The old-school lobbyists may well want to force all OTC FX on exchange, but what if you are a Swiss Bank? – Op Ed
Switzerland’s vault-like reputation and notorious disdain for interference from outside may well be its savior should the exchange lobby attempt to revamp OTC derivatives onto listed venues. When was the last time anyone argued with a Swiss bank or its regulator? That’s right. Never
Stubbornness, excessive bureaucracy and detail-obsessed compulsiveness is sometimes a boon rather than a burden.
Switzerland, from where this editorial is being penned as the winter snow falls on the mountains that set the backdrop to Grand-Saconnex on the outskirts of Geneva, is a mele of beauty, solidity, haute-couture whose financial system and the technological infrastructure that supports it operates with the accuracy and infallibility of, well, a Swiss watch.
In Switzerland, any company which provides retail FX or multi-product trading facilities to a retail client base must be licensed as a Swiss Bank, and Swiss banks have for many generations been regarded as the most vault-like in the world.
Switzerland is a country which did not even capitulate during the Second World War, even though the epicenter of that atrocity was right on its doorstep. Whilst the rest of Europe fought long and hard and took over 50 years to recover financially and demographically from one of the worst events in recent history that changed the entire face of the world, Switzerland remained neutral and brushed the dust off afterwards, carrying on as normal.
Therefore, bearing in mind Switzerland’s silent approach to ensuring that absolutely anyone who means it harm is absolutely not tolerated, even on the aforementioned scale, a few large scale international listed derivatives marketplaces and exchange execution venues with an ulterior motive should be a walk in the park.
As 2016 drew to a close, Britain’s Financial Conduct Authority (FCA) released proposals to change the entire method by which CFDs, a core business activity for many large, longstanding and highly respected British OTC retail trading firms with loyal domestic client bases, could be provided.
This attracted the attention of absolutely every executive in the FX industry worldwide, and many, including FinanceFeeds, are of the opinion that these proposals represent a kowtowing by the British regulatory authority to lobbyists from large exchanges, whose interest is to apply enough pressure to the entire OTC derivatives industry worldwide – Germany and France have followed with various new rulings including advertising bans and CFD-related proposals – into moving onto exchanges.
Surely there are far more pressing issues for the FCA to address than the conduct of such well organized and well recognized companies, such as the FCA’s upholding of PacNet’s regulatory approval despite PacNet being listed as a criminal organization by the US Treasury recently. The FCA, instead of following the US Treasury’s lead, responded to the sanctions by defending PacNet.
Additionally, the FCA allows binary options fraudsters to run amok in England when other nations have issued outright bans and in some cases resorted to police investigations on the perpetrators.
Instead of tackling this, the FCA has decided to impede the progress of the nation’s finest.
The recent history of many large exchange technology companies and listed derivatives marketplaces is enough to sway learned opinion in that direction too.
CME Group’s recent investigation into the possibility of embarking on a project in which it provides a rolling spot contract is a case in point, as that would position it as a direct competitor to OTC derivatives companies.
Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million. Now Deutsche Boerse is embroiled in its fraught merger with the London Stock Exchange, which has been deemed monopolistic by the European Commission, however that will proceed due to the imminent sale of LCH SA, the European division of LSE’s clearing division LCH.Clearnet as a condition of the transaction, whose buyers will be its largest customer.
Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September this year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities.
FinanceFeeds is also aware that this has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buyside and sellside firms in the OTC derivatives sector.
At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was signed in December, whereby Deutsche Börse will pay a US dollar amount in the single digit million range.
EUREX bought the 360T treasury system, with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics.
In addition to these M&A related indicators, the retail FX industry, large or small, is potentially the subject of a lobbying movement from the old school tie establishment who possibly view it as a 30-year old upstart business that has now become so prominent and so highly respected that the only way to bring that business back onto the traditional method of central exchange execution is to play golf at the right club.
Not in Switzerland!
Here in Geneva, just four entities have retail online trading facilities, those being Dukascopy Bank SA, Swissquote, IG Bank, and Saxo Bank.
Relatively shortly after the establishment of IG Bank by British stalwart IG Group, FinanceFeeds met with IG Bank’s CEO, Fouad Bajjali at the company’s ultra-modern headquarters on the shores of Lake Geneva which would not be out of place in Singapore or Hong Kong, and are located in a building which is home to several Geneva fashion outfits and the Rooftop 42 bar which is a well known haunt for many of Switzerland’s top financial executives.
Mr. Bajjali explained to FinanceFeeds “Switzerland requires that all entities which operate within the FX industry, provide FX technology or operate as an electronic brokerage, are banks, and that there should be no variable factors which other companies face all the time in other parts of Europe.”
“For example, in Switzerland, there are no companies which operate here by passporting from elsewhere under the MiFID rules which allow it, because Switzerland is not an EU member, and also does not allow any firm to operate without being a Swiss bank. All of the FX companies in Switzerland are fully regulated by Swiss banking licenses” he said.
Speaking with Ryan Nettles, Head of Forex Trading and Market Strategy at Swissquote Bank SA where FinanceFeeds took a close look at the trading desk which served to demonstrate the advantage in terms of value proposition that Swiss banks hold over some of their overseas peers, as Switzerland’s FINMA has unique rulings as to how the infrastructure of an electronic trading company must be built.
The company builds its own proprietary systems, its own risk management as well as its own liquidity aggregator which connects to liquidity provision from Tier 1 banks and ECNs.
This is all hosted on an internal datacenter which is in the headquarters with some remote backup facilities, the entire system being completely ringfenced in accordance with Swiss regulations.
“Swissquote’s FX trading operation is very special” enthused Mr. Nettles. “Our systems operate in a totally automated manner. Our FX trading operation is managing trading volumes over 4 billion USD per day and is staffed by 9 traders whom have strong technical knowledge as the systems are completely computerized.”
“Rather than trading using traditional manual methods, our traders spend alot of their time purely conducting optimization with the help of our dedicated quant department and supervision as every component of our trading system, from price discovery and distribution to all of our platforms to execution with the clients and liquidity providers including risk management is completely automated. We do have the ability to override the system manually but we never need to do this under normal conditions” he explained.
Bearing this in mind, the Swiss system is so totally different to any other in any other region, that it does not resemble any style of infrastructure used globally, and most importantly, the entire system, by Swiss law, has to be ringfenced.
This means no external execution, no external sending orders to other counterparties or outsourcing of execution. All servers and all trading environments must be in house, proprietary systems from top to bottom, and must be secured from the entirety of all other systems.
Those are the rules stipulated by the FINMA, which licenses Swiss banks, and when was the last time anyone argued with a Swiss authority on anything? That’s right, never.
This week, here in Geneva, FinanceFeeds will conduct extensive research with regard to this matter, and report in detail on our findings.
Image: Grand Saconnex, Switzerland. Copyright FinanceFeeds