Apr 23, 2012 - Some banks had plans to partially activate their disaster recovery sites in the UK, others with European
FOREIGN EXCHANGE JOINT STANDING COMMITTEE CHIEF DEALERS rd
Monday 23 April 2012 @ 12pm BNP Paribas, 10 Harewood Avenue, London, NW1 6AA
SHORT MINUTES
1.
Apologies for absence from Richard Usher. Since the last meeting Roger (RBS) has stepped
down and Gus has left Deutsche Bank. 2.
The chair welcomed Rohan Ramchandani (Citi) and James Pearson (RBS).
3.
The minutes o f 20 February 2012 meeting were approved. There were no matters
arising. 4.
Tour de Table on current market conditions
Members unanimously reported that the lower volumes since the start of the year had persisted into Q2, though there were mixed views on how this had impacted overall liquidity in the majors and little sign of spread compression easing. The volume declines had been more marked in voice trading than in e-commerce. The continuing theme of central bank activity "distorting" market making in yen and Swiss franc persisted. Overall client confidence and commitment to hold risk positions for any length of time was very low.
Options market liquidity (and activity) was mostly described as poor. Discretionary funds had been repeatedly frustrated by the resilience of the euro and many had "thrown in the towel". The recent sharp weakening of the yen had provided some with the opportunity to produce some alpha. Reserves managers were also described by most members as having been less active, perhaps reflecting caution over developments in the euro area as well as, in some cases, a need to draw down reserves for domestic interventions. One member reported higher central bank activity and this might have reflected regional or even credit related issues.
On resourcing, the majority members said that uncertainties over forthcoming regulation and extreme pressure on business units to reduce costs were raising the barriers to hire personnel.
The chair asked members to update on how contingency plans for the London Olympics were progressing and outlined some of the Bank's preparations. Some banks had plans to partially activate their disaster recovery sites in the UK, others with European branch networks or large Asian operations were planning on re-allocating some of their operations to these overseas offices.
5.
Regulatory update
US The Volcker rule was introduced under Title V I of the Dodd-Frank Act and signed into US statute in July 2010. The rule is designed to limit the level of risk-taking by banks that have government guarantees and Federal Reserve borrowing privileges. On 11 October 2011, a proposal was published jointly by four of the five regulatory agencies (Fed, SEC, OCC, FDIC) responsible for drafting the rule and on 11 January this year the CFTC also released their, almost identical, version. Both rule comment periods have now closed and the agencies received a substantial number of submissions (including from a number of international regulators).
Conformance: Regardless of when the final Volcker text is agreed, and indeed Fed Chairman Bernanke has remarked in a number of recent speeches that it is unlikely this will be before the summer, the statutory effective date is fixed for July 2012. Last week, the Federal Reserve issued guidelines clarifying when banking entities must bring their activities, investments, relationships and transactions into conformance with the Volcker Rule. Generally, the guidelines provide that banking entities have the full 2-year statutory conformance period (until July 21, 2014) to fully conform their activities with the Volcker Rule, subject to a requirement that they engage in good-faith efforts to meet that deadline.
Main elements of proposed rule: The Volcker rule will prohibit proprietary trading by federally insured depository institutions, US Banks and foreign banks with any US branches or operations, as well as all their affiliates and subsidiaries worldwide. This means they are prohibited from engaging as principals in short-term proprietary trading of any security, derivative and certain other financial instruments. Further, it prohibits owning, sponsoring or having certain relationships with a hedge fund or a private equity fund. The US agencies' proposals introduce certain exemptions to the prohibition, by instrument and by activity. In particular, trading in loans, spot commodities, spot FX, repo and US government bond obligations (but not related derivatives) are outside of the scope. Moreover, for those instruments that are covered under Volcker, principal risk taking is allowed for market making, hedging, underwriting and offshore activities. These activity exemptions are narrowly defined in the proposals and require entities to prove compliance through collection of a broad range of metrics. The offshore exemption, for example, requires that no part of the transaction involves a "US nexus".
Since the previous Chief Dealers meeting, the CFTC has approved a number of final rules relating to Title V I I of the Dodd Frank act (relating to OTC derivatives). In particular they have approved (a) final rules relating to reporting, recordkeeping and daily trading record requirements as well as customer clearing, timing of acceptance for clearing and clearing member risk management requirements. The CFTC have also re-proposed the minimum block size rules for large notional offfacility swaps and block trades (this will impact transaction reporting and execution requirements). Most recently the CFTC and SEC have adopted the final entity definitions for 'Swap Dealer', 'Security Based Swap Dealer', 'Major Swap Participant', 'Major Security-Based Swap Participant' and 'Eligible Contract Participant'. One of the key changes to the rules since they were first proposed was an increase to the qualifying threshold for how many swap transactions companies must carry out per year in order to be classified as swap dealers (from $100m to $8bn initially and then to $3bn after five years). Another change since the first proposal will let dealers exclude portfolio hedging and anticipatory hedging activities from their threshold calculations. Major swap participants will also be allowed to omit hedging or the mitigation of commercial risk from their position total.
Europe In March the European Parliament approved final text of the European Market Infrastructure Regulation (EMIR) which introduces central clearing and reporting of derivatives and establishes rules for central counterparties and trade repositories. The regulation will enter into force 20 days after it is published in the Official Journal of the European Union, which is expected this summer. The European Securities and Markets Authority (ESMA) is already developing technical standards under EMIR in a number of areas, including: which classes of derivative will be required to be centrally cleared; exemptions for intra-group transactions, pension funds and non-financial companies; requirements for CCPs; and, in tandem with the other European Supervisory Authorities, margin and capital requirements for non-cleared derivatives. Draft regulatory technical standards are expected to be published for consultation in June, before they are finalised in September 2012. EMIR will take effect at the end of 2012.
Still no real progress on extra territoriality (international reach).
The chair offered to forward any f x industry specific questions internally to the Bank staff looking at these issues.
Extra Item on U K regulation: Today the Financial Services bill goes to a 2 day Report Stage in the Commons. The Chair updated the sub group on the next steps.
Special Items:
Chinese RMB initiative. Chair updated the sub group on latest developments on the CNH market.
th
Global FX Committee meeting on 19 March
Chaired by ECB (Papadia). 3 from BOE plus Chris Allen (Barclays) and chair of the FXJSC legal subgroup.
6.
Extra item: Processes around fixes. There was a brief discussion on extra levels of compliance
that many bank trading desks were subject to when managing client risks around the main set piece benchmark fixings eg WMR.
7.
AOB. There was no other business. The sub group will meet again on Friday 13 July 2012 at
the offices of State Street.
M C Mallett Chair 7 July 2012
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