Meeting a man with his eye on the ball

e-Forex talks with Richard Anthony, head of e-risk - FX & Metals at HSBC

First Published: e-Forex Magazine 45 / e-Forex Interview / October, 2011

Meeting a man  with his eye on the ball

Richard, what are your main day to day responsibilities at HSBC?

I am responsible for the pricing and risk management of electronic foreign exchange transactions. Over the last 20 months HSBC has been investing heavily in its eFX infrastructure. Thus, as well as my day-to-day risk management responsibilities I am heavily involved in the management of the ongoing strategic improvements we are making to our offering; ensuring we build an eFX offering commensurate with HSBC’s wider FX business. 

Over the last year HSBC has been undertaking ambitious plans for strengthening what is already a powerful global FX franchise. In what ways has your team also been working at the same time to enhance the banks’ FX e-commerce offering?

Within the eFX group we have dedicated teams ensuring that our offering meets the needs of our client base; from identifying and implementing changes in our product suite through to enhancing the user experience. As my team is responsible for the pricing and risk management of electronic transactions, our goal is to ensure that we provide the most competitive and consistent pricing for our clients at all times. To achieve this we have been investing heavily in the trading side of the eFX business; both in terms of quantitative development to improve our pricing and risk management algorithms and, in terms of our underlying technology that supports those algorithms.

HSBC is one of the few banks with a truly global footprint which provides you with unrivalled market insight across multiple regions and client sectors. How has that helped in the development of your e-FX services?

HSBC’s global footprint means we have FX personnel in a large number of centres, a reach not rivalled by the majority of our competitors. This presence provides valuable local expertise which enhances the pricing process for less frequently traded currencies and outside of local hours. By leveraging this local presence and local liquidity we are able to offer competitive and consistent pricing at all times. 

Do you agree with some analysts who contend that the market always gets faster and that success in FX is directly related to the level of IT and technology spend?

The industry continues to focus on reducing latency as there is a clear advantage in being the first to react to any input into the pricing and risk management process. This has lead to a technological “arms-race” which has been the subject of much discussion and debate amongst market participants. The market has therefore got faster and this has indeed fuelled technological spend by those who wish to remain competitive; a market-maker may have the best pricing and risk management algorithms but if they were to the last to deliver a price, or react to a risk management signal then those algorithms will struggle. The more pertinent question is whether success in FX should be directly related to the level of IT and technology spend?

Meeting a man  with his eye on the ball

There continues to be increased demand for FX Prime Brokerage from many regions around the world. What steps has HSBC been taking to ramp up your FXPB services to meet this?

Early in 2010, we launched our FX Prime Services business globally. We have desks in Asia, EMEA and the US to cover our growing client base. We have invested in technology and client services in to address client demand across client segments and regions. As our clients grow their business, we are committed to understand their challenges and offer solutions by leveraging our global presence, strong balance sheet and diverse franchise. Many clients come to HSBC as they recognise our expertise in emerging markets and look to us to provide guidance in these markets as they grow their businesses and because of our strength in balance sheet. Our systems and processes are scalable, so as the FXPB service grows, we focus on working closely with our clients to mitigate credit and operational risk as much as possible and add value by helping them to better manage through volatile FX markets.

Why do you think offshore renminbi trading is proving so popular and how has HSBC been extending it’s capabilities in the electronic execution of CNH?

We have seen a great deal of interest in the offshore renminbi market. HSBC did the first CNH spot transaction, dealt the first CNH options and were first to create a tradeable CNH index. More people can now access the renminbi market than ever before and as the first bank to offer CNH electronically, we continue to support the development of the market. The freely floating nature of the currency means that one can buy it, sell it, borrow it, lend it and not having to use NDFs removes the fixing risk. Add the fact that one does not have to pay a premium to hold it (as with the NDF) and it’s easy to understand why CNH volumes are already greater than CNY NDFs. 

Many leading FX banks are trying to find the right balance with their tactical and strategic response to regulatory and market changes. How is HSBC addressing the likely impact of new OTC regulatory requirements on your electronic FX trading business?

There are still many unknowns in the regulatory environment around what products are in scope in the FX asset class for Clearing, Reporting and execution on a SEF.  Designing strategic solutions whilst many requirements remain uncertain is harder.  Many requirements will crystalise when final determination regarding the US Treasury exemption of FX Forwards and FX Swaps from the Swaps definition in the Dodd Frank Act is made.  HSBC are involved in all relevant industry groups and are working with AFME to keep up to date with the changing regulatory environment.  FX Spot is out of scope for clearing, trade reporting and can still be transacted by voice or on a SDP so work is continuing on developing our internal and external capabilities.  On FX Options we are working with several potential SEF providers to ensure we have connectivity to both stream liquidity and transact on these platforms as they are launched.

