Committed to maintaining a balanced ecology for all traders

e-Forex talks with Jeff Ward, Global Head of FX Sales at ICAP Electronic Broking.

First Published: e-Forex Magazine 47 / e-Forex Interview / April, 2012

Jeff, in 2004 you joined EBS, which was acquired by ICAP in 2006. What gives you the most satisfaction about your day to day job?

As a global intermediary, ICAP sits right at the heart of the financial markets and is an incredibly dynamic environment to work in. I have a great global team, who never cease to impress me with their commitment, insights and creative solutions to the challenges we face on a daily basis, which constantly force us to evaluate what we’re doing – and how we do it. Over the years, I’ve also developed some very strong relationships with our customers, and it’s always gratifying to hear from them that we’re delivering what the market needs.

As the world’s largest interdealer broker, ICAP has a diverse group of customers ranging from manual to algorithmic traders. How much of a challenge has it been to deliver a balanced set of products that meet the conflicting needs of all  your clients, many of whom may have different priorities?

I think it would be fair to say that this is our toughest challenge. ICAP has thousands of customers in over 50 countries at bank and non-bank trading organisations, so it’s no easy task to make sure we’re providing them all with the tools they need to conduct their business effectively. We do get a lot of credit for delivering a product that satisfies our broad customer base but it’s probably the most difficult part of our job. 

Even within individual customer organisations there are often very different expectations of what they want from EBS, so we need to make sure we’re constantly doing our best to meet these expectations.

We’re committed to promoting orderly markets and improving execution efficiency, and go to great lengths to maintain a balanced ecology for all traders – both manual and algorithmic. We achieve this through built-in platform features, and our dealing rules and policies. 

With the growing prevalence of API trading, we’ve continued to focus significant resource on supporting the competitiveness of manual traders by providing them with the functionality and order types they need in order to compete effectively with API traders. 

Continuous Match (CM), for example, is a block trading solution that allows bank manual traders to enter large buy or sell interest (minimum $10 million) into a separate liquidity pool, with minimal market impact and slippage. CM orders and deals are not included in any EBS market data and only the two counterparties are aware of the size of the CM trade.

Fix Orders on EBS is another innovative order type that was developed with the bank manual trader in mind. Fix Orders on EBS allow bank manual traders to execute their customers’ fix orders electronically – a first for the market. This greatly increases accuracy, as all matched orders are always executed at the specified fixing rate and there is no confusion regarding the amount dealt. They also provide a significant boost to internal transparency and audit capabilities. 

ICAP acquired the EBS Spot FX platform in June 2006. In what ways have you invested resources to improve the EBS system?

With the acquisition of EBS, ICAP inherited a tried and tested platform that has demonstrated tremendous resilience in all market conditions over the past six years. But for EBS and our other electronic platforms to remain best in class requires substantial and sustained investment. We’ve significantly increased our investment in the platform technology in order to deliver a more flexible and dynamic platform for our customers in a rapidly changing FX market.

“ICAP sits at the centre of the markets and financial institutions, including banks and central banks, and governments all around the world depend on EBS to be fair, transparent and available at all times.”

We’re now nearing completion of a major initiative that will leverage new technology to offer EBS customers a wide range of new products, starting with market data services. You can expect to hear more as our launch date approaches later in the year.

Last year many FX platforms saw record volumes as a result of extraordinary volatility associated with the Eurozone crisis and various currency interventions. How much engineering and capacity planning has ICAP done to ensure you have an adequate cushion to meet practically any multiple of average daily volume?

EBS has proven to be robust, even in moments of extreme market volatility. The system has the capacity to handle three times our current daily volume record of USD 454.2 billion, back in August 2007. On the day of the ‘flash crash’ on May 6 2010, over a quarter of a million deals were transacted on EBS, and more than three and half thousand deals were done in one minute on 3 March 2011.But this doesn’t mean we’re complacent. We’re constantly reviewing and testing the system to ensure it will be able to cope with even more extreme market volatility.

Investors naturally seek safe havens from the turbulence and uncertainty surrounding the major currencies at times of crisis in the market. Does this present opportunities for leading FX providers like ICAP who have a wide global footprint, more robust operational infrastructures and perhaps deeper product and risk management capabilities than many other players?

ICAP sits at the centre of the markets and financial institutions, including banks and central banks, and governments all around the world depend on EBS to be fair, transparent and available at all times. We’ve worked hard to become and remain a reliable trading venue at the centre of FX price discovery. Because of this, during times of extreme volatility and stress, market participants rush back to EBS.

EBS is very active in a number of major currency pairs but this is only part of the story. We’ve developed and launched a number of new products particularly suited to the needs of emerging markets and traders whose focus is outside the G-10 currencies. 

