STEP Market Convention Signed

JULY 2006
VOL 1, ISSUE 89
ISSN 1469-2031
Contents
STEP Market
Convention Signed
Features:
• STEP Convention Signed
Issuers of European short-term paper are now free
to apply for a STEP (Short-Term European Paper)
label, following the signing of the STEP Market
Convention on June 9 2006.
• ACI Unveils Operations
Certificate in Manila
• Optimism and Filipino
Hospitality Mark 45th
ACI World Congress
• FXC Acts on Auto-Dealing
• South Africa Holds Options
Course
• Central Bank Reserves
Climb
• Sri Lanka Association
Praised by Central Bank
• TMA Hong Kong to Set
USD/HKD Rate
• New Websites
• OTC Derivatives Markets
Continue to Grow
• Canada Issues Invitation
to Montreal World
Congress
• In Memoriam:
Hans Lamme
Franck Hebeisen
The Market Convention is the cornerstone of the
STEP initiative, which was set up in 2001 and is
being led by ACI – The Financial Markets
Association and supported by the Fédération
Bancaire de l’Union Européenne (FBE).
The initiative aims to foster the integration of the European market for shortterm paper through the convergence of market standards and practices.
While the US market is integrated, the European commercial paper markets
are segmented into several market places. As a result, issuers and investors in
the European short-term paper markets are confronted with reduced depth and
liquidity, and have less diversification opportunities than in the US.
The STEP inititiative aims to promote a pan-European short term paper
market through market players’ voluntary compliance with the standards set
out in the STEP Market Convention.
“Integration of the European markets will enhance market depth and liquidity
and increase the diversification opportunities for issuers – both financial and
non-financial institutions, and investors”, says Euribor ACI and EuriborFédération Bancaire Européenne, the two associations responsible for
implementing the STEP initiative.
“STEP is a normalisation of the short-term paper programmes in Europe. It is
about transparency and harmonisation”, added Franck Hebeisen, chairman of
the Euribor ACI STEP task force at an ACI meeting last month.
For issuers who are STEP-compliant and apply to the STEP secretariat, a label
will be granted. When short-term commercial paper or certificates of deposits
earn the STEP label, they become “regulated”, which provides greater
opportunities for European investors.
Currently, European funds are restricted in the amount of unregulated paper
they can buy. A STEP label lifts the 10% limit and allows European investors
to increase their investment in short-term securities.
Brussels Signing
The STEP Market Convention, which is managed by the STEP Market
Committee – comprised of 10 industry professionals appointed by the FBE
and ACI – was signed on Friday June 9 2006 in Brussels by Guido Ravoet,
Secretary General of Euribor FBE and Thierry Cazaux, president of Euribor
ACI.
It sets forth the criteria and requirements that short-term paper programmes
must fulfil to be STEP-compliant, covering aspects such as information
disclosure, the format for documentation, settlement, and the provision of data
for the production of STEP statistics.
To earn the label, issuers must apply to the STEP Secretariat, which has been
created under the joint responsibility of Euribor FBE and Euribor ACI.
Although the Secretariat is the only party that can award or rescind a STEP
label, it has the support of the European System of Central Banks, which has
expressed a willingness to contribute to the management of the label for two
years after launch and to promote market transparency by permanently
publishing statistics on yields and volumes on the website of the European
Central Bank. This, it says, will foster integration and reduce issuers’ costs
through greater market transparency.
For programmes that have been granted the STEP label, the details will be
made publicly available on the STEP Market website (www.stepmarket.org).
A list of all the programmes that have been granted a STEP label will be
displayed on the website and updated in accordance with the Market
Convention.
The STEP secretariat can withdraw the STEP label granted to a programme at
any time, however, if it contravenes any of the articles of the Market
Convention.
Information on the procedure to apply is described on the website of ACI, as
is the Market Convention. Both are also available from the STEP website,
www.stepmarket.org.
Issuers Feedback
The signing of the convention follows a consultation period where, at the end
of March 2006, Euribor ACI and Euribor FBE asked for feedback from large
European issuers on the convention and procedures to obtain the STEP label.
ACI says feedback from testers has been crucial in acting as the basis on
which criteria of eligibility for programmes and issuers have been adapted.
In addition the STEP label is now more user-friendly for some types of short
term papers such as ECPs/ECDs without deteriorating the level of
transparency and normalisation that this project aims to promote, the
association adds.
Last month Jean-Claude Trichet, President of the European Central Bank,
gave a ringing endorsement to the STEP initiative during a presentation at the
Cass Business School in London on European financial integration.
“I expect that the market-led Short-Term European Paper initiative, the STEP
initiative, will advance European integration,” he said. “The success of the
STEP initiative will be proof that market-led initiatives are essential for the
benefits of integrated financial markets in Europe to be reaped.”
ACI Unveils Operations
Certificate in Manila
ACI – The Financial Markets Association unveiled the latest addition to
its suite of examinations during the 45th World Congress in Manila.
Andreas Gaus, Head of the ACI International Operations Working Group, told
delegates in Manila that events in the global financial markets in recent years
have served to raise the profile of reputational and operational risk higher than
ever. This meant that an efficient operational team has become indispensable
to all trading organisations – especially in those institutions offering prime
brokerage or other back office outsourcing services.
