The hottest industry event in Europe kicks off in London tomorrow, and we touched base with one of its key speakers, Adrian Boehler of BNP Paribas. We asked the Global Co-Head of FXLM and Commodity Derivatives of the French bank several questions about current industry trends and some upcoming developments like the implementation of MiFID II and the FX Global Code of Conduct.
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Adrian Boehler
FM: Recent quarters have seen lower volatility compared to previous years. As a result, the profitability of FICC divisions at several major PBs has declined. How is this affecting your clients and operations?
AB: It is true that lower volatility typically means lower levels of conviction from our clients which in turn usually means lower volumes all other things being equal. That being said, the lower volatility environment affects all market participants – and not just us – so we have to stay close to our clients in these quieter markets in order to ensure that when volatility returns we are well positioned.
As the FX (and broader fixed income) market evolves we also look to take advantage of the efficiencies that digitizing our business offers and this is the reason why we are investing so heavily in our digital programme. Ultimately digitizing the workflow means we spend less time on the execution workflow and more time generating alpha for our clients.
Do you already see any material impact on the bank and in client behavior in the run-up to Brexit ?
Ironically in the past couple of years, change has been the only constant in the industry’s operating model and the competitive landscape. Brexit, in many respects, is the latest challenge to face the industry as a result of that constant change.
The key to staying profitable against that dynamic backdrop is to remain nimble and adaptive, and that in turn almost invariably hinges upon an organisation’s ability to drive operational efficiency, transformation and greater adoption of digital. The ambitious transformation programme launched by the Group in March of this year is aimed at improving our ability to do just that between now and 2020, not least of all thanks to a EUR 3 billion investment in digital.
While I personally think it is too early to assess the full impact of Brexit on the business, I am confident that BNP Paribas will continue to draw on its well-diversified business model, its strong geographical footprint, and the balance between our Global Markets operations in the UK and Continental Europe – we are in a strong position to adapt to the post-Brexit environment.
With the majority of the MiFID II impact to be felt in the fixed income market, do you see any impact on the FX market too? Fixed income and FX are generally well correlated.
Concerns about the industry’s state of readiness for MIFID II remain real with barely a month to go before “go live”, and the potential for disruptions in the effective functioning of markets and possible fragmentation of Liquidity in the first few weeks of 2018 remain real in the eyes of many market participants.
While it is fair to say that the major impact is felt away from currency markets, a number of challenges remain for FX market participants too, such as the timely availability of all Legal Entity Identifiers, the exact process and logistics of ISIN creation and the precise data requirements of each trading venue to name but a few.
Here I think that pragmatic guidance from relevant regulators and authorities will be key in ensuring that the transition to the new regime is as smooth as possible and that implementation risks are mitigated as much as possible. Too much is at stake – including the overall competitiveness of European markets versus their equivalents in the Americas and Asia Pacific – and consequently, my view remains that regulators will exercise judgment during this initial period so long as market participants have made a real and genuine effort to be as compliant as reasonably possible on day one.
What are the main challenges for the FX industry with the introduction of MiFID II?
Over and above the (not insignificant) challenges already mentioned, we are anticipating a relatively low impact for FX when it comes to market infrastructure since ESMA considers FX to be illiquid. For FX derivatives, given the sheer scale of unique underlyings in scope, sourcing external benchmark data for use in best execution monitoring remains challenging.
How are rising interest rates impacting the PB business? What about broker clients, what should they expect as rates continue to go higher?
I do not see that higher rates particularly affect the FXPB or Broker business as fees are not typically a function of interest rates plus a spread as they may be in other PB businesses. That being said, if market participants feel we are entering a period of normalizing interest rates, then that bodes well for investor conviction and hopefully heralds a higher baseline level of volumes in FX markets, and that provides a more positive backdrop for everyone.
Would you say that the SNB panic of January 2015 has left a lasting impact on the FX market?
The key lesson for the market from the SNB event was the realization that unprecedented intraday moves are not the sole preserve of less liquid currency pairs. The extreme pace and magnitude of the move were a rude awakening for many market participants. Consequently, today when event risk looms large on the horizon – and indeed more generally – Prime Brokers are more proactive in managing their risk. Prime Brokers have understandably become more conscious of return-on-risk and also more selective about the clients with whom they wish to partner.
We now manage event risk much more proactively, by either increasing margin or recalibrating limits on a temporary basis and we know anecdotally that other market participants and retail brokers are adopting a similar approach. Events in early 2015 have made this a much more widespread and accepted practice.
What is changing with the implementation of the FX Global Code of Conduct for the FX market? How have clients responded to the news of its implementation?
I think it is fair to say that after an initial period of education – during which familiarity with the Code was somewhat inconsistent across jurisdictions – awareness is in a much stronger place. And with that better understanding of the Code has come a very positive response to it.
Of course there is the odd pocket of scepticism driven by the mistaken view either that the Code is predominantly aimed at the sell-side or that its integrity is in some way undermined by the ongoing debate on Last Look, but by and large market participants are embracing the Code in the correct spirit and that is fantastic to see.
After all, the Code is the culmination of two years of work and the unique partnership between the private and public sector, and the result is 55 solid principles and over 60 pages of profound common sense.
In terms of how the Code is changing behavior, I feel there are a couple of areas in which the Code is already making its presence felt. First of all, market color is flowing much more freely among market participants now.
Recall that when we sat down to begin writing the Code a couple of years ago, a certain paralysis had descended on the industry as market participants were increasingly unsure what they could and could not say safely given the investigations taking place across the street. Consequently, market color stopped circulating.
The Market Participants Group (MPG) that worked on the Code alongside the Central Banks (and I was fortunate enough to be part of the MPG), felt that an integral part of an efficiently functioning market was the free and safe flow of market colour and so we worked on guidelines on information-sharing in Phase I of the Code, as a result of which market colour is now once again being shared between market participants.
Secondly, disclosures aimed at driving greater transparency around how market participants are operating are becoming much more frequent and that is a very welcome step in the right direction. And thirdly, we are hearing anecdotally that asset owners are starting to ask whether asset managers are planning on adhering to the Code in RFPs for potential new mandates, and that is a very powerful development, because as soon as market participants understand that there is a strong commercial incentive to embrace the Code, then adherence quickly follows.
I am confident that in the future your “conduct rating” will be as important a factor in counterparty selection as credit rating has been historically, and adherence to the Code is an obvious way of sending a strong message of assurance to other market participants that you hold yourself to the right standards of conduct.
What is your position on Last Look and its inclusion in the Code?
The debate that has raged on about Last Look is well-documented by now of course, and I think it has been extremely beneficial to get these issues on the table. The Code has provided a very effective framework for transparent and constructive discussion. Let us not forget that the MPG received in excess of 10,000 comments during the drafting of the Code, so the process has been extremely inclusive.
While some may argue that the Code has not gone far enough on Last Look, I think we can be confident that the Code will continue to evolve to reflect these ongoing discussions. And if of course, an individual market participant feels that they would like to hold their counter-parties to a stricter standard on Last Look than is currently prescribed in the Code, then nothing stops them doing that.
On the contrary, the Code gives them the perfect framework for having that conversation. Our own position on Last Look is that the Code would benefit from a strengthening of the language in Principle 17 and that specifically trading in the Last Look window is inconsistent with good market practice and so like many others we are awaiting the output from the Last Look consultation undertaken by the Global FX Committee with great interest.
