We have seen many crises in the past, but this one is in many ways unique and I cannot recall a similar set of circumstances in my 43 years in markets. Financial crises have been global before but have originated within the financial system. Natural disasters have been localised as has dislocation due to terrorism and wars. This pandemic is unique as it is the first time we have seen such dislocation in so many countries at the same time. All financial centres are going through unprecedented emergency implementation of disaster planning activation.
In December 2019, the UK National Competent Authorities (NCAs) published consultation papers entitled “Operational resilience: Impact tolerances for important business services”. Within these, important business services provision of FX hedging services and payments was specifically mentioned. The UK NCAs are, sensibly, operating some forbearance as we cope with these difficult times. While firms are expected to service their customers, robust procedures and controls must be in place. The FCA has said:
“As firms are moving to alternative sites and working from home arrangements, they must consider the broader control environment in these new circumstances … this could include enhanced monitoring, or retrospective review once the situation has been resolved. Firms should continue to record calls, but we accept that some scenarios may emerge where this is not possible. We will continue to monitor for market abuse and, if necessary, take action”.
In essence there is some allowance to permit delays, however not for breaches and it is important that firms remain cognisant of their responsibilities under key principles of business and conduct. Therefore, vigilance of their duties under the Senior Managers Certification Regime (SMCR) remain crucial. Under the FX Global Code, which many firms have stated commitment to, principle 33 is the most relevant which simply states:
“Market participants should have business continuity plans in place that are appropriate to the nature, scale, and complexity of their FX business and that can be implemented quickly and effectively in the event of large-scale disasters, loss of access to significant trading platforms, settlement, or other critical services, or other market disruptions.”
Once this crisis has passed both senior managers, and other the lines of defence will be better informed and will have takeaways to improve resilience in times of crisis in the future. It will be a unique and informative lessons-learned process as we look at ensuring key roles remain fully informed during a crisis and see how reporting and controls can be improved. In participating in some interesting discussions regarding the current difficulties some early common issues are emerging. This is not unexpected with recent surveys estimating up to 60% of the FX market is working from home and it is probably applicable to those working in other asset classes.
Communication recording is an issue and has prompted NCAs to single this out, alongside reporting, is where they are prepared to offer forbearance. Going forward I expect many will be upgrading this key aspect of market surveillance. Digital recording that is integrated with deal execution and capture systems with a link on all quotes and deals to the underlying communications will be top of many shopping lists, alongside a Regulatory Reporter. For those currently experiencing this issue the advice is simple – tell the NCA and then undertake robust retrospective reviews!
Another related issue is the accuracy of timestamps. Delays booking trades executed into deal capture and TMS’s are causing some concerns. It could be noted that cutting edge front ends with flashy screens can be let down by non-digitised legacy back ends. The more disparate systems you have, the more hops you have and so more latency. Going forward the benefits of a holistic system, integrated with real-time capability, coupled with execution and sales desk functionality, alongside a common data store, will prove to be a more robust solution. This can then be integrated with downstream systems and still operate in real-time.
Other benefits that would prove to be efficacious in the current crisis would be the ability to see credit limit utilisation, also in real-time, especially when such functionality is remotely accessible with a permissions regime to allow approval of excesses. A TMS that combines both execution and sales desks, optimised with common processes automated, will be required in the first instance. This would be integrated with kill switches, an ability to turn on deal & cover and switch all spreads based on volatility at the press of a key.
With the desktops (accessible from home) individually customised, you would reap the benefits of great customer service in current times. The option to offer mobile trading would also be a big plus with those currently offering such functionality pointing to in excess of a threefold increase in business! This could easily be combined with a plugin electronic payments capability to make sure this other key business requirement is covered. It is also worth bearing in mind all this must still be alongside best execution requirements and so processes to prove this should also be baked into the solution.
In conclusion the main takeaway is going to be that remote access to systems is likely no longer a nice to have but a necessity going forward. Fundamental changes as to how we operate will continue to emerge during this pandemic and will require a solid foundation on which to build out improved operational control.