ACI’s Board of Education has developed the Operations Certificate to meet
the needs of the evolving financial markets industry and set a standard for
operational staff globally. It continues ACI’s efforts to promote and maintain
the highest operational standards in the world’s financial markets. Marketbased organisations such as the New York Foreign Exchange Committee and
the UK’s FX Joint Standing Committee have raised awareness of these issues
by stressing the need for vigilance and best practice in operations departments.
The new Operations Certificate is aimed at back- and middle-office staff,
traders and vendors and helps to build understanding between trading and
operational staff. The topic baskets in the new examination include:
•
•
•
•
•
•
A front-to-end treasury view across all foreign exchange, money
markets, derivatives and short term bonds and notes
Deal capture, trade entry and confirmations
Settlement, netting and clearing
Reconciliation and investigations
Treasury systems and data management
Risk management, controls, compliance and documentation
Developed in association with Germany’s Frankfurt Business School,
candidates can study for and sit the new Operations Certificate – which is
provided by a wide range of external training companies – in English or
German. As with all ACI examinations, the ACI Operations Certificate will be
open to both members and non-members of ACI – The Financial Markets
Association.
Optimism and
Filipino Hospitality
Mark 45th ACI
World Congress
President of the Republic of the Philippines, Her Excellency Gloria
Macapagal-Arroyo, opened the day with a keynote speech
The groundwork for bringing the annual ACI
World Congress to the Philippines—the 17th
country and the first Asian country to become
a member of ACI-The Financial Markets
Association in 1963—began years before the
ACI flag was turned over by ACI Sweden to
ACI Philippines at last year’s Congress in
Stockholm.
The flurry of preparations resulted in a world-class Congress attended by
approximately 500 financial markets practitioners from the world over. The
success of the Congress worked to dispel doubts as to the soundness of the
state of the Philippine economy and security, and impressed foreign delegates
who experienced first-hand the world-famous Filipino hospitality.
The Philippines’ local colour and inherent optimism rubbed off on delegates to
the 45th ACI World Congress, held in Manila last May 25 to 27, making the
event uniquely memorable to its attendees. Interspersing serious business with
festivities, every component of the Congress was a success—from the
Reuters-ACI World Congress Golf Tournament that kicked off the event, all
the way to the Gala Dinner and Dance on the last night of the Congress.
Foreign delegates who registered for the Reuters-ACI World Congress Golf
Tournament teed off with sponsors at the Orchard Golf and Country Club in
Dasmariñas, Cavite, in the morning of the first day.
Strictly Business
May 26 kicked off on a high note with no less than the President of the
Republic of the Philippines, Her Excellency Gloria Macapagal-Arroyo,
opening the day with a keynote speech. In her address, President Arroyo, who
referred to herself as a “proud and ardent saleswoman” of the country, led
local delegates in welcoming foreign delegates to the Philippines. She
expressed with utmost hope, “tempered by realism,” that foreign traders will
find the Philippines worthy of [their] attention and investments.
To show the government’s full support to ACI Philippines and the 45th ACI
World Congress, the Chief Executive was also joined on stage by former
Secretary of Finance and current Philippine Monetary Board member Juanita
Amatong, and incumbent Finance Secretary Margarito Teves.
After her welcome remarks, President Arroyo was ushered into the exhibition
area for the formal ribbon-cutting ceremony, along with ACI Philippines
president Jose Emmanuel Hilado, Teves and ACI-The Financial Markets
Association president Godfried de Vidts.
The series of presentations and panel discussions began with the keynote
speech by Michael Powell, head of Global Markets at HSBC, entitled “From
Queen’s Road to Canary Wharf: Lessons from Asia.” In his short talk, Powell
walked the delegates back to 1996, when FX trading had a “much more
human, more personable environment” and business was generally more
vibrant, in contrast to the present business situation.
For his part, ACI Philippines president Hilado likewise welcomed participants
to the Philippines and the 45th ACI World Congress, which he described as a
“very significant milestone in the history of ACI Philippines.” Hilado further
explained that the theme, “Rising to the Challenge,” was in recognition of the
increasingly borderless world, which has spawned the acceleration of capital
movements around the globe. He invited the delegates to look forward to a
programme that aimed to dissect the present challenges through relevant
speeches, presentations and panel discussions.
The first panel discussion focused on the topic, “Rationalizing Credit Rating
Agencies,” and was moderated by Cezar Consing, partner at The Rohatyn
Group. Panelists included: Citigroup Global Markets managing director
Stephen Taran, head of JP Morgan Credit Rating Advisory for Asia Pacific
Stephen Long, Fitch Ratings senior director and Asia Sovereign Ratings head
James McCormack, and UBS AG head of Country Risk Analysis Max
Schieler. The discussion that ensued focused on the relevance of credit rating
agencies and on the implications of credit ratings that have proven to be
inaccurate.
The briefing on New Operations Certificate, delivered by Andreas Gaus, head
of the ACI International Operations Working Group, followed the panel
discussion. In his presentation, Gaus formally launched the New ACI
Operations Certificate which is the updated and expanded version of the ACI
Settlements Certificate.
The afternoon session was opened by author and clinical psychologist, Dr.
Margarita Holmes, who delivered a rousing talk on “Trading Up in Life, Love
and Lust”.
