitted that there had been some initial western bias but that this has now been altered – Michel Barnier particularly was co-ordinating with regulators in that region. When the moderator shifted the emphasis somewhat asking whether regulatory discrepancies could really provoke meaningful relocation of FX trading eastwards the panel response was not as affirmative as has often been mooted – in fact Soede said believed that more rigorous regulation, despite associated costs might even, be seen positively by clients. But he might have been joking.