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Shaping FX: Leaders in FX – event recap
Leading the debate in FX trends – do we need CBDCs, and is there a case for shorter settlement cycles?
We hosted our inaugural ShapingFX event in the iconic Eiffel Tower in Paris. We gathered participants from across finance, technology and innovation for our Leaders in FX summit. We believe that collaboration among FX market participants is fundamental to understanding and meeting the evolving needs of the market, especially amid the rapidly changing technology and regulatory landscape. Industry events like this, where stakeholders can engage in meaningful face-to-face discussions, can play a crucial role in this process.
CLS CEO Marc Bayle de Jessé’s opening remarks emphasized the importance of addressing two key trends impacting the FX market: the shortening of settlement cycles and the rise of digital currencies, both panel topics at the event.
Banque De France keynote highlights the continued importance of resilience in FX
In her keynote speech, Emmanuelle Assouan, Director General Financial Stability and Operations at Banque De France, shared a view of the FX landscape from a central bank’s perspective. Emmanuelle discussed the market’s evolution, specifically highlighting fragmentation and the diversity of trading options.
She touched on the FX market’s resilience and cited the establishment of CLS and the introduction of the FX Global Code to define best practices and promote transparency.
She ended by highlighting innovations like central bank digital currencies (CBDCs) that are currently shaping the market and creating opportunities for developing solutions that balance risk mitigation, liquidity optimization and operational efficiency.
Leading the debate: the panels
Panel 1: How global trends are moving toward shorter settlement cycles. The shorter, the better?
Lisa Danino-Lewis opened by giving a brief overview of the FX landscape, particularly in relation to the T+1 transition in North American securities markets in May 2024. Her first question centered on the challenges arising from this change for FX market participants and the steps taken to minimize the impact.
Adrian Boehler, Global Head of Macro Distribution at UBS, remarked that from the sell-side perspective, the transition was successful and incident-free. Prior to the change, data analysis suggested that the impact on volumes would be relatively modest. Regardless, UBS undertook robust planning and preparation to ensure a smooth transition. It engaged with clients to understand their sensitivities and with industry forums and regulators. UBS also educated staff and conducted a full review of impacted workflows.
Post transition, UBS temporarily increased staffing during the impacted window of 16:00 to 18:00 EST to manage any potential spike in clients transacting at the end of the day after the US equity market close. Boehler noted that this spike has yet to materialize in a meaningful way, so UBS have reverted to pre-T+1 staffing levels during this time.
Lizzie Wilson, Global Head of Security Services, FX at J. P. Morgan, echoed these sentiments from the custodian perspective – remarking that early planning and client engagement had been key to help clients and the wider industry prepare for the transition. In particular, Lizzie highlighted that although Custodians have existing FX solutions available to clients J.P. Morgan also looked at ways to streamline end of day processes and extend internal deadlines to alleviate end-of-day stress for clients. Thanks to the preparations and diligence of the clients, industry and regulators the T+1 transition was a success.
James Kemp, Managing Director Global Foreign Exchange Division at the Global Financial Markets Authority agreed that for the FX industry as a whole, the transition went well. The GFMA’s focus was similar to those of UBS and J.P. Morgan – engaging its membership and coordinating with buy-side associations in multiple jurisdictions to raise awareness. James added that outreach to banks and buy-side associations in Asia – and Japan in particular – was key because the Asian time zones further increased time pressure in the deal lifecycle post the transition.
The discussion then shifted to whether shorter settlement cycles in the FX market could be beneficial. Lisa asked panelists for their views on potential advantages and the feasibility of wholesale market adoption.
Adrian Boehler remarked that it is premature for the industry to reach a definitive conclusion. He added that coordination at a global level is needed to facilitate greater understanding of the impact of a wholesale move across all market constituents (banks, central banks, asset managers, hedge funds, corporates), and a rollout plan would need to be developed if any agreement is reached. He also emphasized the need for greater insight into potential risks, as any compression of settlement cycles can increase pressure on fundamental operations like trade confirmations, reconciliations and remediation.
Kemp added that the FX market’s position in the wider financial ecosystem cannot be understated, explaining that FX is vital in underpinning and supporting global trade and investment. Before proposing accelerated FX settlement cycles, all stakeholders must be clear as to the expected risks and benefits. James highlighted that one of the biggest risks involves failures in settlement operation funding – and highlighted that any disruptions could significantly impact the global economy given the extensive FX user base ranging from global asset managers to corporates, to regional and domestic SMEs.
Boehler stated that the biggest barrier from the sell-side perspective is the ability for the broader ecosystem to adapt to shorter settlement cycles. The scale of migration would surpass what was seen during the US securities transition. He added that the network effect beyond the sell side remains limited because other parts of the ecosystem have yet to embrace new technology in the same way.
From a custodian perspective, Wilson agreed that a wholesale shift to shorter settlement cycles in FX would be very different from the US securities transition. Even with the lessons learned there, deeper analysis is needed to compare the benefits against the risks. Global coordination and collaboration across the industry would be key when assessing the impact on regulation, infrastructure, operations and resourcing.
Panel 2: The role of digital currency in FX. Need a token? What is broken?
Joined by public sector and industry experts, Dirk Bullmann opened the second panel by sharing key observations from CLS about the evolution of central bank digital currencies (CBDC). He noted a transition in use cases from domestic application to cross-border, as well as a notable shift in focus from retail to wholesale CBDCs. This sparked discussions among the panelists regarding some of the potential use cases.
Claudine Hurman from Banque de France highlighted two major use cases for wholesale CBDCs (wCBDCs) from its experimentation program – tokenization and delivery-versus-payment (DvP) and using CBDCs to enhance cross-border transactions. She highlighted various initiatives undertaken by Banque de France, such as a project exploring the concept of automated market makers where a common pool of CBDC tokens could be exchanged, while maintaining central bank control of these assets. More recently, Banque de France efforts have focused on exploring the FX layer of interconnection between fast payment systems and using CBDC tokens to enhance cross-border payments.
Distinguishing between assets (tokens) and the underlying technology (distributed ledger technology, or DLT), Bullman asked the panelists about DLT’s readiness for adoption and what use cases they were seeing.
Scott Lucas from J.P. Morgan said he believes DLT is ready for certain use cases, citing a product that J.P. Morgan has had on the market for the last four years. While niche in its offering, he stated that the product is already providing value for the clients using it. In his view, DLT’s capabilities exceed current demands in the FX market, and it may be a case of innovating, launching products and seeing how the market responds before there is more widespread adoption.
The discussion then turned to FX services and practical use cases like intraday FX swaps.
Ousmène Jacques Mandeng from Accenture remarked that there may be strong use cases for spot trades and instant atomic settlement. He believes that the interest lies in the ability to execute complex transactions on an instant basis, explaining that in an instant and atomic environment in combination with a safe settlement medium like CBDC, foreign exchange settlement would become near riskless. Pre-funding would effectively become obsolete. Instead, participants could immediately swap or borrow the required currency. Mandeng also pointed out that for smaller currencies, such as those outside of CLS, a new, token-based approach could be one of the paths forward for more efficient settlement.
Concluding with what they believed the next big thing will be, Hurman shared that while she does not see a dramatic overhaul of the landscape, she expects improvements that make payments quicker and less costly.
Mandeng thought that new, safe mediums like tokenized money market fund shares could increasingly become part of the FX settlement ecosystem. Lucas concluded that while optimism is higher now that it has been – partly because of more openness to the technology in North America – the next big thing will likely involve more of the same: presenting interesting opportunities for markets to explore future possibilities.