For example, in September 2010, the first electronic CNH (Hong Kong cleared and settled Chinese yuan) trade was executed on EBS. 

In February of this year, we launched the Brazilian Roll (BRL ROL) on EBS, which allows customers to trade the front future outright, roll their position from the front future date to the next, and roll day to day balances to the front future in BRL. This is another electronically-traded product that is unique to EBS and has been received very positively by the market right from launch.

As US and European regulators continue to mull over FX, a great deal of uncertainty still remains regarding the final rule-sets that are likely to emerge. How would you describe ICAP’s tactical and strategic response to regulatory and market changes and is it fair to say you have hoped for the best but planned for the worst? 

Our platforms have been designed and built to deliver efficiencies in execution as well as risk management. EBS is transparent with full audit trail capabilities and currently exceeds the standards outlined in Dodd-Frank. So given current definitions, we fully expect EBS to qualify as a SEF in the US and to meet European qualification criteria as an OTF. 

Since NDFs will be included under the new legislation and EBS is set to become a SEF, this presents a tremendous opportunity for us. EBS was the first platform to introduce electronically-traded NDFs, which we now offer in a range of Asian and LatAm currencies, including fixed data Brazilian real NDF, as well as Russian ruble. We’ve recently seen rapid growth in our NDF business – both in average daily volumes and trading counterparties. This will continue to be an important focus for us this year.

Although it appears that forwards may be exempt from the legislation, subject to a final ruling by the US Treasury, we’re in the process of exploring FX swaps and forwards solutions on EBS to ensure we’re prepared for a range of outcomes.

The changes to the OTC regulatory landscape over the next few years will have a very significant impact on our industry. But while it’s true that there’s still considerable uncertainty, regulatory reform will also create opportunities. We’re well-resourced and prepared to enhance our capabilities to ensure our markets retain their leadership positions in the impending new regulatory environment.

It’s likely that reform will provide a significant boost to electronic execution, as there will be a need for greater transparency in pricing and reporting that meets regulatory requirements.

We’ve also recently configured our electronic FX business to reflect and anticipate changing market dynamics and the new regulatory landscape. We’re excited to have Gil Mandelzis on board as the new CEO of EBS, as his vast experience and depth of market knowledge will enable us to continue responding to the rapidly evolving needs of our customers and to deliver exceptional service.

“Growth in FX is likely to come from BRIC 
and emerging markets”

“Growth in FX is likely to come from BRIC and emerging markets”

A block-trading service called Continuous Match and decimalised pricing on major currency pairs are just some of the other innovative products that ICAP has released over the last 18 months. Are you planning a period of consolidation now to give customers time to adjust to the changes that have been introduced?

Any changes we make to our platforms should enhance our customers’ trading experience. Just like our customers, we don’t believe in change for the sake of change, which is why we innovate in response to real customer need. 

But a bigger risk both to us and our customers would be to rest on our laurels. The market’s evolving rapidly and we need to make sure we stay at the forefront of this evolution – and help our customers to do the same. When we launch any new product, order type or platform functionality, we ensure that our customers have all the information they need to be able to use new features effectively. 

This has certainly been the case with Continuous Match, which is now well established and, as I mentioned earlier, is continuing to see strong growth, both in average daily volumes and new trading counterparties. 

We’re excited about introducing more intelligent order features in the future that will bring greater convenience to our customers and tie together some of the order types we’ve already developed. We have an exciting product roadmap in place for 2012-13, which has been carefully planned to provide our customers with tailored solutions they’ve expressed a need for.

As the market continues to get faster some commentators believe that FX is locked in a technology “arms race”. Do you believe success in FX may ultimately be directly related to the level of IT and technology spend?

In order to compete effectively in the rapidly evolving FX trading environment, fast, robust, scalable technology is critical – and this requires significant, ongoing investment. 

In order to further strengthen and grow our global electronic market business, ICAP invests heavily in technology, which includes our trading platforms. In the financial year to March 2011, ICAP invested 12% of its revenues in technology – and around GBP 1 billion since 2005.

But I don’t think this boils down to an arms race. A successful FX trading venue depends on much more than technology. We work closely with market participants to understand their requirements and aim to create a balanced trading ecology. This is part of our rationale for introducing systemic controls to EBS, such as a minimum quote lifespan (MQL) and fill ratio requirements, and why we constantly monitor platform activity. Technology is not an end in itself – it’s only as useful as the liquidity and counterparties it enables traders to connect to, which is what differentiates EBS.

“As part of our continued emerging markets focus we’ve worked hard to build Russian ruble liquidity on EBS, following the introduction of the ruble to the platform in late 2008, and we now offer a number of innovative ruble products.”