This was followed shortly by the panel discussion on interest rates, titled
“Post-Greenspan: Impact on Global Interest Rates and Capital Markets.” The
panel established expectations on very gradual interest hikes on a regional
basis, as governments remain concerned about the growth of the economy.
The panel was moderated by Jose Isidro Camacho, Credit Suisse First Boston
vice-chairman for Non-Japan Asia, Investment Banking. Panellists included:
Michael Spencer, chief economist for Asia and head of Global Markets
Research at Deutsche Bank; Chua Hak Bin, director of Asia Pacific Economic
and Market Analysis, Citigroup; and Dr. Andrew Freris, chief economist and
head of Fixed Income Research for Asia-Pacific, BNP Paribas.
The day’s programme concluded with the General Assembly, highlighted by a
speech from ACI-The Financial Markets Association president Godfried de
Vidts and followed by presentations by the respective Committee Heads.
Day Two
May 26, the second day of the Congress proper, began with the panel on
foreign exchange, titled “Evolution of Currencies: Fixed to Floating and
National to Regional”.
Panellists Richard Yetsenga, HSBC currency strategist; Yianos Kontopoulos,
Merrill Lynch managing director and chief global FX strategist; Robin
Poynder, Reuters global head for FX Customer Propositions, Treasury and
Fixed Income, and Thio Chin Loo, BNP Paribas senior currency analyst,
joined panel moderator William Pesek, columnist at Bloomberg. The
discussion zeroed in on how much more currency flexibility the Asian region
needs to see. This was in line with the observation that Asian currencies
presently lie somewhere in between the spectrum of FX modelling—with
fixed on the one end and flexible on the other. The feasibility of a regional
currency for Asia was also discussed and most of the panellists were of the
opinion that it cannot yet happen in the immediate future given the differences
in political systems and level of economic development.
The last panel focused on regulatory issues and discussed “Adopting Basel II:
Changing Financial Markets Landscape.” The panel was moderated by David
Clark, honorary president of ACI-The Financial Markets Association, and had
Eli Remolona, head of Financial Markets at Bank for International
Settlements; Nestor Espenilla, Deputy Governor of Bangko Sentral ng
Pilipinas; and Loh Boon Chye, head of Global Markets for Asia at Deutsche
Bank AG, as panellists. The panel dissected Basel II and how it would affect
the treasury business. It was an interesting discussion as it brought home the
message that market practitioners have to prepare for these changes if they
want to remain competitive and profitable.
The second day’s session was capped off by a keynote speech on the Congress
theme, “Rising to the Challenge,” delivered by Kevan Watts, chairman of
Merrill Lynch International Incorporated and senior vice president of Merrill
Lynch and Company, Inc.
Social Events
Complementing the business conferences were the world-class social events
that showcased the Philippines’ colourful culture through performances by
home grown Filipino talents.
The ACI Council heads from different countries, delegates, sponsors, VIPs,
and members of the ACI Philippines Organizing Committee were treated to a
night of classical music and fashion at the Ayala Museum on the night of May
25. Dubbed as “The Filipino…Up Close and Personal” and sponsored by
Tullett Prebon, the cocktails featured classical and kundiman (traditional
Filipino music) repertoire performed by RSVP String Ensemble, as well as
creations by renowned Filipino fashion designer Barge Ramos. It was a
unique evening as the fashion models ended up socialising with the guests.
The social event on May 26 was held at the Coconut Palace Museum, and
carried the theme “Pais Tropicale.” Sponsored by Banco de Oro Universal
Bank, the welcome cocktail reception featured performances by singers May
Bayot and Nyko Maca. Samba de Orfeo dished tropical-inspired music as
male and female dancers encouraged guests to let their hair down and join
them on the dance floor.
The night of May 27 was Fiesta Filipina night at the Harbor Garden Tent,
Philippine Plaza Hotel. Sponsored by the Department of Tourism and HSBC,
the entire programme was a celebration of Filipino culture in music, dance
and fashion. Performers wearing traditional Filipino costumes blew native
horns to welcome the visitors early in the night. As the night progressed, the
Jammers, Pangkat Kawayan (Bamboo Group) and PUP Banda Kawayan
(Bamboo Orchestra) made music using unconventional bamboo instruments
while the guests wined and dined. The festive mood peaked as approximately
250 performing artists from the Cultural Center of the Philippines—all in full
Filipiniana regalia—shared the stage for a grand song-and-dance production.
Not to be outdone, the Merrill Lynch-sponsored Gala Dinner and Dance at the
Makati Shangri-La Hotel’s Grand Ballroom on May 27 was equally exciting.
Standards performed by the Philippines’ foremost vocal group, The Company,
set the mood for a memorable night for both the local and foreign delegates.
After a few sets, the group gave way for ACI Philippines president Hilado and
Organizing Committee chairman Jose Arnulfo Veloso to lead the ceremonial
turnover of the ACI flag to the next ACI World Congress host. ACI Canada
president Sharon Grewal was called onstage to receive the ACI flag and
deliver a short message of invitation to the 46th ACI World Congress in
Montreal.
After which, Hilado and Veloso formally thanked the delegates for coming to
Manila to participate in the 45th ACI World Congress. The two likewise
invited the other members of the Organizing Committee to come up and be
recognized for the ceremonial toast. Finally, ACI-The Financial Markets
Association president Godfried de Vidts proposed a toast to ACI Philippines
by saying: “Is the Philippines an emerging country? After what I have seen in
the last few days, it is not. It’s an emerged country!”
