Apr 18, 2017

FX Derivatives: Electronification, Regulation, Globalization and the Market Outlook

Udi Sela, VP of Business Development at Numerix, is a former FX market maker and our resident FX expert at Numerix. In this video blog, he discusses key issues in the FX exotic derivatives market, from regulatory drivers of electronification to globalization impacts on the regulatory landscape, and offers his outlook on the FX market. This is Part II of a two-part video series addressing electronification and market trends, Part I can be viewed here.


Jim Jockle (Host): Are there any other significant drivers that are tipping the electronification of FX from your perspective?

Udi Sela (Guest): The implementation of MiFID II will probably be a good driver to support this trend of electronification. Otherwise I think that counter drivers for regulation would be the various elections that we see in Europe and the possibility that the single states will not approve specific regulations, let’s say FRTB, and will decide not to implement it. This trend of deregulation may impact trading and who knows maybe even the single currency is at risk now. We’re not sure by let’s say at the end of 2017, all countries will use the Euro. Given the elections in France, in Germany, the crisis in Greece, etc.

Jockle: Let’s dive into that a little bit more, right, because you know obviously, you’re speaking on the broad trend of globalization and you know having kind of a single benchmark regulatory regime and we’ve seen that retract this potential retrenchment give the geopolitical landscape but the question is if we look at cross border issues, they have seen significant retraction over the past couple of years. Is this a bigger issue, at this point in time, given the way that the money is flowing or is it a top-level concern, but the markets have already adjusted based on the cross-border issues?

Sela: Well, that’s a very broad question. So, we see some things for instance, in that respect. Let’s take the regulatory points. So, for instance, it seems that CCPs have been well. I guess digested by the financial community and therefore about, I guess over 80% of the trades that should be cleared centrally are actually cleared centrally, so that’s one thing. And now we see, at least in Europe that is, more people asking for solutions for SIMM for the margining of non-centrally cleared trades. So this seems to become the widespread consensus. I guess because this a regulation which is also good for the banks, I guess that’s the way they perceive it. Of course, it comes with requirements now to see MVA becomes like the most important valuation adjustment. As to other regulations, like, yeah we mentioned PRIIPS KIDs, or FRTB. So PRIIPS, KIDs needs to be approved by the European parliament or else it will be postponed again. FRTB seems to be postponed again because it doesn’t seem to be a consensus. We do see the implications of let’s call it the political changes and trends on regulation at the impact of that is course important on the markets. I don’t believe that the trend of electronification would be reversed because I think it’s also in the interest of banks to get that because it makes them more efficient and gives them a better return.

Jockle: One final question. You know obviously, you are our FX expert, we’ve talked many times about negative rates; we still have many countries negative at this point but obviously, the US now is a rising rate environment, even a little bit more aggressive. What’s your outlook on the market?

Sela: Interestingly, you would expect the dollar to strengthen against most currencies and actually the trend is not that way. I think that now the market is so far since the election of Mr. Trump has been pricing deregulation, lower corporate and income tax taxes and so forth, and now it’s the time to deliver. So, you know they say, buy on rumor, sell on fact; this is pretty much what we see now. I always tell you when we do these blogs that I look at the 10-Year Note and it has been trying to break to 2.6 annual yield and it doesn’t manage to go there, it always retreats. So, I think now this is really the key. We’ve kind of reached the critical point because if the new health care reform doesn’t go that means deregulation and the new tax laws will not go through 2017 and I think that the market is now starting to price that and, as a result, the dollar is weakening against the other G7 currencies like Euro, like Yen, etc. but also against Emerging markets and you see let’s say the comeback of the Russian Ruble and so on. So I think we will get towards the summer, at least in Q2, you will see higher volatility in the FX market.

Jockle: Excellent, well Udi thank you so much for joining us. Always a pleasure to have you here and get your insights on what’s going on in the world of FX and of course if you have any questions please hit us up on Twitter @nxanalytics or on LinkedIn and stay in tune on all of the topics we talk about here at Numerix.

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