What's ahead for 2011

What's ahead for 2011

Joachim Alpen, global head of FX at SEB
Global banks scrambled to re-enter the countries and markets they abandoned during the crisis, and there was a more aggressive hunt for market share. We have also seen an increased internalisation of flows within the banks, implying both a higher level of warehousing risk as well as decreased activity in the interbank market. 2010 was also the year when markets fully normalised after the crisis.

Zar Amrolia, global head of FX at Deutsche Bank
The impact of Credit Valuation Adjustment (CVA) has already been felt in the markets but will become a much more significant theme in 2011 and beyond, largely as a consequence of Basel III.  The impact on the cost hedging for clients will drive different market behaviour and will also generate innovative solutions to meet those client needs.

George Athanasopoulos, managing director, global head of FX and precious metals distribution at UBS
I believe we need to look at market and industry developments separately. On the markets front, the year was dominated by the euro crisis in Q2 and the resumption of quantitative easing by the Federal Reserve in Q4. These two events combined with the governments’ interventions (‘currency wars’) have generated substantial volatility in the markets, and contributed to a substantial increase in investor interest in emerging markets. Emerging market FX has clearly been the fastest growing part of the FX market.
On the industry front, we believe the biggest development is the new OTC market regulations, especially the proposed move of several FX products to central clearing.

Chris Bae, head of EMEA FX trading and global co-head of foreign exchange options Bank of America Merrill Lynch 
The most significant development in 2010 for FX has been the introduction of regulatory reform over the industry and product. Given the foreign exchange industry’s global nature across products and participants, its large users have begun to react to these changes and understand the potential impacts and future considerations.

Mike Bagguley, global head of FX trading, Barclays Capital
While in 2009 there were a lot of banks participating in FX, in 2010 there was a certain amount of consolidation among the top players. The industry will be dominated increasingly by these top players who have the advantage of scale that best serves clients.

Frederic Boillereau, global head of FX and metals at HSBC
I would highlight the internationalisation of the renminbi - as reflected both in the trade settlement programme first piloted in June and the CNH (offshore renminbi traded in HK) introduced in the autumn. China's dominance in the global economy and in international trade will only increase over time, and it seems to have recognised that it is in its own interest to enable its currency to be used more actively as a transaction facilitator outside its geographic borders.

Alan Bozian, president and chief executive at CLS Bank

The FX market has certainly been alive and well throughout 2010. This was further endorsed by findings in the 2010 BIS Triennial FX Survey. Monthly trading volumes continue to increase, as the increasingly liquid and transparent asset class has attracted a wider investor and trader base, aided by the adoption of electronic and algorithmic trading and new technology. From a settlement perspective, 2010 was a landmark for CLS, surpassing both previous records for daily and monthly settlement volumes and encouragingly, we estimate that CLS is now settling 70% (+/- 5%) of the accessible market.

Kim Fournais, co-founder and chief executive, Saxo Bank
Unfortunately, I expect to see a continuation and intensification of the eurozone sovereign debt crisis, leading to extreme volatility in the FX value of the euro. Ultimately, this can only go one way, leading to the formation of a de facto fiscal union entailing the creation of the so-called E-bonds, which have been mooted recently. Such collective debt issuance, with all the Eurozone countries being jointly and severally liable, would imply that the economically stronger nations would certainly insist that Brussels had the power to set national tax rates. It won’t be pretty.

Derek Sammann, managing director of interest rates and foreign exchange products and services at CME Group 
A significant development in 2010 was the increase in exchange-traded volume driven by the desire for counterparty risk mitigation, particularly in an environment where risk is at a premium. This speaks to a broader and a deeper adoption of
listed FX trading on-exchange. The growth in the FX market has been a big story in recent years, particular in 2010, and it continues to expand rapidly, which is illustrated clearly by the 2010 BIS triennial survey. From April 2007 to April 2010 the global FX market showed a 20% growth rate. During this same time period, CME Group FX volumes also showed a substantial growth of 94%.
 
Jas Singh, Thomson Reuters global head of treasury
Regulation. We know the shape and form, we’ve done all the prep work we need to do, and we’re now executing against the date.

Phil Weisberg, chief executive, FXall
The FX market has grown significantly in stature as an asset class in its own right that attracts real-money participants. Recent BIS statistics highlight that FX turnover has increased by 20% over the past three years, driven by growing trading activity from “other financial institutions”. Volumes of inter-dealer FX transactions increased to a much lesser extent, and have now – for the first time – been surpassed by the active trading segment, which was also reflective of the move towards greater internalisation. The different requirements and trading strategies of both the active traders and banks represent a shifting dynamic within the composition of the FX industry that has required an innovative response from platforms such as FXall.

Martin Wiedmann, Credit Suisse’s head of global foreign exchange sales and distribution
1. Further significant growth of the FX Industry overall and, in particular, the various FX emerging markets and the non-deliverable forwards businesses.
2. The increasing investment spend required to become a ‘top flight’ bank is making it more difficult for non-established market participants to break into the ‘premier league’. Because of that, a clearer gap will emerge between the leading global participants and the more regionally focused franchises.