As soon as the stage was cleared, the all-female trio Mocha stole the scene
with their stirring renditions of disco music. The delegates then took the cue to
loosen up. In minutes, the dance floor was crowded as delegates paired up
with dance instructors at the centre of the floor, and danced tirelessly until
way past midnight.
Aftermath
In hindsight, more than being the biggest milestone yet in the history of ACI
Philippines, the 45th ACI World Congress also proved to be a major lesson in
rising to the challenge. “True to its theme, the success of the event was, more
than anything, a showcase of the Filipino’s ‘can do’ attitude,” said Hilado.
Despite the challenges that the Organizing Committee faced —regional
security issues, the impeachment complaint against the President, the state of
emergency— ACI Philippines did Rise to the Challenge and delivered a
world-class event in an environment of warm hospitality that the country is
known for.
FXC Acts on Auto-Dealing
The New York Foreign Exchange Committee (FXC), which operates under the
auspices of the Federal Reserve Bank of New York, has issued best practice
guidelines aimed at the boom in algorithmic trading of FX products. The FXC
says that recent auto-dealing product and technology developments have led
to changes in market practice for participants in market and that it
acknowledges “the need to assess the impact of these developments on market
conditions and emphasise best practices that address the risks of participating
in the changing environment”.
Algorithmic trading has grown intensely in FX over the past year in particular
as more and more firms take advantage of deep, streaming liquidity in the
market. Many of these firms have moved in from the equity and exchangetraded fixed income markets and with their very fast technology have proved
to be something of a thorn in the side of the banks – especially those firms
conducting “latency arbitrage”.
As far as the FXC is concerned, it says that the market impact of algorithmic
trading include;
•
In periods of low price volatility, the increased number of bids and
offers in the market from auto-dealing participants may enhance
market liquidity for all market participants.
● When new information is introduced to the market, the market reacts
more quickly than was possible before the advent of auto-dealing.
Auto-dealing market participants are interconnected via systems with
minimal human intervention. This connectivity can bring temporary
challenges to manual dealers trying to access liquidity in competition
with computer programs, particularly in the moments following the
release of new information.
● Prices are quoted and canceled far more frequently in the automated
environment than they were in the previous environment that
permitted only manual dealing.
● Many new participants have entered the foreign exchange market,
specifically hedge funds and proprietary traders that have experience
accessing markets other than foreign exchange through auto-dealing
interfaces.
● Systematic traders may pursue the strategy of placing bids and offers
on one platform, outside of prices that are available on other platforms,
to arbitrage liquidity and credit. This type of trading activity may give
the illusion of more liquidity in the market than may actually be
available at a given point in time.
● Increased price transparency and secondary market access to
additional pools of automated liquidity have reduced bid-offer spreads
and margins earned by market-making banks from their customer
business.
● Latency differences – differences in the reaction times of systems
technology – may arise between platforms and bank systems. These
differences may provide arbitrage opportunities for some auto-dealing
models.
● Some market participants have expressed concerns about auto-dealing
stratagems that appear designed to artificially influence prices. Such
schemes may raise reputational issues for the market and for those
who provide access to the market.
“In summary, auto-dealing has altered the landscape of the foreign exchange
market by increasing both deal flow and the number of market participants,
deepening liquidity during periods of low volatility, and accelerating the
development of straight-through processing capabilities,” the FXC says. “As a
result, auto-dealing has improved the overall operational efficiency of the
dealing community. At the same time, auto-dealing has added to the number
of transactions conducted anonymously through prime-brokerage facilities,
and it has heightened the sensitivity of market participants to the performance
of their technologies and the capacity of their infrastructures.”
To meet the challenges of the new generation of traders entering the market,
the FXFC is issuing guidelines for dealers and prime brokers. As in all advice
provided by the FXC, the guidelines are not legally binding but constitute
what the Committee considers to be “best practice”.
The FXC stresses the importance of banks and prime brokers reviewing their
procedures and policies to ensure they are up-to-date on the challenges they
are facing from the new generation of counterparties and their response to
those challenges. These are;
Ensure adequate risk management and technology when operating in the
auto-dealing space
Apprise new market entrants of professional practices and standards of
behaviour
Monitor reputational risks and confidentiality issues
Manage Latency Issues
In conclusion, the FXC says that the dynamic nature of the foreign exchange
market will continue to facilitate the entrance of new participants and
technologies into the marketplace. Within this context, the significant and
growing role of auto-dealing should be viewed as a healthy and natural
progression.
The self-regulatory nature of the foreign exchange market and the global span
of its entire suite of products will continue to ensure that the foreign exchange
market is on the forefront of innovation within the world’s capital markets.
Auto-dealing will likely continue to be an important part of this environment.
As such, it is imperative that market participants be cognisant of the
challenges and opportunities that auto-dealing presents for all parties.
Liquidity providers should make sure that they possess the technology
required to provide the necessary infrastructure and risk management tools in
the auto-dealing space.
Additionally, banks providing prime-brokerage services in the auto-dealing
environment should be particularly aware of the fact that clients are
transacting in the prime broker’s name and prepared to investigate a complaint
by an executing dealer that their customer may have engaged in illegal or
unethical trading practices.