Meeting a man  with his eye on the ball

Post trade services is one specific area where many FX market participants are currently focusing their efforts to improve STP and reduce risk. What are the most urgent and critical post trade FX issues facing leading FX providers like HSBC as you take steps to overcome the various work-flow and technology hurdles associated with connectivity to clearing houses and trade repositories?

Connectivity is the first hurdle banks need to overcome, there is no consistent common format message being used between different CCPs and trade repositories, so internal code needs to be transformed in to various formats, complicating the connectivity challenge.  FX is a global business but different jurisdictions are implementing aregional trade repositories.  The work flow to ensure trades are reported in the correct format in the correct location will be a challenge.  HSBC is supportive of the Global FX Trade Repository run by DTCC and would hope in time this will be used to populate other regional repositories.  There will be an increase in collateral requirements as firms will lose the offset between their cash and derivatives trades, with collateral on cash still being bilateral and on derivatives being with CCPs, this increase will be compounded by the need to post Initial Margin and post capital into default funds at CCPs.  Clients will also need assistance in having a consolidated view of their entire portfolio, reporting to repositories and managing collateral between cleared and uncleared transactions and will need to partner with banks to facilitate this. As we build out our OTC Client Clearing offering, we are taking these client challenges into consideration to ensure we create solutions for them.

“..we have been investing heavily in the trading side of the eFX business; both in terms of quantitative development to improve our pricing and risk management algorithms and, in terms of our underlying technology that supports those algorithms.”
“..we have been investing heavily in the trading side of the eFX business; both in terms of quantitative development to improve our pricing and risk management algorithms and, in terms of our underlying technology that supports those algorithms.”

Do you believe that regulatory pressures will see FX evolving into a hybrid model with clients clearing some products like FX Options on a CCP and other products being cleared OTC?

There are currently hurdles to overcome mainly around liquidity in order to facilitate the clearing of physically settled FX, these will need to be resolved before FX Options can be cleared.  Initially the industry will work towards ensuring the regulation can be adhered to. This will result in FX Options and NDFs being cleared and FX Spot, FX Forwards and FX Swaps being traded OTC (if the US Treasury exemption is granted).  As explained earlier this will increase both buy-side and sell-side collateral requirements, there will inevitably be a push from the CCPs to clear unmandated products to increase revenues and this is likely to be supported especially by the buy-side as this will reduce collateral requirements and simplify work flow. Clients will also be looking at this as a cost - benefit analysis. Regulations will be very costly and clients will need to determine the added benefit of these regulations and determine if it is worth the added cost to voluntarily incorporate their OTC products.

Do you think the role of e-FX is changing and moving beyond the basic transactional process, perhaps towards a customer relationship model based around empowering clients and helping them to extract more value from research, risk and advisory services?

Yes. Clients demand more from their FX providers and as such the role is moving away from just the “basic transactional process” towards offering more sophisticated value added services in a number of ways; for example the need to provide more specific eFX solutions that are more effective in managing clients execution needs beyond what is available in the standard single- and multi-bank platforms. Electronic platforms are growing in sophistication and are an effective way of delivering trade ideas, research and pre-trade analytics. They are however just part of the client offering and most effective when provided in conjunction with traditional channels where clients still embrace the model of talking to key Sales, Research and Traders.

Over the coming months e-Forex is going to be focusing on how alternative new digital media channels, including mobile applications and Social Media Investment Networks are being applied across both the Institutional and Retail FX markets to enhance and enrich client relationships.  How do you view Social Media in the context of helping to deliver e-FX solutions and potentially adding value for clients?

Demand for richer multimedia experiences in trading environments is now crossing over more consistently from the consumer space. Clients still value fast, reliable pricing most of all, but the decision-support space can be significantly enhanced with value-added information delivered in context. Customers expect a consistent experience whether they are trading on their desktop or using their mobile device. It remains vitally important to support all relevant mobile platforms and not to try to force customers to choose technology brand. Developments in social media investment networks are being driven largely by the retail side at present. They are likely to continue to build momentum overall but it is very unclear which model and platform(s) will become most significant. We continue to keep a keen eye on all developments in the social media investment network including Twitter-style platforms in general.  

Meeting a man  with his eye on the ball

Traditionally HSBC has maintained a competitive edge in FX by leveraging your strong brand, balance sheet and emerging markets expertise. Looking ahead, how will you look to differentiate your services in the electronic FX space?

Differentiating for HSBC is first about ensuring that our core set of services are competitive and then making sure that the information and ideas from our global network are effectively distributed and giving our clients access to the liquidity in these local markets. This is especially true of the emerging markets space and its associated products. We must ensure our platform is simple and easy to use for every location and, through our product offering, deliver our local expertise globally.

One final question on metals. Gold – is it a buy or sell in your opinion?

That depends on your investment horizon. On a longer term view I would say that you want to hold gold in your portfolio.