What will be the biggest change for 2011?

Joachim Alpen, global head of FX at SEB
The biggest change for 2011 will be necessary adjustments to more regulation and the change these adjustments encompass. Banks will have to position themselves within the new framework, and it will be a challenge for them to do that.

Zar Amrolia, global head of FX at Deutsche Bank
The regulatory impact of forthcoming decisions regarding swap execution facilities (SEFs) and FX clearing pose the most significant challenge in 2011. Depending on the scale and timing of regulatory change, there is likely to be fundamental changes to a number of the most important FX markets within a very short period of time.

George Athanasopoulos, managing director, global head of FX and precious metals distribution at UBS
Again we should look at the market and our industry separately, however in many ways 2011 is going to be a continuation of 2010. The next chapter in the European fiscal crisis and the effects of quantitative easing on the continuing growth of the US Economy, as well as any policy response by emerging market economies to continuing investor inflows will set the scene for what should be a very busy year in FX. On the markets front, the implementation of central clearing for selected FX products will be the most important industry development in years. Depending upon the eventual scope this could have a major effect on the competitive landscape

Chris Bae, head of EMEA FX trading and global co-head of foreign exchange options Bank of America Merrill Lynch 
The changes in 2011 will be focused around the industry’s response and change to these reforms. Already today there are a broad array of industry initiatives and plans that will deliver over the coming 12 months. These initiatives could potentially significantly change how FX participants transact.

Mike Bagguley, global head of FX trading, Barclays Capital
Fundamentally, growth in the FX market is related to the global economy – more pools of savings, more trade, more FX transactions for market participants and clients. As we expect the global economy to grow, we expect a larger volume in 2011. With volatility higher, we expect a continued interest in correlation products.

Frederic Boillereau, global head of FX and metals at HSBC
The biggest change in 2011 will be how the regulatory developments in the US and eurozone affect FX. Dodd-Frank is now law, but the rule-making process is arguably more important than the law itself. It is the regulators' interpretation of the law that will dictate the practical applications for the market.
There are many unanswered questions that will only become clear towards the end of 2011. Their outcome will undoubtedly bring about some of the largest developments in the FX market of the past decade. Will FX swaps and forwards be exempt from the mandated clearing and exchange-trading requirements? Will FX options and NDFs somehow receive an exemption, and if not what will that mean for the banks and the customers that use those products? How important is it for institutions to offer a clearing solution as part of their suite of FX products? Will Europe immediately follow the US lead on the regulatory front with respect to FX?

Alan Bozian, president and chief executive at CLS Bank

Like many other asset classes, the evolving regulatory landscape will, with some certainty, dominate the FX market during 2011. Exactly what changes these industry-wide reforms will bring to the market, what exemptions will be made under Dodd-Frank if any, and how participants will have to adapt, is still to be determined. Whatever the outcome, CLS' raison d'être will not change and we will have to work even more closely with the industry in bringing innovative post trade solutions - with increased participation and new currencies - to the FX market.

Kim Fournais, co-founder and chief executive, Saxo Bank
I think the biggest change we might witness in 2011 is a distinct toughening of the US stance towards unfair trade practices. By the summer, President Obama will be cranking up his November 2012 re-election machine, and US unemployment will almost certainly still be above 9%, which would be politically very damaging. I fear a return to the age-old tactic to pursue a populist policy associated with a much harsher form of rhetoric with China. This would be an extremely dangerous development, possibly taking us down the treacherous route to trade wars.

Derek Sammann, managing director of interest rates and foreign exchange products and services at CME Group 
A large focus for us, and the broader FX market, in 2011 will be OTC FX clearing. Because of the recent regulatory and industry focus on credit default swaps and interest rate swaps, our initial focus in 2010 was centred on launching clearing services for these asset classes, which are successfully underway. We are now working with a broad range of sell-side and buy-side market participants to determine the best mechanism to introduce clearing for OTC FX, and set the benchmark for the market that will align with the pending regulation regarding mandating clearing.

Jas Singh, Thomson Reuters global head of treasury
The biggest change for 2011 is the impact of regulation on market behaviour.

Phil Weisberg, chief executive, FXall
One of the biggest drivers of change will be new regulation such as the Dodd-Frank Act and the ability of market participants to be flexible and agile to comply with the new rules. As a market, we need to ensure liquidity is not compromised and clients have control and choice in their execution strategies. While there is some uncertainty regarding the implementation of any regulation, it is important to invest in technology. We believe the focus on transparency is positive and will continue to partner with our clients by contributing our perspective to the decision-making processes. It is key the market is permitted to maintain efficient trading mechanisms and also retain the flexibility demanded by market participants.

Martin Wiedmann, Credit Suisse’s head of global foreign exchange sales and distribution
1. The upcoming regulatory changes resulting from the Dodd-Frank Act, including the introduction of central clearing.
2. Foreign exchange is, for most participants, a by-product of a core activity with only a small percentage of the market looking at FX as a stand-alone investment and a source of outperformance. In 2011, there will be an increased focus on slippage and transaction costs from market participants using FX as a by-product of their core activity.
3. Forex volumes are primarily driven by the prevailing market conditions so, to a certain extent, the FX market is at the mercy of the performance of the “risk trade” and the global equity markets. I think 2011 will offer greater opportunities to generate positive alpha and returns. Forex volatiliy is expected to stay high with strong, extended market moves in all major currency pairs.