Whenever possible, banks should refer new market entrants to existing best
practices for guidance on appropriate conduct.
South Africa Holds
Options Course
ACI South Africa recently
organised a five-day workshop
in Johannesburg on Foreign
Exchange Options, which
culminated in a practical and
theoretical examination and an
award of the ACI South Africa
FX Options Certificate to the
successful candidates.
The workshop is presented at an
intermediate level, and is
facilitated by Peter Skerritt & Associates, a pan-African training company
specialising in derivatives. “Options are undoubtedly the most complex of the
instruments in the foreign exchange market,” observes Roy Daniels, President
of ACI South Africa. “And we hope that this initiative will lead to the wider
acceptance of formal standards for the accreditation of option dealers at a
practical level, to complement the theory of the ACI Dealing Certificate and
Diploma in this area.”
The workshop attracted delegates from several African countries where
foreign exchange options markets are currently being developed. A real-life
simulation environment was created for portfolio management, and interbank,
client, and broker dealing via the use of Fenics FX, the FX options pricing and
risk management system from GFI Group. “The fact that implied volatilities
almost doubled in the real South African rand options market during the week
of the workshop provided an exciting backdrop to the risk management and
trading sessions,” adds Peter Skerritt, the workshop facilitator. “Truth can
indeed be stranger than fiction”.
Similar workshops are planned over the next twelve months in the US, UK,
and Dubai. For more details, please contact peter@skerritt.co.za.
Central Banks’ Reserve
Accumulation Continues
Typically, reserve accumulation has been an Asian phenomenon as dollar
reserve accumulation exploded in the early years of this century, but now the
net is widening.
So what, if any, influence (beyond funding the ballooning US deficit) is the
high level of reserve accumulation having? Recent data from the IMF says
that reserves held as at September 2005 were in excess of $4 trillion, up from
$1.2 trillion in 1996, meaning the central banks have a lot more money to
manage and play with. It is worth remembering that the hedge fund sector is
seen as very influential even though most surveys suggest it has slightly in
excess of $1 trillion of assets under management.
The European Central Bank (ECB) has published a working paper studying
the growth in reserve accumulation, within which it notes that, “The
impressive pace of reserve growth has become an important issue on the
international policy agenda and has been considered from various
perspectives, including the financing of the growing US current account
deficits, the debate on high net savings in the Asian economies and oil
exporting countries, the sustainability of reserve accumulation, and the factors
behind exceptionally low yields within and outside the United States.”
The paper was produced by the International Relations Committee (IRC) task
force established under the auspices of the European System of Central Banks.
It investigates the features, drivers, risks and costs of reserve accumulation, as
well as the other uses that countries have been making of their foreign assets.
The report also reviews the main trends in reserve management and provides
evidence for the impact of reserve accumulation on yields and asset prices.
The paper notes that reserve accumulation in recent years has exhibited four
features that “seem largely unprecedented”. Three of these features became
particularly prominent in 2002-04, the paper states. Firstly, world reserves
grew by around 85% (or 91% if the first eight months of 2005 are included),
at a pace three times faster than in 1999-2001.
Secondly, monetary authorities in Asia, until March 2004, accounted for the
bulk of the accumulation, and eight of them are currently among the 10 largest
reserve holders. Thirdly, fewer official creditors held an increasingly larger
share of the total accumulation. The top five reserve accumulating central
banks, which accounted for almost 57% of the total reserve accumulation on
average in the period 1995-2001, increased their share to more than 68% of
the total world accumulation in 2004. The top two, Japan and China,
accounted for about half of the total world accumulation in 2002-04, and
currently hold around 40% of the total world stock of reserves.
“A fourth, equally important development has come about more recently,” the
paper adds. “The oil-exporting countries, whose combined current account
surplus is estimated to have exceeded that of the Asian economies in 2005,
have emerged as a new major group of net capital exporters in the world
economy. They, however, have accumulated assets not only in the form of
“traditional” reserves, but also by building up foreign assets in so-called oil
funds – a phenomenon that is not yet fully captured by the available statistics,
including those on the financing of the US external deficit.”
Drivers
The paper sees three main drivers behind the growth in reserve accumulation,
in addition to the more recent oil price hike. First, in the aftermath of the
financial crises that occurred in the 1990s and early 2000s, many emerging
market economies (EMEs) felt the need to self insure against future crises.
Second, at the beginning of their recoveries and following strong depreciation
of their currencies, the crisis-hit Asian economies pursued export-led growth
supported by exchange rate regimes anchoring their currency, de jure or de
facto, to the US dollar.
Third, it continues, certain features of the domestic financial systems of
EMEs, especially in Asia, are likely to have played a role. Such characteristics
relate mainly to their under-developed local financial systems, entailing
difficulties in properly channelling domestic private savings to investment as
well as inefficient and/or costly hedging markets. They also relate to the
resultant tendency towards dollarisation of official and/or private
cross-border assets on the part of certain creditor EMEs; and, from a macro
viewpoint, an excess of domestic savings over investment driven by either a
savings glut (e.g. China) or an investment drought (other Asian emerging
market economies). “All these features have significant links to reserve
accumulation,” the paper states.