In what ways are you seeing banks and FX providers in some of the leading emerging market economies keen to leverage innovations ICAP has developed on the EBS platform in other markets?

A key factor in our success in emerging markets has been our EBS Prime offering. For many regional banks and non-bank trading organisations, access to credit can pose a significant barrier to participating in the interbank FX market. 

EBS Prime allows these customers to access EBS liquidity and trade on prices that might otherwise be unavailable to them, by enabling them to view the market through the pre-screened credit of an EBS Prime bank.

As part of our continued emerging markets focus we’ve worked hard to build Russian ruble liquidity on EBS, following the introduction of the ruble to the platform in late 2008, and we now offer a number of innovative ruble products. For example, we’re the only electronic OTC trading venue to offer the basket ruble hedge trade and this year we introduced the EMTA RUB Fix. 

I’m pleased to say that we’re now seeing the fruits of our labour. With the support of our customers, we saw strong growth throughout 2010 and 2011 and year-on-year – from January 2011 to January 2012 – ruble trading volumes on EBS have doubled and trading counterparties are also continuing to increase. EBS is now the leading electronic OTC trading venue for ruble globally. Offshore price making on the platform increased 50% over the last year, and most of Russia’s top 20 banks are now live on the platform. 

As I mentioned earlier, NDFs are a key part of our emerging markets strategy and we hope to see the strong growth trend of recent months continue.

Where will you be focusing your efforts to further develop the emerging market capabilities of the EBS platform during 2012?

We recognise that growth in FX is likely to come increasingly from BRIC and emerging markets, as currency controls relax. A major challenge is how to develop solutions that satisfy often less-liberal local financial market structures and at the same time enhance trading opportunities for the wider (global) FX community. 

Operating in local markets is made easier by a genuine understanding of the key issues – infrastructural, regulatory, cultural and historical – facing each specific market, and being able to offer a tailored, relevant solution or proposal. What makes EBS successful in establishing itself in new markets is the strength of our leadership and track record, significant forward planning and resource investment, as well as our ability to maintain focus and patience as less-developed, less-liberal FX markets grapple with and then over time begin to embrace the benefits of electronic OTC trading. 

We also have the advantage of being able to leverage partnerships with local ICAP voice businesses, as well as domestic institutions. In Brazil, for example, we’re working closely with the banks and regulators to develop the markets there.

We’re also currently exploring the possibility of offering execution in local emerging market currencies, such as the Brazilian real and Indian rupee.

Can you give us some examples of where ICAP is making longer term investments in new “Greenfield” marketplaces around the world to improve settlement infrastructures and help promote electronic trading?

Again, Russia springs to mind. The Russian payment system poses a considerable challenge to efficient ruble settlement and for a long time there was little information available to market participants about its unique requirements.

ICAP has taken proactive steps to address this situation and in 2007 founded the International Ruble Settlement Forum (IRSF). Through the forum we aim to facilitate a commitment between all correspondent ruble banks in Russia to use BESP, a real-time gross settlement system created by the Central Bank of Russia, which goes a long way to solving the great majority of payment issues associated with the current BRPS payment system.

The IRSF is now a regular event, held twice a year, alternating between London and Moscow, and has the support of all major ruble market participants. ICAP will be hosting the eleventh IRSF in London on 24 April.

What feedback have your clients been giving you on where they would like the resources of ICAP to be focused on further specific development of your e-FX products in the near to medium term?

Since 2003 we’ve conducted annual customer satisfaction surveys, which provide us with benchmark data to track our performance and help us understand what we should focus on delivering. 

“In Brazil, for example, we’re working closely with the banks and regulators to develop the markets there.”

The most recent surveys report that liquidity is the number one priority across all our customer groups, while manual traders in particular have indicated that they want us to continue developing new order types that will help them compete in an increasingly automated trading environment.

So continuing to examine market behaviour in order to ensure that EBS remains the core source of deep liquidity in this new, more automated world is absolutely paramount.

Looking ahead what steps will ICAP be taking to maintain your competitive edge in FX and differentiate your services in the electronic trading space?

We take our position at the heart of the OTC financial markets very seriously and work hard to ensure we never stand still. 

We’re committed to a consultative approach and ongoing engagement with our large, diverse customer base to ensure their requirements are anticipated, understood and satisfied. We’re continuing to meet regularly with our customers and are striving to deliver intelligent solutions that create an even better trading experience on EBS.

I think all market participants can expect to face a number of challenges over the course of the next 12 months but we believe our plans for the coming year will go a long way to helping us and our customers maintain an edge in an increasingly competitive marketplace.