Joachim Alpen, global head of FX at SEB
Smarter IT platforms and the programming of more intelligent algorithms will have a substantial effect on the market. SEB has built up the capacities and is well positioned to manage this transition.

What will be the most significant technology development and how will it affect you? 

Zar Amrolia, global head of FX at Deutsche Bank
Reacting in a timely manner to regulatory and market changes will be the most significant technology challenge.  Finding the correct balance between tactical and strategic solutions to fundamental market changes within short timeframes will prove complex for all market participants, especially given the competing technology requirements of ongoing business.

George Athanasopoulos, managing director, global head of FX and precious metals distribution at UBS
For many years technology developments in FX have centred around electronic execution and risk management. The anticipated implementation of central clearing in 2011 has the power to change the FX business model front to back, with significant technology implications for the major FX players across their entire platform and not just execution. We believe our experience in FX as well as our expertise in clearing puts us in a very strong position to add value to our clients as they prepare themselves for the upcoming changes

Chris Bae, head of EMEA FX trading and global co-head of foreign exchange options Bank of America Merrill Lynch 
Technology is constantly changing and challenging the industry to service our clients better. With much of financial reforms’ intent to enhance price transparency, I believe there will be a continual effort by all market-makers to evolve and ensure our technology delivers just that.

Mike Bagguley, global head of FX trading, Barclays Capital
The FX enviroment will mirror the larger world, with more emphasis on streaming rates.

Frederic Boillereau, global head of FX and metals at HSBC
The continued migration of business towards electronic mediums is not necessarily a 2011 development, but a continuation of an accelerating trend we have seen over the past few years.
This means that as the FX market continues to evolve rapidly, the players in the market need to constantly adapt and keep up with the changing landscape.
Quite simply, technology has caused the FX business to constantly innovate and will continue to be the key driver in its evolution.

Alan Bozian, president and chief executive at CLS Bank

In our case it is applied technology and we expect the momentum behind the CLS Aggregation to continue to grow in 2011 - both from a volume and participant perspective. The users have indicated that it is exceeding their expectations in its ability to address capacity issues and lower trading costs.

Kim Fournais, co-founder and chief executive, Saxo Bank
We have throughout 2010 witnessed a maturation of the mobile technology space, and I think the mobile and tablet space is a step towards ubiquitous computing, driven by the rapid inflation in the number of computers for each person. Therefore, it is important for us to be aware of multiple consumer platforms and provide flexible solutions to span the platforms. We are also seeing more and more advanced features coming out for the retail segment, which was previously reserved for the professionals. Clients are demanding more and more advanced features, alongside the fact that information and news are becoming more and more accessible for everyone. My guess is that a higher level of information aggregation and segmentation will be a trend for 2011. Machine-readable news has been on the wallpaper for a couple of years now, and we’re not quite there yet, but we will eventually be, and combined with investor communities, more intelligent news and information features have an important role to play in the future market of financial services.

Derek Sammann, managing director of interest rates and foreign exchange products and services at CME Group 
We as a company and our customers invest greatly in technology, and will continue to invest throughout 2011 and beyond. Again, as the market prepares to introduce clearing for OTC FX in line with the pending regulation, the participants have to invest in technology that underpins this evolving market. Investment will be targeted at systems that not only facilitate and align transactional capabilities in both OTC and futures, but integrate to in-house and client clearing models. We at CME also remain focused on our continued investment in our globex system and matching engines, and our state-of-the-art data centres allowing quick, low-latency customer access.

Jas Singh, Thomson Reuters global head of treasury
It’s utilising what you’ve built and then taking it to market. It’s the year of execution and for us it’s bringing products to market. It’s about getting Dealing MTF compliant in as many jurisdiction as I possibly can.

Phil Weisberg, chief executive, FXall
Technology must support transparency and insight – two key drivers for the FX market in 2011. Transparency will be a significant requirement for all market participants to comply with pending regulatory requirements. Forex is a dynamic and evolving market, and those who anticipate and embrace regulatory changes will be the clear winners. In addition, FX market participants are demanding insight into how best to trade and how to maximize relationships with their counterparties. Providing access to data and sophisticated analytics that can be customised to make strategic execution decisions will become a key differentiator across the market in 2011.

Martin Wiedmann, Credit Suisse’s head of global foreign exchange sales and distribution
1. The eFX business, or electronic trading, will continue to grow and expand into more products, including FX derivatives, precious metals, emerging markets and NDFs.
2. All banks are investing in technologies to be able to get closer to their clients’ business, eg, deep-dive analytics of their business to help truly partner on an ongoing basis. Banks such as CS have this expertise, and this is increasingly in demand from our clients, who look to ‘challenge the norm’ and add value to areas of their business that historically did not have much focus, eg, cash management and passive currency overlay.