The paper also identifies one aspect of reserve accumulation that most nations
have in common – the role played by the build-up of official foreign assets
both as an outcome of and an instrument for integration of the EMEs
concerned into the global financial markets. “Several emerging countries,
especially in Asia, have in fact become major players in international trade but
are still underdeveloped from a financial angle,” the paper states. “This
asymmetry is probably one reason why EMEs now hold around two-thirds of
world reserves compared with less than 30% at the end of the Bretton Woods
period, whereas the total reserves of mature economies with complete and
deep financial
markets, excluding Japan, have remained stable at around USD 500 billion
since the early
1990s.”
Risks and Impact
Nothing is straightforward in the financial markets, of course, so the paper
identifies potential risks and costs arising from the surge in reserve growth. It
highlights inflationary pressure, over-investment, asset bubbles, complications
in the management of monetary policy, potentially sizeable capital losses on
monetary authorities’ balance sheets, sterilisation costs, segmentation of the
public debt market and misallocation of domestic banks’ lending as the chief
areas of focus.
“Two other noteworthy developments have been recorded in several
economies in recent years,” it suggests. “First, some progress has been made
towards more active management of official reserves, resulting, for instance,
in investment in a more diversified range of instruments with longer
maturities. Second, a substantial share of
official foreign assets has been channelled into vehicles with purposes other
than reserve holding.”
Regarding the impact of reserve accumulation on yields, the paper notes that
estimates of the effect of intervention on US Treasury yields are quite
different, and range from negligible to 200 basis points. “This paper shows
that purchases of US government debt securities by Asian monetary
authorities might have affected the level and dynamics of their yields; in
particular, there is some evidence that Japanese purchases of US Treasuries
might have had an impact of around 65 basis points on three-year US Treasury
yields at the time of the most sizeable interventions. Looking forward, the
overall market impact of portfolio changes could differ, depending on the
preferences of the private sector.”
Sri Lankan Association Wins
Praise from Central Bank
The Sri Lanka Forex Association (SLFA) has won the support of the country’s
central bank for ACI’s education efforts in the region. Speaking at the opening
ceremony of the recent ACI Australia Dealing Simulation Course held in
Colombo, Dr A.G. Karunasena, Assistant Governor of the Central Bank of Sri
Lanka, told delegates and attendees that the central bank has given its blessing
to the initiative to introduce an accreditation programme based around the
ACI suite of examinations and qualifications.
Referring to the Dealing Simulation Course itself, and the fact that it trains
and equips dealers with dealing skills, needed for a fast developing financial
market in an increasingly globalised environment, Dr Karunasena said,
“Training such personnel is very important at present and it is a national
requirement, as a vision of the country is to develop Colombo as a financial
centre.”
Under the present floating exchange rate regime, one of the objectives of the
Central Bank of Sri Lanka is to ensure an orderly adjustment of the exchange
rate, with excessive volatility, reflecting changes in the macro-economic
fundamentals of the country, Dr Karunasera told delegates and local officials,
adding that the central bank considered it necessary to encourage the use of
new forex market products. He also revealed that the central bank has recently
granted approval to introduce derivative and hedging instruments to the
domestic FX market. “Dealers, however, should be well trained on the use of
such instruments which are somewhat complex,” he added. “Therefore I am
grateful to the Sri Lanka Forex Association for arranging this programme
which is timely.”
Dr Karunasera then pointed out the necessity to formalise mechanisms to
ensure local markets adopt best practices and safeguard end-users, while
conforming to the highest professional standards. “We, in the central bank, fell
it is necessary to do more to deepen and widen the foreign exchange market in
Sri Lanka, which is characterised by thin volumes, constant lack of live twoway quotes and lack of hedging instruments,” he observed. “I hope that all
participants may take the maximum benefit out of this programme and make
use of the knowledge gained to address such weaknesses in the domestic
foreign exchange market.”
The Assistant Governor also had special praise for the SLFA and its “valuable
contribution” to the market’s development through the various measures taken
to develolp a healthy and robust domestic market by focusing on people,
education and accreditation. Referring to an agreement between SLFFA and
ACI Australia for the latter to support Sri Lanka’s move towards a formal
qualification, Dr Karunasera said the central bank “always encourages this
kind of development and appreciates the commitment of the Sri Lanka Forex
Association to develop professionalism and to elevate the overall standards of
the [domestic] foreign exchange market”.
The SLFA has presented to the central bank of the introduction of the ACI
qualification in Sri Lanka and “the central bank has given its blessing to the
initiative and agreed to help in developing a fully-fledged qualification in Sri
Lanka,” Dr Karunasera revealed to the audience.
“The central bank has also agreed with the Sri Lanka Forex Association to
establish a committee to adopt the ACI Model Code in order to ensure that the
financial markets adopt best practices,” the Assistant Governor concluded.
“Meanwhile the senior management of the central bank has initiated to
encourage the CEOs of commercial banks and other financial institutions to
recognise ACI qualification for recruitment and career advancement of their
offices since it is a useful and important qualification for their forex dealers
and treasury managers.”
New Websites for Malta and
Russia: Italy Site Now Available
in English
The National Associations in Malta and Russia have released their new
websites. Members of ACI- The Financial Markets Association can keep up to
date with events in both countries by going to www.acimalta.com, and
www.acirussia.ru.
