A SELLSIDE POINT OF VIEW.
Best Execution spoke to Richard Bibbey, Managing Director, Global Head of FX Cash Trading, and Richard Anthony, Managing Director, Global Head, FX eRisk and Liquidity Management at HSBC about the state of play in the FX markets.
Richard Bibbey, I read that almost eight years of your career was spent in Australia. Could you please tell me a bit about this experience, the differences in the region and any lessons learnt that you’ve brought over to the UK and Europe?
Richard Bibbey: Although I was based in Australia, I was running a regional business which in Asia generates a huge number of challenges because you had to service clients across multiple jurisdictions. Due to the disparate nature of the geography, there is no regional hub like London in the UK or New York in the US. Instead, there is Sydney as well as Hong Kong, Shanghai, Singapore and Tokyo.
As for lessons learnt, from an FX perspective, we were operating in 24 or 25 markets and it was important to be in constant communication with the other markets and kept abreast of all developments. Also, due to the diversity of the client base there was no ‘one size fits all’ solution and therefore you had to understand the nuances of the clients and make sure that your people could deliver solutions that fit their particular requirements.
In general, how do you think regulation has changed the industry and which rules have been the most important?
Richard Bibbey: At the moment, HSBC and other banks in the UK are involved in the Bank Reform Act which imposes a higher standard of conduct on UK banks and requires the ring-fencing of retail and wholesale banking activities. Dodd Frank and Volcker as well as MiFID II are also important. Sometimes these rules evolve and move fast; that’s why the strategy we have implemented is to have contingency plans and to plan for what we know at the time will happen. We need to ensure that we are ready for the likely eventualities versus having layers of contingency plans in place. One of the most important things to me is that we have the right technology and infrastructure for all cash transactions and the 30 currency algos that we trade.
Richard Anthony: One of our areas of focus is MiFID II where as a bank we have included spot FX. What this has meant is extending our data management systems to capture and analyse the data which is needed to be sent in a report to all our stakeholders.
How successful do you think the FX Global Code will be and what changes do you think the industry will have to make?
Richard Bibbey: I think the Global Code is absolutely the right way for the industry to go. The Foreign Exchange Working Group includes a large number of central bankers, currency managers and other market participants getting round the table to establish a single set of global principles of best practice for FX to operate in. It focuses on important areas such as governance, compliance and execution and encourages the creation of a forum where people can discuss and share information on best practice.
What impact do you think the move to electronic trading is having on the industry?
Richard Anthony: The industry has seen sizeable growth in electronic trading. In 2008, it accounted for around 50% of all trades and today it has grown to 70% to 80% (source: Greenwich Associates). In many ways it is like any other industry that has gone through automation in that it leads to greater efficiencies, and in this case this means distribution of the products and price generation. This is increasingly important in today’s low interest rate environment because it is difficult to generate returns and the improved efficiency is beneficial to our clients.
How has the use of algos developed?
Richard Anthony: The first generation of algos is now looking tired and today there are a number of different flavours including sophisticated algos that are more information and signal based. However, although algos are an important part of the product suite we do not see them overtaking our principal relationships. I don’t think moving to a pure agency model would be in the best interests of our clients because liquidity is not present throughout the day in every instrument. Clients want a greater understanding around their liquidity profiles and the best times to execute orders.
Richard Bibbey: To Richard’s point, principal stands comfortably alongside agency trading. The technology provides greater efficiency but also flexibility which means that we can offer clients a greater degree of choice. I also think that there is a misapprehension that electronification takes away jobs. In fact, the greater efficiency means that people can spend more time speaking to clients, better understanding their needs and creating bespoke solutions.
How has HSBC tightened risk management practices in light of regulation and trading conditions?
Richard Bibbey: Clearly in the Dodd Frank and Volcker world, the approach to risk is different. However, HSBC has put a strong emphasis on its risk management framework and what we have done is repurpose it for the regulatory environment. The knock-on effect though is that big businesses like ourselves have the scope and scale to invest not only for our regulatory responsibilities but also to enhance the business. The result is we are well placed to service clients as we have the access to investment dollars to do both.
The impact of politics on all markets has been pronounced over the past two years. What effect has that had on FX markets?
Richard Bibbey: Obviously politics has become much more important over the last couple of years. Historically, the polls were accurate but today they are more erratic and the chance of an outside surprise has become the new norm. There are also a number of events coming up over the next 12 month such as the French and German elections and these events will be watched closely as they are likely to have an impact on financial markets.
What are your key challenges in the year ahead?
Richard Bibbey: I think there are three big themes – the first one being how the US and China relationship will play out, while the second is whether Trump’s economic policy will deliver growth and a reflation of the yield curve. There is also the uncertainty of what will happen in Europe over the next few years and whether Brexit will be an isolated event or a prediction of things to come.
For HSBC, we have to make sure that we are on top of everything going on in the world but we have an advantage that we are a global bank with local knowledge. This is an extremely valuable currency in today’s uncertain world.