The aim of regulators is to provide a more transparent and stable FX market structure, after the FX benchmark-rigging scandal, but more than three-quarters of respondents (77.8%) to an industry survey have said the biggest impact of the aggressive regulatory climate is increased cost of compliance, with just 5.6% indicating new rules have increased market stability.
That represents an embarrassing vote of no confidence in the regulatory agenda from albeit self-interested parties.
More than half (52.8%) said the regulations were a waste of time, slightly ahead of the 50% who said they had increased risk awareness (50%).
TradeTech FX is a conference dedicated to electronic FX trading in the US, hosted in Miami, surveying the heads of FX trading at dealer firms and US buy-side institutions.
Two-thirds of the respondents described regulation and compliance as one of the top three challenges they face in their primary trading medium – along with reporting and transparency as well as fragmented trading.
The survey shows concern about regulation is far more pressing than this year’s other issues, such as the lack of market volatility, sourcing liquidity, generating alpha and benchmarking, each of which received between 30% to 40% of the votes. Accurate risk analysis was a top concern for less than one-in-five respondents.
Last month, Citi, HSBC, JPMorgan, RBS and UBS were collectively fined £1.1 billion ($1.7 billion) from the UK’s Financial Conduct Authority for market abuse in the G10 spot FX trading businesses, and $1.4 billion by the US Commodity Futures Trading Commission (CFTC) for attempted manipulation of benchmark rates.
Meanwhile, Dodd-Frank introduced new clearing, margin and reporting requirements across FX products, and the industry is also waiting to see whether the CFTC will introduce mandatory clearing for non-deliverable forwards. What’s more, the European Market Infrastructure Regulation also imposes detailed reporting requirements, while Basel III imposes new capital charges that will affect FX transactions.
|Instead of changing what is traded, buy-side desks |
are more open to adapt their desks for how
they trade and ensuring compliance
More than four-fifths of respondents alluded to a state of inertia triggered by regulation, indicating they have not changed the FX products they trade specifically because of impending regulation.
“This shows that instead of changing what is traded, buy-side desks are more open to adapt their desks for how they trade and ensuring compliance,” states TradeTech FX.
Regulators might find the findings uncomfortable reading. Only a little over a quarter of respondents felt they had succeeded in what is one of their primary aims – improving transparency – and less than a quarter said they had helped streamline processes. Only a little over 11% said it had led to improved data, and less than 10% said it had reduced off-exchange trading – another stated aim of the new regime.
The importance of cost to financial institutions was underlined by the finding that 55.6% said cost effectiveness is the most important factor when selecting their broker.
And the squeeze on costs is also evident in how much market participants plan to spend on new systems: well over half indicated they will spend “up to $250,000” on new technology – the lowest amount possible among the available responses. Less than a quarter plan to spend more than $500,000.
More than half of respondents said they will invest in transaction cost analysis (TCA) systems in the next 12 months, making it the biggest growth area for new technology. Around 55% said TCA is the most important technology to improve FX execution.
However, the survey was no endorsement for the status quo. Three-quarters said there is no universal benchmark for FX trading, while nearly 70% do not believe that the WM/Reuters London close fixing rate is a good benchmark.
A little over half of those questioned also said they still prefer discretionary trading, despite the plethora of new electronic trading options available for FX. Nearly two-thirds indicated point-and-click remains their most common form of FX execution, with nearly 28% citing algorithmic execution and around 8% for voice.
The findings also highlighted a lingering sense of trepidation among market participants about the expected market conditions in 2015. Two-thirds of those surveyed said they expect the low volatility and reduced volume environment that has characterized much of 2014 to continue next year, with 44% saying the biggest implication of that being lower returns.
Around 30% of respondents said reduced volatility would push them into either new trading strategies or into new asset classes altogether.
The survey questioned FX professionals on the buy side, based in the US, including heads of trading, heads of FX and currency managers.