TradeTech FX: Life after regulation

How have UMR and SA-CCR impacted the FX trading desk and market structure? TradeTech FX panellists explore the consequences of these landmark regulations, and how they might influence other FX products in the future.  

After decades avoiding the regulatory spotlight, the FX industry has been rocked by not one but two major recent regulations that have had a significant impact on the way the market operates. The final phase of the Uncleared Margin Rules (UMR) came into force in September, while the Standardized Approach for Counterparty Credit Risk (SA-CCR, the capital requirement framework under Basel III addressing counterparty risk for derivatives trades) had its final implementation in January 2022. Between them, they’ve had a cataclysmic impact on operations, requiring participants on both sides of the Street to implement whole new systems and procedures in order to account for and comply with the new requirements.  

“It’s been a big headache,” said Kirstie MacGillivray, CEO UK of Aegon Asset Management. “UMR only impacted a small proportion of our clients, yet we had a huge infrastructure to build. I’m glad to say we’re now regulatory compliant, but it took a lot of work.”  

Elke Wenzler, head of trading at MEAG, agreed. “It was clear that we were in scope, and to get the resources in place, the operational set-up for variation margin, for clearing, to get all that done – it really did take a lot of effort. We asked all our counterparties to get involved and push that forward. It’s now in place, and I’m looking forward to seeing how it will develop.” 

“We’re getting a lot of requests for help, from both the buy and sell-side,”

But players are still not entirely sure where they stand – or what they need to do. “We’re getting a lot of requests for help, from both the buy and sell-side,” said Ben Tobin, head of Europe/portfolio optimisation at Capitolis, a platform driving financial market optimisation.  

And optimisation is the key word here – and perhaps one of the biggest pain points. “SA-CCR is probably the hottest topic this year in terms of optimisation,” said Mattias Palm, business manager at triReduce FX, OSTTRA. “It impacts the whole industry, although banks are the worst hit right now.”  

SA-CCR is really the first time FX has been front and centre of global regulation. Banks are finding it very hard to get this off their books. FX as an industry hasn’t really been known for its proactive optimisation, because it’s never really been in the front line, so banks are now suffering a lot. Even today, we’re optimising from dealer to client. More and more, the buy side are going to have to work with their liquidity providers,” added Tobin.  

This is already happening, and relationships are becoming of paramount importance. “We looked very carefully at our list of counterparts,” said MacGillivray. “We don’t see them as liquidity providers, we see them as liquidity partners. We need that interaction with them.”  

But the pain of SA-CCR is already filtering down to buy-side execution desks. 

“Banks at least have full visibility. We don’t,” pointed out MacGillivray. “A while ago we started to notice a change in pricing. We had several meetings with counterparts to determine what was happening. It took six meetings for them to finally admit that SA-CCR was behind it – they wouldn’t admit to us what was going on. That’s not partnership. We’re happy to work with them to solve issues, but they in return have to be transparent with us. Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”  

“Our job is to get best execution, and we can only do that by having a full dialogue with our counterparties.”

So what trading strategies can the buy side use to help banks deal with this challenge? 

“All our positions are fully cash collateralised – it’s a fairly straightforward answer,” said MacGillivray. “Talking to our counterparties, that’s what they want. Also, when is the optimal time to trade to suit their book? We’re happy to talk about things like this, but it needs to be an open dialogue.”  

Actually though, suggests Palm, under SA-CCR it could be easier now to optimise than it used to be. “It used to be either gross-notional related, or by end-date. SA-CCR is only about spot, and that’s a much larger number,” he said. “There is a netting effect in it already, and to offset those exposures requires less operational activity – which means fewer trades.”  

Even if you’re not impacted yet, it’s worth paying attention, because you soon could be. 

“The banks who are really hurting are having to widen their spreads, but over time, everyone will fall under the SA-CCR remit and everyone will see the same struggle,” warned Tobin. “This is very new for FX, we’ve not really had to deal with anything like this before, and people may be struggling with their systems. If you’re a bank not yet under SA-CCR, you’re probably getting a lot more flow right now, but I would urge you to look at your systems in advance, and make sure they are ready, because it’s coming.”  

The Nirvana would be to achieve an all-in estimated cost for optimisation, an all-in system for everything, but most panellists agree that right now, that is more of a pipe dream than a realistic goal.  

“Many of the banks want to do it, but don’t have the time to even think about it,” said Tobin. “Most banks are struggling to calculate the numbers they need for their business and their regulators right now as it is. I think we should focus more on solving today’s issues first, and we’ll keep working towards Nirvana as we go.” 

“It’s a headache, but we have to pick our headaches, we can’t get rid of them all at the same time, so some of them you just have to deal with,” agreed MacGillivray. 

And now the buy-side are also starting to participate in optimisation. For banks, it’s capital cost-related. “The metrics for the buy-side will be different, but the same types of tools can be used,” said Palm. “Reducing counterparty exposure, reducing line items, reducing balance sheet, being able to cash out, compress risk.”  

“Optimising collateral management – when I started on the trading side, I didn’t expect it would be such a big topic for me!” said Wenzler.