Separately, ACI Italy has added an English version to its website
www.aticforex.com. The new language version will be available from July 20,
2006.
TMA Hong Kong
Launches Spot USD/HKD
Fixing Rate
Eddie Tan
The Treasury Markets Association (TMA), which
incorporates ACI’s Hong Kong National Association,
recently launched the Spot USD/HKD Fixing to provide
investors with a reference rate for the pricing of Hong Kong
dollar-linked currency products.
Market data vendor Reuters was selected as the official exclusive calculator
and distributor of the fixing rate. The rate is calculated by averaging the
middle quotes after excluding the highest three quotes and lowest three quotes
from contributed rates provided by 20 banks designated by the TMA.
“The availability of a representative fixing for the spot USD/HKD exchange
rates will be conducive to the further development of the Hong Kong dollarrelated currency products in Hong Kong,” says Eddie Tan, Chairman of the
TMA Codes and Standards Committee, which developed the fixing in
consultation with market participants.
The spot USD/HKD fixing will serve as a benchmark for the market exchange
rates of USD against HKD at 11:00 a.m. Hong Kong time.
The calculated spot USD/HKD fixing will then be published on both Reuters
RIC <HKDFIX=> and Reuters page <HKDFIX> at 11:15 a.m. from Monday
to Friday, except public holidays.
“Market participants have noted that many banks have launched innovative
FX-linked structured products in the markets and this fixing is intended to
meet their needs to reference a benchmark HKD rate,” says Kenneth Tsui,
Managing Director in Reuters North Asia.
OTC Derivatives Activity Rises
Again in H2 2005
Activity in the OTC derivatives market, as measured by the Bank for
International Settlements’ (BIS) semi-annual survey of outstandings continues
to rise, however for the second successive survey period, the pace of growth
has slowed.
Overall notional amounts outstanding (excluding credit derivatives) rose to
$284,819 billion as ay end-December 2005, compared to $271,282 billion at
end-June 2005 and $251,499 billion at the end of 2004. Gross market values,
which measure the cost of replacing all contracts, declined to $9,139 billion
from $10,417 billion at end-June 2005.
All published figures in the statistics are adjusted for double-counting
resulting from positions between reporting institutions. Notional amounts
outstanding were adjusted by halving positions in relation to other reporting
dealers. Gross market values were adjusted by adding the total gross positive
market value of contracts to the gross negative market value of contracts with
non-reporting counterparties only.
Outstandings in the largest segment of the OTC derivatives market – interest
rate contracts – rose to $215,237 billion from $204,795 billion six months
previously. Within this, the numbers in all three categories – FRAs, interest
rate swaps (IRS) and interest rate options – rose, FRAs from $13,973 billion
to $14,483 billion; IRSs from $163,749 billion to $172,869 billion; and
options from $27,072 billion to $27,885 billion.
Regarding the pace of growth in the interest rate sector, which stood at 5%
compared to double-digit growth during the first half of the decade, the BIS
says it is too early to say whether it is a temporary blip or the start of a more
permanent trend, perhaps reflecting the maturing of the market. “What is clear
is that the rates of growth in the OTC market outstrip those recorded on
organised derivatives exchanges,” the BIS states.
Financial institutions dominate usage of interest rate products, with just
$25,092 billion of the $215 billion outstandings being with non-financial
customers. Conversely, in terms of currencies and tenors, the data is more
evenly spread. Up to one year (residual maturity) recorded $69,091 billion,
from one-to-five years $88,402 billion and over five years $57,744 billion.
In currency terms, the euro continues to be the most actively-traded currency,
with $82,641 billion outstanding, followed closely by the US dollar with
$75,354 billion outstanding. There is then a sizeable gap to outstandings in
Japanese yen ($26,561 billion) and sterling ($15,248 billion).
Exchange traded interest rate contracts outstanding stood at $52,300 billion at
the end of the year, a drop from end-June’s $53,794 billion, but well up on the
previous year’s $42,769 billion.
FX Continues Steady Progress
Outstanding amounts in foreign exchange contracts also continued to rise, and
again it was at a slower pace than previously. Total outstandings stood at
$31,609 billion as at end-December 2005, up from $31,081 billion six months
previous and $29,289 billion a year before.
The most dominant sector was outright forwards and forex swaps with
$15,915 billion outstanding (up very slightly from $15,801 billion in June
2005), followed by currency swaps at $8,501 billion ($8,236 billion) and FX
options at $7,193 billion ($7,045 billion). Exchange traded contracts
outstanding stood at $172 billion, slightly up from June’s $170 billion.
Gross market values in FX contracts fell back from June’s $1,141 billion to
$998 billion – this represents a continued decline from December 2004’s
$1,546 billion outstanding.
Reporting Dealers ($12,092 billion, a slight decline from six months before)
and Other Financial Institutions ($13,039 billion from $12,334 billion) made
up the majority of FX activity, with Non-Financial customers accounting for
$6,479 billion from $6,568 billion at end-June.
FX activity is heavily weighted at the shorter end, with $24,134 billion having
less than a year to maturity, $5,180 billion from one-to-five years and $2,295
billion more than five years. Unlike the interest rate segment, the US dollar
dominates activity, being responsible for $26,364 billion of outstandings,
followed by the euro at $12,870 billion, the yen at $7,793 billion and sterling
at $4,422 billion. The BIS does note, however, that the US dollar’s share of
the market – at 83% - is its lowest since the BIS started collecting data in
1983.
As well as highlighting strong growth in outstandings in the yen (from $6,907
billion to $7,793 billion), the BIS also notes strong growth in the Australian
(20%) and New Zealand dollars (60%). “This may be related to the strong
issuance of eurokiwi and uridashi bonds,” suggests the BIS. “The New
Zealand dollar has recently overtaken the Australian dollar as the leading
currency in [the uridashi] market due to the high yields offered in that
currency.”
Issuers of eurokiwis and uridashis tend to swap the proceeds into other
currencies, and as such in this case are a natural counterparty for New Zealand
banks issuing in foreign currency or for traders speculating on a decline in the
NZ dollar (which was in fact very stable during the survey period). “Another
factor behind the massive growth of the NZ dollar derivatives market could be
the increased use of currency swaps for liquidity operations by the Reserve
Bank of New Zealand, at least to the extent that these operations are with
reporting dealers and not local or Australian institutions not included in the
sample,” adds the BIS.
Credit Growth Also Slows
Notional amounts in credit default swaps (CDSs) also rose during the second
half of 2005, also at a slower rate than previously. Total notional outstandings
stood at $13,698 billion at end-December 2005, up from $10,211 trillion at
end-June 2005 and $6,397 billion at the end of 2004, the first time the BIS
collated CDS statistics. Gross market values rose from $264 billion to $346
billion. The total notional amount is calculated by adding together contracts
bought and sold and deducting 50% of the total of contracts bought and sold
between reporting dealers, who make up almost 65% of the market.
“The data do not confirm fears that the emergence of a liquid credit
derivatives market has led to a large-scale transfer of risks from the banking to
the insurance sector,” states the BIS. “Insurance corporations accounted for
$180 billion (2%) of the protection bought, and purchased $60 billion (less
than 1%) of the protection sold by the reporting dealers.
“While it is possible that these aggregates hide some sizeable individual
exposures, they certainly do not support a picture in which insurance
companies purchase CDSs to take on credit risk on a massive scale,” it adds.
“That said, it must be pointed out that the BIS data do not contain information
on instruments other than CDSs (including synthetic CDOs) that could be
used to transfer credit risk across sectors.”
Single name instruments made up the majority of CDS outstandings at
$10,217 billion, up from $7,311 billion at end-June and $5,116 billion at endDecember 2004.
Elsewhere, activity increased in the other segments measured by the BIS.
Equity-linked contracts outstanding rose from $4,551 billion at end-June
2005, to $5,057 billion; and commodity contracts outstanding rose from
$2,940 billion to $3,608 billion. The two segments were the fastest growing in
the second half of 2005.
Jamaluddin Appointed
Chairman of ACI Board
of Education
ACI – The Financial Markets Association’s Council has
unanimously elected Saad Jamaluddin as the new
Chairman of the ACI Board of Education.
Mr. Jamaluddin works for Arab Finance House SAL (Islamic Bank) as Senior
Executive Manager, Treasury & Correspondent Banking in Beirut, Lebanon.
He has a broad and respected experience in financial markets and is
considered the pioneer in introducing Islamic Treasury products to the
Lebanese Financial Markets and its banking industry.
Mr. Jamaluddin was appointed President of ACI Lebanon in 2003 after
serving as its Secretary from 1997. He was a member of the Board of
Education in recent years and significantly contributed to the progress in
education provided by ACI – The Financial Markets Association.
ACI would like to thank Carlene Crnkovich, who chaired the Board of
Education for the last three years, and wish her every success for the future.
From now on ACI will concentrate all its offices, including Education, at its
Paris location to further enhance communication and internal efficiency. The
quality of service rendered by ACI – The Financial Markets Association, and
the commitment to service the banking industry and its 13.000 members in
particular in the educational area remains unchanged.
In other news, Ann McGoff has resigned from her post of Head of ACI’s
Education Operations effective July 7, 2006. ACI would like to thank her for
all her hard work and wish her all the very best for the future.
For any assistance and questions regarding ACI Education please contact Saad
Jamaluddin or Jean Pierre Ravise, ACI Managing Director.
In Memoriam:
Hans Lamme
Hans spent almost all his career at ABN Amro and will
be remembered as a warm and very dedicated person by
all that worked with him.
Hans was a key driver in the success of the Treasury
within the former Amro bank, always focused on
growing the business in the best interest of the bank and
its employees. In more recent years at ABN Amro, he was a major force in
expanding the FX options business and building the first real global trading
book within the bank. This was a major breakthrough in the way the bank
conducts its business and was exemplary for many other product lines.
As a representative for ABN Amro, Hans became a member of the Board of
ACI, Netherlands as a secretary from 1989 to 1997. This was a tailor-made
job for his qualifications and skills. He delivered in that respect an important
contribution to the success of EUROFOREX´95 in Amsterdam in 1995.
Because of his personality and knowledge of market practices he was asked
by ACI Paris to become a member of the Committee for Professionalism.
In the last part of his professional career, his expertise on the markets,
products and the bank was instrumental in ensuring a successful transition to
the Euro for ABN Amro, as well as having Financial Markets smoothly
passing the much-feared Y2K point.
We will miss Hans and wish his family the strength to overcome this loss.